Enter the ultra-budget airline

Courtesy NewLeaf

Courtesy NewLeaf

LESS than a month after Canada’s latest carrier Airlines revealed plans to offer ultra-low fares operating from its base in Winnipeg to six cities within the country, namely Abbotsford, Halifax, Hamilton, Kelowna, Regina, and Saskatoon, it announced it was “temporarily postponing service” and would refund all transactions already made. The first service was to be launched in February.

Newleaf’s fate now rests in the hands of the Canadian Transportation Agency (CTA) which is reviewing the carrier’s aviation licence. Apparently Newleaf was selling seats through a charter arrangement with Kelowna-based Flair Airlines Ltd which held the CTA operating licence. The question is whether the indirect Newleaf should itself be holding a licence directly.

Newleaf CEO Jim Young’s reaction was one of optimism. He said: “We welcome a regulatory system in which businesses like ours can thrive in Canada as they do in other countries.”

That aside, the ultra-budget airline that is sometimes referred to as a discount airline is not an entirely new phenomenon. In his somewhat premature announcement of the launch of the airline, Young said: “Lower landing fees mean we have savings we can pass on to you.” The key word is “affordability”. According to him, “Ultra low-cost carriers are some of the most financially successful airlines in the world today.”

Young may be referring to operators such as Iceland’s WOW Air and the longer haul Norwegian Air Shuttle. WOW Air, for example, is offering US$99 fares connecting Boston and San Francisco in the US with the Icelandic capital Reykjavik. It is next looking at connecting with Montreal and Toronto in Canada.

While you might remind Young of how as many airlines so-called budget too have come and gone, Newleaf is already expressing interest to expand its operations to other destinations within Canada and in the United States.

Young, who was at one time CEO of Frontier Airlines, explained: “By unbundling the entire service you get to choose what you want.” That basically is the budget model, and one that is further trimmed down on costs. As an example, he cited how NewLeaf would be able to save money in part because it does not offer its seats on any third-party travel websites, which charge airlines a fee to post and make sales there. Considering the nature of its operations, that makes economic sense. After all, Young did not see Canada’s two other major carriers – Air Canada and Westjet – as Newleaf’s competitors. He said: “If I had a competitor, it would be the airlines that Canadians are driving across the border for.” He was referring to Canada’s loss of market share to US airlines such as Allegiant Air operating out of airports south of the border, close enough for Canadians to drive across to take advantage of the lower fares.

Young added: “We’re looking to create a new market and stimulate people who aren’t flying today. What I’m going after are people that will make the three-and-a-half hour drive in the middle of winter to go to Grand Forks because they’ve got to get to some place warm or can’t afford to fly from here.”

That argument about developing new market has been the slogan of many a budget upstart, and which has contributed to the success of some of them to go where the full service airlines would not go. Newleaf is therefore targeting a limited but niche leisure market on the back of a strategy that focuses on second-tier airports. It can count on that as a strength to drive its growth, particularly at a time when it could take advantage of the current low fuel costs. Too many no-frill operators in the past had been hit badly by soaring oil prices. The challenge for Newleaf will come when other upstarts similarly motivated jump into the same arena, or when one of the legacy airlines decide that the market has grown big enough for them to join the competition most probably through a subsidiary offshoot such as Rouge, the budget arm of Air Canada.

Legacy airlines across the world have become increasingly wary of the growth of the budget carriers, particularly after the 2008 global economic crisis when air travel trended downwards to cheaper fares. Budget carriers are now competing in the same market, not only for seats in the traditional economy class but also for travellers who want some perks but at lower fares as they introduce their version of business class. North American domestic operations by the major airlines are already adopting the budget model to charge for meals and baggage among a slew of chargeable.

The temptation of growing bigger than intended is always present. This unbridled ambition has led to the downfall of many operators in aviation history, perhaps the reason why the doyen of the budget model Ryanair remains undecided whether it should launch long haul services across the Atlantic, and why some discount carriers such as Allegiant have stayed small. Will Newleaf, when granted the licence to operate, given its ambition to expand far and wide, go down this same road?

Perhaps not, as it would appear that the current budget model exemplified by carriers such as Ryanair and easyJet is not trim enough, and if lower cost will stimulate demand, there is room for Newleaf to grow. Yet one begins to wonder how much lower you can go.

This article was first published in Aspire Aviation.

Is budget long haul but a pipe dream?

Courtesy PA

Courtesy PA


Only days after announcing plans to launch transatlantic flights in five years, Ryanair retracted its position, abandoning the plans. In a statement, it said it “has not considered or approved any transatlantic project and does not intend to do so.” This ran contrary to the earlier announced approval by its board to mount budget flights between various European and US cities. Why the sudden turnaround?

The budget long haul challenge continues to entice entrepreneurs who dare go where others fear to tread. We hark back to the days when Sir Freddie Laker pioneered the low-cost model and Laker Airways took to the sky in 1977 flying between London Gatwick and New York’s JFK Airport. It went bankrupt in 1982.

Others have tried and failed. Most notable among them, Oasis Hong Kong Airlines that operated scheduled non-stop services from Hong Kong to both London Gatwick and Vancouver International Airport. Voted “World’s Leading New Airline” at the Annual Travel Awards 2007, Oasis folded its wings a year later, ending a three-year run. It went down the same path as Canada’s Harmony Airways which started services within North America in 2001, then mounted a service to Manchester in UK and announced plans to expand into Asia. It collapsed in 2007, a lesson that might have come too late for Oasis.

AirAsia X, which is an offshoot of Asia’s largest budget carrier AirAsia, commenced services in 2007, flying from Kuala Lumpur in Malaysia to the Gold Coast in Australia. It was a tactical move to build up Australian traffic feed into its subsequent services to London and Paris. Three years seem to be as long as such services could last. In 2012 AirAsia X withdrew its services to both European destinations, along with others including Delhi, Mumbai, Abu Dhabi, Tianjin (China) and Christchurch. It cited high fuel prices and taxes, and a weak market. But AirAsia X is keeping the dream alive with plans to reintroduce services to London and Paris, and adding other new destinations such as Sapporo in Japan. As recent as the end of last year, AirAsia chairman Tony Fernandes announced that “reopening of KL-London is definitely on the card.”

Courtesy Norwegian Air Shuttle

Courtesy Norwegian Air Shuttle

The latest foray into that arena is Oslo-based Norwegian Air Shuttle, which began services in 2013 to the US and Bangkok in Thailand. It has plans to also fly to Hong Kong and India. The airline, which has been profitable before flying long-haul, is reporting losses and blamed it on the costs of expansion and disputes with US regulators and competitors who aren’t too welcoming of its intrusion.

Yet the temptation to prove that the budget long haul formula can work is irresistible to many a visionary, to whom we must give credit for their derring-do. In a price sensitive market, it should work but it seems not for the long haul as the short haul. It is widely accepted that beyond four hours, at most five, passengers have different needs and their demands begin to change inversely to cost. For one thing they are likely to carry more bags and could do with some pampering to break the monotony of the journey. Harmony Airways boasted low-cost with full service, and Oasis Airlines too tweaked the Spartan low-cost model to include some element of that. But running an extremely lean outfit in an unpredictable environment of volatile fuel prices, uncertain travel demand, potential flight delays and cancellations, and unforeseen natural disruptions among other things, is a big challenge.

There are other factors such as aircraft utilization with quick turnrounds, fleet support in the event of delays and cancellations, and competition. Legacy airlines can no longer afford to ignore budget carriers as niche players outside their turf for the short haul, as they spawn offshoots to check the competition. Air France-KLM and Lufthansa introduced Transavia and Germanwings respectively to compete with the likes of Ryanair and easyJet. Australian flag Qantas carrier has its Jetstar brand. Even Singapore Airlines reputed for premium service is adding yet another budget carrier, Scoot, to its fold, the new carrier literally sharing the same arena with older sibling Tigerair although it is pitched as a medium-range operator. So if the competition heats up, you bet the big boys will flex their muscles.

It is so tempting for an airline such as Ryanair as it succeeds and grows to look for new opportunities. That it did not work for others in the past does not necessarily dictate the formula cannot work for Ryanair, which has succeeded in the short haul where many others too had failed. Others such as AirAsia and Norwegian Shuttle which have gone ahead are still testing the ground. Apparently Ryanair is treading carefully as it has been seven years since it first expressed the desire to cross the big pond in 2008. In the earlier announcement before it changed its mind, it said, quite rightly so, it would be “dependent on attaining viable long-haul aircraft”. Consider how when the oil price soars, budget carriers are the hardest hit. It will take another four to five years in Ryanair’s estimate for such an aircraft to emerge. The airline’s spokesman revealed that it was talking to plane manufacturers. So, again, the question: why the turnabout?

Is the answer close to what easyJet chief Carolyn McColl said about sticking to what it does best? Ms McColl reportedly told the BBC: “We have no intention to do long haul because we think it’s a different kind of business.” It would be too high a risk to change its short-haul strategy. But Ryanair chief Michael O’Leary is known for suggesting game-changing ideas, as revolutionary as “standing room only” flights and charging for the use of the aircraft loo, and for setting trends in the industry such as charging for printing a boarding pass at the airport, so we wait to be surprised.

Interestingly, a new “ultra low cost” concept is rearing its head. While an airline such as Qatar Airways is demonstrating that there is almost no limit to dressing up a premium product with its latest offering of a private cabin furnished like a hotel suite, a new airline in Canada, Jetlines, has big plans to offer rock-bottom airfares said to be below 40 per cent what rivals Air Canada and WestJet are charging. Jetlines chief David Solloway said the airline is ready to take to the sky. He cited Ryanair, easyJet and Allegiant Air as models. “The model of buying a seat and a seatbelt and only paying for goods and services each passenger may choose individually,” he said, “is known all over the world and is the fastest growing segment in the airline industry.”

Apparently some five million Canadians cross borders to board flights out of neighbouring US airports because of ultra low fares offered by US airlines such as Allegiant Air. Mr Solloway hopes to stem the outflow by offering not only very low fares but also the convenience of flying from the home base. The question is: How low can you go? So much for nomenclature. The only thing certain about Mr Solloway’s proposal is that Jetlines will be much cheaper than other Canadian carriers. He probably already knows that the leaner the model, the stricter is the demand on discipline and efficiency. And the best bet for survival is flying into secondary airports rather than the main hubs, though this is somewhat tricky considering customer preferences. You fly where customers want to go. Apparently Mr Solloway has done his homework. He said: “If you’re asking the question whether Canada could have a third airline, the answer is no. But if you ask whether Canada can support an ultra low-cost, low fare airline, the answer is overwhelmingly yes.”

While US carriers are trying to stop the thrust of Norwegian Air Shuttle, the same question may be asked of the budget long haul: Is there a market, if not ready but potential, for the business? There has to be something out there for the many enterprising founders since Freddie Laker to wager their millions. Yet as they came and went all too soon, something seemed to be missing in the formula. Or is the budget long haul but a pipe dream?

This article was first published in Aspire Aviation.