Size matters in the air

Courtesy Getty Images

Ryanair chief Michael O’Leary predicted that “within the next four to five years you are seeing the emergence of four or five large European airline groups.” He even named the airlines, Ryanair among them in a mix of full-service and low-cost operators: Lufthansa, IAG (International Airlines Group which owns British Airways, Iberia, Aer Lingus, Vueling and Level), Air France-KLM and, probably, Easyjet.

This sentiment has been opined before by others at a time when mergers, assimilations and acquisitions across the industry were trending as competition broke barriers of entry and intensified, and so-called safe niche markets became every player’s game.

Air France-KLM as the name suggests is a merger of the two European airlines in 2004. Rival British Airways (BA) viewed it as a step in the expected direction, predicting further consolidation within Europe. And in 2011 IAG came into being when BA and Iberia merged. BA chief executive Willie Walsh said at the time that the merger would enable the airline to compete effectively with low-cost carriers.

So there came a time when budget carriers began to pose a threat to full-service airlines, with Ryanair leading the pack. Many of the legacy airlines today have adopted the budget model of charging for ancillaries, and introducing a basic economy class to keep cost-conscious travellers from switching. However, many low-cost carriers have become victims of the competition – the reason why Mr O’Leary named only one other carrier, EasyJet, as a probable survivor.

EasyJet, founded in 1995 and headquartered in London Luton, UK, is Ryanair’s closest rival which has grown and spread its wings across Europe. It too has made a number of acquisitions which include Swiss TEA-Basle and Go.
Elsewhere around the world, the vibes are not unfamiliar, New in the circuit is Air Canada’s interest in Sunwing and Cathay Pacific’s interest in Air Hong Kong Express, And where acquisitions and mergers are not on the plate, airlines are working to form alliances that are more than mere code-sharing. Qantas did it in 2013 with its tie-up with Emirates, and now Malaysia Airlines and Japan Airlines have applied for waiver of government restrictions to form an alliance that will enable easier connections between the two carriers.

It looks like size matters in the air.

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Ryanair affirms market for budget travel

courtesy PA

Despite problems with pilot rosters last year that led to cancellation of flights, Ryanair has reported record annual profits for the full year ending March 31, 2018. Profits after tax rose 10 per cent to €1.45 billion (US$1.71 billion).

The results yet again affirm the strength of the budget market even as the global economy continues to improve. The improved economy should favour legacy airlines as they begin to give more attention to their premium product. However, the competition continues to be a thorn at their side, and legacy airlines are also offering basic economy without the full entitlements of normal economy.

Ryanair chief Michael O’Leary warned though that not all budget carriers can survive the future as oil prices rise. The outlook for 2018/19, he said, would be “on the pessimistic side of cautious.” In an interview with CNBC, he added: “Those airlines that couldn’t make money when oil was at $40 a barrel last year, I don;t think will survive this winter when oil remains at these elevated levels.”

It is tough competition. Many budget carriers have come and gone, and the last few years have been good to them as the fuel price holds steady, leading to the growth of budget long-haul as well. Their ability (and willingness) to offer lower airfares than legacy carriers make them attractive alternatives – the key reason why passenger numbers for Ryanair increased by 9 per cent to 130 million last year. But the Irish carrier is paring down its expectation to only 7 per cent increase this year. The good news for customers is that fares are likely to remain unchanged.

And as legacy airlines (and their subsidiaries) in Europe undergo what looks like an annual affliction of industrial strikes by staff, Ryanair is there to fill the gap and rake in the hay.

Big Mess at Ryanair

Courtesy Getty Images

The world’s biggest budget airline has found itself floundering in a big mess. An apaprent mistake in leave schedulign of pilots as it claimed has led the airline to cancel 2,100 flights over six weeks until November – 40 to 50 flights a day. That means inconveniencing some some 300,000 customers who would receive or had already received emails informing them of the cancellations.

Ryanair said it would arrange alternative flights or refund the fares. Under the European Passenger Rights legislation, passengers are entitled to compensation for flight cancellations. Ryanair estimates it will cost the carrier 20m euros (US$24m).

The unpredented slew of cancellations may also subject Ryanair to penalties imposed by the authorities. Italy’s competition regulator – Italian Competition and Market Authority – has started a probe into the matter, on whether the cancellations could have been prevented. It is hard to believe that Ryanair had nto anticipated the problem and, if found guilty, could be fined as much as 5m euros.

Ryanair chose to cancel flights first at its busiest airports so that it would be eassier to arrange alternative flights. But, of course, in the mess of events, this has a knock-on effect.

Ryanair chief Michael O’Leary denied the airline was experieicning a shortage of pilots, even as many as 140 of them have left to join new rival Norwegian Air Shuttle. Mr O’Leary insisted it was because the airline had “messed up” the rosters which left it without enough pilots to operate all the scheduled flights.

One thing for sure, Ryanair will certainly feel the heat of the competition brought on by Norwegian and other carriers such as EasyJet, if advanced bookings for October at 70 per cent comapred to September at 90 per cent are any indications.

Will this mess cause Ryanair any further loss of customers in the future? The airline has a dotted history of going from zero customer service to attempting improving that aspect in the face of rising competition. Much depends on how it handles the current crisis. In a price sensitive market, people’s memories tend to be short while most people are actually more forgiving than expected under the circumstances. The real threat for Ryanair remains the competition particularly if the rivals are seen to be more reliable.

Standing room only on this flight

Those of us who go to the theatre often enough will be familair with the term “Standing Room Only” (SRO). But SRO on a flight?

Budget airline Viva Colombia has just that in mind. Its founder and CEO William Shaw told The Miami Herald: “There are people out there right now researching whether you can fly standing up. We’re very interested inanything that makes travel less expensive.” So, wey not? After all, he said, “Who cares if you don;t have an in-flight entertainment system for a one-hour flight? Or that you don;t get peanuts?”

This thought isn’t new. As far back as 2010, Ryanair flaoted the idea. (See Standing room only up in the air, July 23, 2010) Actually, instead of standing upright as in a bus, passengers will have “vertical seats” to leab against, complete with seatbelts and a small cushion to support the lopwer back – which is said to be good for people with back problems.

Ryanair chief Michael O’Leary was of the opinion that people flying very short hauls (say, up to two hours) wouldn’t mind standing all the way if the fare was that dirt cheap. Then he was thinking of fitting only the rear of the aircraft with vertical seats as a choice.

Vertical seats, otherwise known as saddle seats. Courtesy Airbus.

In fact Airbus put forth the concept in 2003 with the hope that it might be implemented by 2010. Now the South American carrier based in Medellin, Colombia, is reviving the idea. Guess what, the low-cost operator is partly owned by the founders of Ryanair.

Still, the question that hangs in the air is when and if it happens the regulators will approve the operations as safe-worthy.

Airlines brace for the hard times of a troubled Europe

Two British Airways aircraft, with British Airways plane taking off in background.

Two British Airways aircraft, with British Airways plane taking off in background.

IT is easy to blame Brexit. International Airlines Group (IAG) which owns British Airways (BA) and EU carriers Iberia, Vueling and Aer Lingus, says the weak pound has caused its operating profits for Q2 (Apr to Jun) to fall below forecasts, even the number (€555m) (USD618m) is higher than a year ago ((€530m). The weak pound has cost the airline €148m.

But, of course, BA is a key contributor to IAG’s bottom line. IAG is not too upbeat about the immediate future as it “continued to experience a weaker trading environment in our UK point-of-sale business, which represents around one third of total revenue.”

The situation is definitely not helped and in fact made worse by the slew of terror attacks across the continent. Other European airlines such as Air France-KLM and Lufthansa are also under a lot of pressure to keep the numbers up, warning that travellers would avoid coming to popular destinations in their home countries.

Air France-KLM reported a 5% dip in revenue for Q2 to €6.22bn. The airline said: “The global context in 2016 remains highly uncertain… resulting in an increasing pressure on unit revenues and a special concern about France as a destination.”

So the problem is not entirely Brexit. And as the pound weakens and reduces purchasing power, and so too as travellers stay away from popular tourist destinations across Europe, the paradox is that airlines will be persuaded to reduce fares to shore up the demand for seats.

Ryanair CEO Michael O’Leary, referring to recent bombings, said: “Airlines have to respond with lower prices to keep people flying.” This will at the same time exert pressure on rival airlines to similarly take the same course. Mr O’Leary predicted average fares to fall approximately 7% this year.

Fortunately the continuing low fuel prices are working in the airlines’ favour although many are already complaining about the need to lower prices. So don’t expect the fuel surcharge to come down.

Which Asian airlines might be interested to buy into Virgin America?

Photo courtesy Virgin America

Photo courtesy Virgin America

UP for sale, Virgin America has some suitors lining up. It has received takeover bids from JetBlue Airways Corp and Alaska Air Group Inc. In this era of the mega carriers (consider the mergers of United Airlines and Continental Airlines, Delta Air Lines and Northwest Airlines, and American Airlines and USAir), a tie-up with another carrier strengthen Virgin’s competitive ability. And while it is almost certain that the merger would be with another American carrier, with analysts placing bets on JetBlue as the best fit, apparently some unidentified Asian carriers have also expressed interest. Still, be that as a remote possibility, one cannot help but be curious and speculate who the likely candidates might be.

Two big names come to mind immediately because of their successes, networks and financial capability, namely Cathay Pacific Airways and Singapore Airlines. Both airlines are keen on expanding their US market. Cathay flies to Boston, Chicago, Los Angeles, New York and San Francisco while Singapore Airlines (SIA) operates to Houston, Los Angeles, New York and San Francisco. Both airlines have codeshare access to several other destinations. Cathay’s codeshare partners include Alaska Airlines and American Airlines while SIA already codeshares with Virgin and with JetBlue.

So it looks like SIA more than Cathay would be favoured on relationships alone. Since foreign ownership rules governing US airlines require the bid to be submitted jointly with a US partner. It would be convenient for SIA to join hands with JetBlue. Of course, Cathay may partner Alaska Airways, but historically Cathay is not quite interested in equity participation. Although it has a 20.3% stake in Air China and 49% in Air China Cargo, that could be a matter of expedience to secure its market in the growing China mainland market.

SIA on the other hand, limited by a hinterland market, tried in its early years to grow through acquisitions. In 1999, it bought 49% of Virgin Atlantic and subsequently 25% of Air New Zealand. Although both buys subsequently proved to be lemons, resulting in heavy losses, the misstep might be less strategic than circumstantial. Unfortunately that has hurt SIA deeply more psychologically than financially as the airline became more cautious about such moves. In subsequent years it failed in its seemingly reluctant bid for a stake in China Eastern Airlines, and the SIA Group was plagued by the poor decisions of its budget subsidiary Tigerair in joint ventures in Indonesia and the Philippines. In Oct 2012 SIA bought a 10% stake in Virgin Australia, joining tow other foreign partners namely Air New Zealand and Etihad Airways. In much the same way that Cathay needed to secure its market in China partnering with Air China, SIA needed to secure its Australian market against the competition by Qantas. Six months after, SIA increased its stake to 19.9%.

But is SIA even interested in a stake in Virgin when its codeshare partnership with JetBlue already places it in an advantageous position to benefit from a JetBlue takeover of Virgin? Would a bid jointly with an Asian partner jeopardise JetBlue’s chances if the powers that be preferred an all-American merger a la the big three of United, Delta and American?

Besides Cathay and SIA, one should not ignore the voracious appetite of the China carriers in the national trend to acquire foreign assets. And why must it be premised on full-service carriers that are already serving destinations in the US? What about a budget carrier with dreams of new frontiers? Maverick AirAsia chief Tony Fernandes who models himself after Virgin guru Richard Branson and who had been where others were hesitant, even afraid, to go may yet surprise with an expression of interest even if it is no more than just that. He is one of the few airline chiefs who, like Ryanair’s Michael O’Leary and Qantas’ Alan Joyce, understood what an opportune good dose of publicity could do.

All this, of course, is speculative. Asian carriers are likely to be less concerned this time than when the mergers of the American big three took place. Together with Southwest Airlines, the big three control 80% of the American market. Virgin and its alleged interested parties JetBlue and Alaska are all largely domestic carriers. Even if Southwest throws in a bid (but for its size that may not pass the antitrust law as easily), it is still the same scenario. SIA’s connections with JetBlue and Virgin will continue to stand it in good stead, but if it’s Alaska that carries the day, then it is Cathay that stands to benefit from the new, extended connection. Or does it really matter when there are already subset agreements across partnership lines that allow you to fly an airline of one alliance and connect on another in a rival group? That’s how complex today’s aviation has become.

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.