Air France to “boost” performance with new low-cost carrier

Legacy airlines in Europe have long been feeling the pinch from low-cost carriers such as Ryanair and Easyjet. Now it looks like Norwegian Air Shuttle and WOW Air are pushing them to look farther before they lose more ground.
Lufthansa already offers a low-cost trans-Atlantic option from Europe to Las Vegas, Orlando, Miami and Seattle in the United States.

The International Airlines Group which owns British Airways, Iberia, Aer Lingusm and Vueling has just added another low-cost carrier – Level – to its stable. Level, based in Barcelona, will fly to Los Angeles and Oakland in California USA, Punta Cana in the Dominican Republic, and Buenos Aires in Argentina. Fares start at the familiar €99 reminiscent of the Norwegian and WOW Air’s promotions.

Courtesy Air France

Following in their footsteps is Air France, which announces the formation of a new subsidiary low-cost airline – Boost as its working name – planned to commence operations in winter. The airline will fly from the main hubs of the Air France/KLM group to destinations in Italy, Spain and Turkey initially, and then farther to destinations in Asia. Norwegian is already flying to Bangkok and will in October connect London with Singapore.

But Boost will be taking on full-service airlines as well, such as the Middle East carriers of Emirates Airlines, Etihad Airways and Qatar Airways which are already ruffling the feathers of the regional big birds of Singapore Airlines and Cathay Pacific.

The developments point to a gradual convergence of the low-cost and full-service product perceived value wise. It’s the antithetical success of low-cost carriers pushing to bridge the gulf and the failure of legacy airlines not being able to maintain if not increase the differentiation. It looks like the European tug-of-war is pulling the legacy airlines towards the centre line.

British Airways is becoming more “budget” than Ryanair

Courtesy Getty Images

NOT too long ago, British Airways (BA) did away with complimentary meals on short flights. (See No more free meals for BA short haul, Jan 16, 2017) Now, in yet another move to operate like a budget carrier, it is squeezing in more seats in its planes and that means less legroom.

According to some media reports, BA seat space will be the same as budget carrier Easyjet, even less than Ryanair.

A BA spokesman said the initiative would keep the fare low. But, of course, that’s to be expected. Air travellers will do better to recognise the new BA as belonging to the same category of low end operators when they are booking flights. And, sadly for BA, it can only mean it is facing tough competition.

BA’s partner airlines – Iberia, Vueling and Aer Lingus – under the International Airlines Group (IAG) are also offering the same seat space.

And, if you’re thinking of complaining about any aspect of BA’s service, think again. There is a £25 fee. If it makes you feel any better, that applies to Easyjet as well. Just don’t make the mistake of expecting more from a legacy-but-no-longer-full-service airline!

Budget and transatlantic competition heat up

Courtesy Vueling Airlines

Courtesy Vueling Airlines

International Airlines Group (IAG) announced plans to commence low-cost transatlantic flights from Barcelona to the United States by budget carrier Vueling. IAG also owns British Airways (BA), Iberia and Aer Lingus.

Legacy airlines (and airline groups) are increasingly recognizing the competition posed by budget carriers, and it is not new that some of them have set up budget operations such as Lufthansa’s Eurowings, Qantas’ Jetstar, and Singapore Airlines’ Scoot. In the US, the Big Three airlines of American, United and Delta are introducing no-frills fares on normal services to compete with low-cost counterparts such as Southwest, JetBlue and Frontier.

Where the competition is most felt is the transatlantic sector, which has seen a surge of cheap fares offered by operators such as Norwegian Air Shuttle and Iceland’s WOW Air, discomforting both US and European counterparts.

WOW Air is well-known for its $99 fare for travel between the US and Europe – destinations such as Copenhagen, Stockholm, Edinburgh and Bristol – with a free stopover in Reykjavik. It has begun enticing US Westcoasters with fares as low as $65.

Norwegian also offers $99 fares with promotional offers as low as $69.

Budget doyen Ryanair has long announced its ambition to also ply the transatlantic routes.

While home-based US airlines are protesting the entry of Norwegian, European airlines are taking a more active approach to compete head-on. IAG will be able to advantage Vueling with the network of partner airlines. Eurowings is already operating nonstop from Cologne and Bonn to the US, and it has plans to add more destinations.

In a price-sensitive market for as long as the current situation holds, budget carriers may be driving the trend. Legacy airlines will be challenged to make their advertised difference in product worth the additional dollars in fares, at the same time keeping their budget rivals at bay in a two-prong approach to the competition.

AirAsia to launch Honolulu services: Revisiting the sustainability of budget long haul

Courtesy AirAsia

Courtesy AirAsia

Malaysian carrier AirAsia will be introducing four weekly services from Kuala Lumpur to Honolulu in June, becoming the first budget airline approved for operations between the United States and Asia. Flight time is anything from 16 to 18 hours.

This is yet another attempt by founder Tony Fernandes to launch a budget long haul, despite the failure to sustain earlier operations under the AirAsia X banner to London in 2009 and Paris in 2011, which were suspended in 2012. However, Mr Fernandes said operations to London will resume in 2018 when the airline receives its new more economical long-range Airbus A330-900neo jets.

Although sceptics continue to doubt the viability of budget long hauls and there have been many who tried and failed, the entrepreneurial spirit to push the boundary is still very much alive. The current slate includes Norwegian Air Shuttle which commenced services from Oslo to New York and to Bangkok in 2013, and Lufthansa’s Eurowings which and operates nonstop from Cologne and Bonn to US destinations such as Seattle, Orlando, Miami and Las Vegas. Budget doyen Ryanair is also looking at crossing the Atlantic. Singapore Airlines’ budget offshoot Scoot has announced plans to connect Singapore and Athens in June.

A number of factors have contributed to the trend.Bu dget carriers are beginning to eye distant destinations dominated by legacy airlines as they expand, and this is now made possible by technologically advanced and more fuel efficient aircraft. The budget model is changing, and the line between budget and full-service carriers is increasingly blurring as the former upgrades customer service and facilities and the latter adopting some of the practices such as product unbundling and charging for add-ons. Legacy airlines no longer view budget carriers as operating in their own niche markets but a real threat. (See Ultra-long flights: The competition heats up, Feb 7, 2017)

Whether Mr Fernandes’ Honolulu venture is sustainable or not in the long run, he has earned his feather. As a stand-alone, it will be a challenge for AirAsia, which will have to tap feeds from its regional connections – as will Scoot when it commences services to Athens. It will be a test, considering the nature of the leisure traffic and the competition posed by several airlines in the region that are already plying the route direct form their home bases or in code-share arrangements.

No more free meals for BA short haul

BA4 courtesy BA.jpg

Courtesy British Airways

British Airways (BA) will stop catering complimentary meals on domestic and short-haul flights. Passengers may avail themselves of food and drink supplied by supermarket chain Marks & Spencer at a cost, and we all know that such meals don’t come cheap.

BA said the decision was made to cut costs, and this naturally was not well received by its customers. It is coming at a time when BA is making record profits compared to its regional competitors, picking up a trend set by North American carriers although ironically some of them such as Delta Air Lines are considering re-introducing meals as the competition intensifies.

The question is: Will BA lower its airfare as a consequence? Increasingly airlines are adopting the no-frill model to boost their coffers with ancillary revenue which has been rising significantly in recent years. But that is at the risk of losing the differentiation that makes full-service airlines a conscious choice of travellers who are prepared to foot more for it. It is good news otherwise for low-cost operators such as Ryanair, Norwegian Air Shuttle and Wow Air.

BA is testing the ground. Its success will depend on how strong it is as a trendsetter, and its understanding of the compliance of the travelling public, however prone they are to complaining. Right now, BA has muscled itself into an extensive network of airlines under the International Airlines Group (IAG) that also owns Iberia, Vueling and Aer Lingus. Time will tell.

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.

Brexit gloom overstated for airlines

THE day after the Brexit referendum, it looked like all gloom and doom as the pound plummeted and the global stock market reeled. The share price of British low-cost carrier EasyJet went down 22 per cent. For their discernible dependence on the UK market, Ryanair and the International Airlines Group (IAG, which owns British Airways besides Iberia, Vueling and Aer Lingus) also suffered declines above 20 per cent. Even American carriers across the pond with the exception of domestic operators took a hit.

Reduced profits for the second half of the year are all but certain. IAG said it would not be able to match the 2015 level. EasyJet warned that fares may increase. Ryanair said it will cut back investment in the UK and focus instead on growth in the EU.

The immediate concern was that the weak sterling may mean British holidaymakers will now count their pennies before committing to an overseas vacation. UAE Director-general of the General Civil Aviation Authority, Saif Mohammed Al Suwadi, foresaw a decline of travel from the UK to the Gulf region, and this is not good news for Middle East carriers which are also benefitting from onward travel by the Brits to places in Asia and Australia. But consider what a weaker British pound could do for Britain to attract tourists into the UK. It may be more than just rephrasing the equation, and airlines including Singapore Airlines which fly to British destinations could benefit from the fallout.

So far the world’s reaction seems unduly lopsided in its view of the dire impact on the UK. Doomsayers are mistaken if they were waiting to see the UK punished indefinitely. At least for the airline industry, the gloom has been overstated. In fact, IAG believed that the UK vote to leave the EU would not have a long term material impact on its business. So too Ryanair which reassured its customers that it “will continue to offer the lowest fares in Europe and the UK.” British carrier Monarch Airlines said it is not raising fares and “will continue to remain competitive.”

Courtesy easyJet

Courtesy easyJet

It is easy to blame Brexit as the shock of the unexpected outcome takes its toll. Understandably, low-cost carriers such as EasyJet are more concerned about losing access to the single EU market, which has spurred their growth across a wider region. EasyJet for one has seen its profit increase manifold from GPD22.1m in 2000 to GPD548m in 2015, and its passenger load from 5.8m to 68.6m making it the second largest operator in Europe after Ryanair. Today it boasts a load factor above 90 per cent and operates from 24 bases across Europe. It may be one, being British, to lose the most if new regulations limit its operations or make it difficult for it to access its present markets. In truth, EasyJet is already facing what it described as “extremely challenging” conditions in the past two months with demand being affected by severe weather, airport issues and industrial strikes in France which resulted in flight disruptions.

Despite the harsh warning from EU leaders that Britain cannot expect to enjoy EU privileges post-Brexit, it is hard to believe that Open Skies which has come a long, long way globally will suffer a substantive setback. The UK could still negotiate access to the EU single market a la the model used by non-EU members Norway and Iceland if Britain then joins as a member of the European Economic Area (EEA). It must abide by EU rules but cannot participate in the Union’s decision-making.

The UK could also look at other models such as one adopted by Switzerland, which is not a member of the EEA but the European Free Trade Association, gaining access through a number of bilateral agreements though not for all sectors. Or, the post-Brexit negotiations could knock up a deal specific to the UK. Outside those jurisdictions, peculiar to the airline industry is the number of complex cross-border partnership agreements that have blurred regional lines.

Britain is a large market, so it is in the interest of all parties concerned to negotiate a win-win deal. The silver lining in the dark Brexit cloud is how commercial considerations will prevail over political deliberations. Politically driven regulatory restrictions will do neither the UK nor EU members any favour. It is in their interest to continue keeping the channels open for competition.

The resilience of the business in adjusting to change cannot be underestimated. Many people take comfort that the due process for any change may take up to two years. The real comfort is that implicitly, any change is unlikely to be unduly drastic or disruptive.