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.

easyJet soars

Courtesy easyJet

Courtesy easyJet

It is a dream come true for easyJet, which in October revised its full year pre-tax profit upwards to between £575m (US$899m) and £580m, previously expected to be between £545m and £570m. (See easyJet rides on Air France’s troubles, Oct 8, 2014)  The budget carrier announced profits of £581m for the year ending September 30, an increase of 21.5 per cent from last year’s £478m.

The good results arose from:

  1. Acquisition of additional slots at Gatwick Airport from rival airline Flybe;
  1. A 7-per-cent increase in traffic to 64.8m passengers carried, filling up 91 per cent of seats available’ and
  1. Cheaper fuel.

Going forward, easyJet expects positive results particularly in light of fuel prices continuing to dip. (See Falling fuel prices do not necessarily lead to lower airfare, Nov 13, 2014) the airline has not ruled out likely fare increases.

The success of the likes of easyJet and Ryanair reflects the competition that budget carriers pose to legacy airlines. (See Ryanair attributes success to its business model, 6 Nov 2014) Air France and Lufthansa, for example, are trying to give more punch to their version of low-cost travel via Transavia and Germanwings respectively. (See Budget phobia grips European airlines, Oct 22, 2014) Why should the experienced full-service airlines be concerned?

easyJet chief executive Carolyn McCall told the BBC: “When people sample us, when they try for the first time, they tend not to go back to legacy airlines.”

The lure of low fares is a starting point, and when budget carriers begin to focus a little more on service and what travellers genuinely want, therein lies the threat for the traditional airlines. Ryanair for one has said it was changing its image to be a more caring airline. (See A humbler and more caring Ryanair, May 22, 2014) For the short haul, budget carriers have finally shown that they can crack the legacy airlines’ dominance. They may not be able to afford the full complements of the big boys, but what they are offering is a value proposition, the strategy of balancing what travellers would pay or forgo for what they offer.

Budget phobia grips European airlines

Courtesy Getty Images

Courtesy Getty Images

THE strike by German airline Lufthansa’s pilots may be over a different personnel issue, but it reflects similar circumstances faced by Air France (see Air France/Union dispute reflects a divisive and unsure industry, Oct 3, 2014).

European airlines are gripped by budget phobia as both Air France and Lufthansa have blamed the strikes not only for the costly disruption of flights but also for hindering their efforts to effectively compete with the likes of Ryanair and easyJet through their respective subsidiaries, Transavia (Air France) and Germanwings (Lufthansa).

On the one hand, it is an issue of fair employee compensation and welfare, and the integrity of the human resource administration. On the other, it is a matter of survival in the competition that ultimately must address the issue of costs.

The imbroglio can only benefit the budget carriers, as disgruntled travellers switch their allegiance. easyJet announced a windfall riding on the Air France/union dispute, which had boosted its revenue by £5m (US$5.35m) (see Easyjet rides on Air France’s troubles, Oct 8. 2014).

Lufthansa management has offered to retain the pension scheme for employees who joined the company before this year. The scheme allows pilots to retire at age 55 but they will continue to receive up to 60 per cent of their pay before regular pension payments kick in at 65. However, Lufthansa will increase the retirement age for new recruits.

Apparently the pilots union has proposed a plan to cover the costs of retaining the current scheme. It would be interesting to find out what.

The industrial action has cost Lufthansa 70m euros (US$89m). The airline failed to get the court to declare the strikes as illegal, and the Vereinigung Cockpit (VC) union does not rule out further action.

Until the dispute is settled, budget carriers can look forward to a better year-end season as travellers make advance bookings for Christmas and the New Year. easyJet announced it has sold 25 per cent of its seats for the next six months.

Easyjet rides on Air France’s troubles

Courtesy AFP

Courtesy AFP

AIR FRANCE should feel chastened by Easyjet’s jubilant admission that the strike by French pilots had brought it a windfall. The industrial action has boosted the budget carrier’s revenue by about £5m (US$5.35m), raising hope of the financial year ending September 30 achieving better pre-tax profit of between £575m and £580m, previously expected to be between £545m and £570m. This will be Easyjet’s fourth consecutive year of record profits.

The Air France/SNPL (Syndicat National des Pilotes de Ligne) dispute may be said to be fulfilling a prophecy that the French flag carrier feared. The issue at heart was Air France’s plan to expand budget subsidiary Transavia’s network across Europe with regional hubs established at airports outside France, and this raised its pilots’ concern about transfers to Transavia and being paid lower wages and hired on less favourable terms as regulated by the country where they are based.

For Air France, growing Transavia a strategy to better compete with the likes of Easyjet and Ryanair, which together with the growing number of low-cost operators, have taken a big chunk of the business away from legacy carriers. Inevitably it must weigh in the factor of cost, a sizeable part of it is wage-related. Perhaps there is a strong reason here why independent full-fledged budget carriers such as Easyjet and Ryanair tend to fare better than upstarts spawned by established full-service airlines.

Lufthansa faces the same problem, when its pilots went on strike in protest against the airline’s cost-cutting plan to introduce new low-cost units to improve its competitive edge. This led to a dispute over retirement benefits for pilots, resulting in strikes in August and September that affected operations at Frankfurt and Munich, disrupting flights to major destinations such as New York, Washington D.C., Boston, Chicago, Los Angeles, Dallas and Atlanta in the United States, and to gateway airports in Asia including Singapore and Tokyo.

Needless to say, the single most critical focus of any budget carrier is cost even as it means a necessary sacrifice of service, the lack of which may somewhat be compensated by the customer’s pre-flight low expectations. Most of the other factors may be said to be universal applications to all airlines, though in varying degrees how they impact on the bottom-line. A cheaper fuel bill will go a long way to boost the carrier’s viability, compared to how on the other hand the higher cost of fuel is more likely to bear a heavier toll on a budget carrier than a legacy airline. Easyjet said it expected its fuel bill for the next financial year to decrease by about £50m, and that is a huge plus.

One may argue that Easyjet’s windfall from the Air France strikes might be a fortuitous once-off event, with more passengers switching to Easyjet in light of the disruption. The question remains as to whether the switch will continue to trend even after complete normalcy returns to Air France. It is more than just a foot in the door for the competitor but a clear signal to the likes of Air France as to where the competition is heading in Europe.

Easyjet CEO Carolyn McCall has added a new spin to what the low-cost model means in a recent interview with BBT (Buying Business Travel, Jun 18, 2014): “It means we have new engines, high fuel efficiency. Our plane utilisation, turn-time and load factors are very high. We use our assets really well. We use our assets really well. We don’t have fancy offices, we have a hanger – open plan offices, and we share space with plane maintenance. It’s very important to us, we’’ never lose sight of it – without that low-cost model, we wouldn’t be able to do the low fares.”

Even if Air France finds that a little stretched, it must recognize the close call, especially when  budget carriers begin paying more if only some attention to customer service, albeit their own differentiated brand. Even Ryanair chief Michael  O’Leary said his airline, noted for its bad service, needed to stop “unnecessarily pissing people off.”

In the end it is all about efficiency as defined by the cost-benefit relationship. Easyjet attributed its success to increased efficiency, which made up for increases in airport charges and other related operating costs. Forward  booking for the next six months has improved, with more than 25 per cent of capacity sold. The plane is achieving a 90-per-cent load. But the industry is far from being stabilized, with new concerns over political unrest in Eastern Europe, the Middle East and Africa, and the Ebola scare.

In summary, Ms McCall said: “We have to understand the economics.” But, of course, with one caveat that neither Air France nor Easyjet can refute: It is the customer that decides, full-service or low-cost. In a way, Easyjet seems to understand what its customers want. One asks, Does Air France, noting how the aviation landscape has changed? If expanding Transavia’s operations is a positive move, has Air France the gumption = and right formula – to press on and succeed?

This article was first published in Aspire Aviation.

Air France/Union dispute reflects a divisive and unsure industry

AFTER two weeks, the dispute between Air France and the pilots’ union SNPL was finally called off. One may be tempted to ask: Who wins, who loses? That aside, the dispute clearly reflects not only a divisive industry but also an unsure one trapped without clear strategies in place in the throes of uncertainty.

The pilots’ strike is costing Air France hundreds of millions of euros, estimated to be as much as 15m euros (US$19m) a day. Yet a day after the announcement last Saturday, the airline was still operating with half its scheduled number of flights though with the hope that flights would gradually return to normal in the week that follows. An agreement is still pending, the only consolation being that according to SNPL, negotiations could now “continue in a calmer climate.”

Courtesy Getty Images

Courtesy Getty Images

The union’s protest concerned Air France’s plans to expand low-cost operator Transavia across Europe as part of the strategy to better compete with budget carriers such as Ryanair and Easyjet. Transavia would operate from regional hubs. The pilots expressed two main concerns: a possible loss of jobs, and transfers to Transavia whose employees are paid lower wages and in accordance with local terms. Air France chairman Alexandre de Juniac and chief executive Frederic Gagey said in a statement: “Our Transavaia project is a 100 per cent pro-France project. It is about developing Transavia to encourage growth in France and quickly create more than 1,000 jobs in France.” Refuting the union’s concern about job security, the airline said an additional 250 pilot jobs would be created.

It is easy to understand how the opposition might treat that public spirited bit as a red herring. But the reason for survival is as difficult an argument to refute, and that does not do the pilots any favour when British operator Monarch Airlines announced at the same time that its employees have agreed to pay cuts of up to 30 per cent to secure the future of the airline, supported by the British Airline Pilots’ Association (Balpa) which said its pilots had made “major sacrifices”. But, of course, the British issue was not complicated by the suggested disparity in wage and employment terms between the parent airline and its budget subsidiary in the French dispute.

The differences between Air France and its pilots are far from being resolved at this stage even as the airline has conceded to expanding its Transavia operations only within France and guaranteed there would be no job relocation while maintaining its prerogative to vary the terms for employment with the low-cost subsidiary. SNPL insisted on similar wage and terms, and issued a statement to say its “determination remains intact.” It proposed the appointment of an independent mediator which Air France rejected, supported by the Government which has a 16-per-cent stake in the loss-making airline.

French government spokesperson Stephan Le Foll had said the Transavia expansion project “strategically, is important to the company. We have to find ways and means for Air France to extend its activity in low-cost flights.” French Prime Minister Manuel Valls said: “The creation of Transavia in France has to go forward.”

Clearly Air France is smarting from losses which it attributed to the competition posed by low-cost operators. There are some 40 budget carriers operating across Europe, and these apparently have taken a large chunk of the business away from not only of Air France but also other legacy European carriers. But is Transavia the answer to Air France’s woes, as an alternative cheap option to stem its losses?

British Airways (BA) had a short run with Go Fly, founded in 1998 and operating flights between Stansted Airport and destinations in Europe until it was sold first in 2001 to a private equity firm and then in 2002 to BA’s rival Easyjet. There had to be reasons for its divestment, among them one of synergy and how Go Fly was attracting BA customers to cross over as well. Other established airlines have gone down that path, in most cases the result of a push rather than pull factor as a way to maintain rather than grow the market and, hopefully, muscle out the competition.

But not all subsidiary low-cost operators managed the challenge as successfully as the likes of Ryanair and Easyjet, although it is to be also noted that only a third of the independent upstarts have survived. However the demise of many budget carriers could be attributed largely to wider economic factors and not necessarily the intimidation of the big boys. On the contrary, it is the threat posed by low-cost carriers that had the established airlines sending their second liners into the game.

Yet that is no argument for Air France to abandon its expansionary plan via Transavia, which the Air France-KLM merger inherited 100 per cent from the Dutch entity, if that is the way to regain its grounds. The paradox is that this then lends some credence to SNPL’s fear particularly if Transavia grows at the expense of the parent airline, and that which must necessarily bring into question what makes a budget carrier tick if not low cost?

Beyond the lure of the budget model that has reshaped the traditional market across the globe, a more pertinent question to ask is why airlines such as BA and Cathay Pacific are profitable but not Air France-KLM and Qantas, with or without the complement of low-cost offshoots.

Frederic Gagey