Low-Cost on Long-Haul – An Inventory

The market in long-haul flights has been changing rapidly over the last few years as prices are decreasing and passenger numbers are increasing yearly.

In the last weeks, media announced, that Ryanair, Europe’s biggest low-cost-carrier which is yet only offering short- and medium-haul flights is going deeper into its planning of first long-haul routes to North America and might offer one-way fares from 14 EUR including taxes but excluding luggage. Ryanair has yet announced that fares this low are not to be planned but it gave them a presence in the media once again.

Beside those plans, what is really happening in the market of low-fare long-haul flights?

The last years have brought a lot of movement into the continental airline market. A lot of so called low-cost-carriers such as Southwest, Allegiant Air, Gol, Ryanair, Wizzair, AirAsia, Air Arabia and many more have been expanding strongly by offering cheap flight tickets excluding any special services such as free food and drinks on board, luggage included in the fare or airport check-in.

This development has been limited to the continental markets or to medium-haul holiday destinations but not included long-haul flights at first. This market has been dominated by the big players such as Lufthansa, American Airlines, South African Airlines or Korean Air.

With the Arabian Gulf airlines entering the market this situation changed. With low prices but good service due to the lower cost structures of staff and tax advantages the airlines around Emirates, Etihad, Qatar Airways and Gulf Air have attracted many passengers and took the passengers away from other airlines. This brought the traditional airlines into a stew as the gulf airlines increased their passenger numbers rapidly while their own were almost stagnating or in worst case reducing.

This situation has caused different actions: on one side the regulation and aviation authorities have limited the number of flights that are allowed by the gulf airlines, on the other side the dropping prices have been reviving the market. With the now decreasing prices of kerosene and the possibility to outsource the operation of planes and crew to cheaper markets have brought low cost carriers into the long-haul market. While the USA are still trying to protect its domestic market, Asian airlines made the first steps in offering flights on no-frills concept basis:

AirAsia X is strongly expanding since 2007, has open orders of almost 100 long-haul aircraft and was one of the first low-cost-carriers on the long-haul market. With a hub in the South East Asian country of Malaysia, it offers connections to continental Asia, but also to Australia and Europe for example. As a competitor to this, Singapore Airlines have been founding their own long-haul-low-cost-carrier (what a word monster) Scoot in 2011. This airline has also been expanding rapidly, offering flights between Asia and Oceania through its Singapore hub and recently a Thai subsidiary called NokScoot has been announced to take off this year.

Also the European market has recently experienced changes in the long-haul sector. While traditional airlines with a hub and spoke strategy have been keeping prices on a higher level than the Gulf carriers, counting on their good service, image and the advantage of being able to offer non-stop flights from their home country giving the passengers the possibility to save time and travel more comfortable without any transfers, the local low-cost-carriers have been planning to enter the long-haul business. And now as they are starting to do so, there’s even more pressure on the traditional airlines. They are following up, not only by trying to lower the cost structures to offer lower prices (what is the reason for a lot of strikes in the last years at Lufthansa, Air France, Iberia and TAP for example) but also by planning to get into low-cost business by themselves. On the continental market this has already happened with low cost subsidiaries such as Iberia Express, HOP! (Air France) or Germanwings (Lufthansa). But now, not even two years after the start of Norwegian Air Shuttle services between Europe, North America and South East Asia on a no-frills-concept basis, Lufthansa has been the first traditional airline to realize an own project for that, under the roof of Eurowings. Flights to the Middle East, South East Asia and the Caribbean will start from Cologne in the end of this year with prices starting at 99€ (Dubai), 149€ (Thailand) and 249€ (Caribbean) per way. These prices are made possible by the no-frills concept with extra charges for luggage, food and assigned seat reservation for example, but also by a lower cost structure due to the reason that the planes will be owned by Sunexpress, a joint venture by Lufthansa and Turkish Airlines, with a cost structure of 20-40% lower than their parent companies. Up to 5 Airbus A330-200 are planned to be used.

And that is the next point in the history of offering cheap flight; aircraft.

The two big players in plane manufacturing aka Boeing and Airbus have been both releasing two brand new mega wide-body aircraft that have a really good efficiency due to low kerosene usage, but neither the A380 nor the B747-8 have yet been used in the low cost sector. The only airline that planned to do so was the Japanese Skymark that was declared bankrupt before it was even able to use its first of the six ordered Airbus A380.

But beside that, the Boeing B787 made the race. Norwegian Air Shuttle, Scoot and the TUI Travel Group have already started using this wide-body aircraft to fly low cost services on long-haul routes. The plane is not only designed to fly long routes with lower passenger demand economically, but is also one of the most fuel efficient and modern planes on the market. The high range of this aircraft makes it interesting to low-cost-carriers, too.

All in all, what is there to come with this development, and is it real that prices for flight will become lower by airlines like Ryanair getting into the long-haul business?

In my eyes, there is a definite no. There might be some real cheap offers from time to time and some seats might be available for not too much money, but a plane full of passengers that have paid below 200€ for a return flight to a destination far away can’t make any airline fly into black figures. Even if the airlines start to outsource crews and operation to another country or wet-leasing aircraft to cut costs the increasing costs of crews, fuel (oil won’t stay as cheap as now forever), taxes and airport fees that are the biggest part of a flight fare and will be giving them hard times.

Yield management and really good market monitoring such as constant comparison with direct competitors is the key to success here. And so is marketing. Telling people to fly them from Europe to the USA for just 14€ will make your brand be stuck in their head and make them consider to consult the respective homepage before booking their next flight no matter to where it goes.

But, and that is important to see: most people are just seeing the starting price during booking and are not thinking about what might be added to it. If you add fees for luggage, seat reservation, a meal, more legroom or pay for inflight entertainment you might already be at the same price that is offered by a traditional airline flying the same route including most (or all) of those services into the ticket price. This wrong perception of the final price is paving the way for low-cost carriers.

So my own conclusion to this is, that there will be several routes available on low cost basis and for sure there will be passengers traveling on low budget using it, but as most passengers are expecting the service one has to pay extra for on a long-haul flight that is operated on no-frills concept basis, the low-cost-carriers might be getting some market shares and also be benefiting from the growing passenger numbers in air traffic (also affected by lower prices) but they will not make it to be big players such as they are on the short and medium-haul sector.

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