Business | Low-cost airlines

Making Laker’s dream come true

Low-cost airlines have revolutionised short-haul flying. Now, after several failed attempts, they are poised to do the same on longer routes

SIR FREDDIE LAKER, the pioneer of cheap “no frills” transatlantic flights in the 1970s (pictured), could not make his ventures succeed. But he did inspire the low-cost carriers that have brought affordable air travel to the masses over the past 15 years or so. Ryanair of Ireland is now the world’s biggest international airline by passenger numbers, carrying 81m people last year. Budget airlines round the world, from Southwest in the United States to AirAsia in Malaysia, have succeeded where Laker failed by sticking to shorter routes.

Subsequent attempts to apply the low-cost model to long-haul routes have flopped as badly as Laker. Oasis Hong Kong Airlines went into liquidation in 2008, a year after starting cheap long-haul flights to London and Vancouver. More recently, AirAsia’s sister airline for longer flights, AirAsia X, abandoned its attempts to run budget flights to Europe. The incumbent full-service airlines have lost much of their short-haul business (flights of up to three hours or so) to the low-cost carriers, but they continue to dominate the skies on the longest routes.

However, a number of airlines in Asia, AirAsia X among them, have continued to test the limits of how far the no-frills model will travel. Scoot, an affiliate of Singapore Airlines, offers cut-price direct flights between Singapore and Tianjin in northern China that take around six hours, more or less the boundary between medium- and long-haul (there is no official definition).

Now, a fresh attempt to undercut the incumbents on long-haul routes is beginning. Norwegian Air Shuttle, a low-cost carrier that has been expanding rapidly across Europe, has begun flying across the Atlantic and to Thailand. Next March Wow Air, an Icelandic carrier, will start flights on routes such as Boston to London, via Reykjavik, with introductory prices as low as $99 one way.

In Laker’s day, the fuel burned by long-haul planes made up a large proportion of the cost of operating the flights. That made it hard for budget carriers to find enough cost savings elsewhere to cut prices sufficiently to tempt flyers to switch from carriers offering more comforts.

This is now changing, with the launches of some new and far more fuel-efficient planes: Boeing’s 787 Dreamliner, already in the air, Airbus’s A350, which will start flying within weeks, and a revamped version of Airbus’s A330, coming in 2019. Ryanair’s boss, Michael O’Leary, recently reiterated a promise that he would eventually sell transatlantic flights from as little as €10 ($13) one-way and with average return fares of around €200-300. The full-service airlines will also be ordering these new planes, but their cost disadvantage compared with the nimble budget carriers (because of such things as their legacy pension schemes and labour agreements) will become more stark.

In recent years mergers and alliances between full-service airlines have made some of the most popular long-haul routes, such as across the Atlantic, a cosy oligopoly. The big legacy carriers have begun to improve their chronically dismal financial performance. Now, not only do they face a rising threat on intercontinental routes from the three Gulf “superconnector” airlines—Emirates, Etihad and Qatar—but soon they may suffer the same pitiless competition from the likes of Ryanair and Norwegian that they get on shorter routes.

This is why Norwegian is having such trouble getting permission to expand its transatlantic flights through a subsidiary registered in Ireland. For months, regulators in America have held up Norwegian’s permits on spurious safety grounds, under pressure from the country’s big airlines and pilots’ unions. European Union officials pressed the Irish subsidiary’s case at a meeting with American counterparts on November 25th.

Norwegian’s boss, Bjorn Kjos, has been able to apply to his long-haul venture many of the cost-saving tricks that have helped his short-haul business grow so quickly. Norwegian crams more seats into its 787s: 291, compared with around 250 in more common configurations. It works them hard: by scheduling back-to-back flights across the Atlantic and to Bangkok it keeps them flying 17-18 hours a day compared with a maximum of 15 hours at many full-service rivals. Where possible, as it does in short-haul, Norwegian flies to secondary airports with lower fees.

What is helping Norwegian establish a foothold in the transatlantic market is that, unlike some full-service airlines that are still flying older planes, he already has a fleet of seven 787s. Mr Kjos says he can achieve an operating cost per seat, per kilometre travelled, that is 20% cheaper than they can. That goes a long way to selling tickets which he claims are around 40% cheaper than the competition.

However, there are some things that budget airlines find harder in long-haul than on short routes. The combination of long routes, time differences and airports’ night curfews can make it harder to turn planes around quickly. Overnight layovers mean paying for crews’ bed and board.

Selling enough tickets to fill a medium-sized “widebody” plane like the 787 several times a week, and thus to run a reasonably frequent service, is a lot harder than filling the smaller “narrowbodies” the budget airlines typically use on short routes. The older carriers still have enough of a short-haul business for this to feed connecting passengers on to long-haul flights. Norwegian can do some of this too, but the problem may be going away, as ever more passengers “self-connect” by booking each leg of a trip separately online. Some airports, such as Malpensa in Milan and Gatwick in London, have begun to make this easier, by arranging for connecting passengers’ bags to be transferred from one flight to another, even when they are switching to a different airline.

In all there are a number of reasons why passengers should be able to look forward to flying longer for less. However, Ryanair’s Mr O’Leary is uncharacteristically cautious about whether long-haul, low-cost’s moment has finally arrived. For a start, he thinks his Viking counterpart, Mr Kjos, has erred in not offering business-class seats on his longer flights. The full-service airlines make most of their profits on business seats, and Mr O’Leary thinks even ruthless cost-cutters like his own airline will need to offer some in order to make long-haul routes pay.

Furthermore, says Mr O’Leary, business travellers expect flexibility, and will want one or two flights a day to the main destinations. So, he reckons, a fleet of 30-50 of the new, efficient planes will be needed. Boeing and Airbus are working flat out and have a long waiting list. Mr O’Leary thinks it may be four to five years before he has received enough of the new planes to launch his attack on the long-haul market.

So the older, high-cost airlines have a little breathing-room, for now. But in three years or so the two big manufacturers will start delivering a further set of highly efficient planes: revamped versions of Boeing’s 737 and Airbus’s A320, the narrowbody craft that the low-cost airlines already use on their short routes. What is different is that each will come with long-range versions capable of crossing the Atlantic and, in Boeing’s case, flying from London to Delhi. These smaller planes will be far easier to fill and much cheaper to run. When the skies are filled with swarms of them, fares should hit rock-bottom and Laker’s dream may finally come true.

From the archives: Freddie Laker launches Skytrain

This article appeared in the Business section of the print edition under the headline "Making Laker’s dream come true"

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