Can long haul low cost airlines be successful Assignment

Can long haul low cost airlines be successful Assignment Words: 3687

It is estimated that cost advantages might be much lower than the 50-60% on shortfalls. Other factors such as the adoption by network airlines of some LLC features and their likely competitive response, the limited potential for market stimulation, the need for dense markets and feed traffic all combine to cast doubt on the widespread establishment of the business model for long-haul flights. Keywords: airline operations; long-haul air services; low-cost airline viability 1. Introduction The idea of a low-cost long-haul airline is not new but previous attempts have not been successful.

Since their demise, however, new technologies and business recesses have been developed, so that it is appropriate to re-examine the economics of these services. One of the first of such ventures was Lake Airways that in 1977 transformed its I-J charter operations into a long-haul ‘no frills’ airline. Its first ‘Strains’ flight was London Catwalk to New York and it subsequently added Los Angles and Miami. The features it had in common with today’s low-cost business model were: Point-to-point operations, with no interlining or transfers can long haul low cost airlines be successful By nuances High density single class seating

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The airline had a single aircraft type, the McDonnell Douglas DDCD, with one class 345 seats, and offered an introductory fare of EYE. 50 compared to the lowest existing equivalent fare of Just under OHIO. It is doubtful whether this cut in fares was sustainable, another LLC feature being the ability to offer large reductions in fares based on significantly lower unit costs. In order to reduce the disadvantage of having no distribution system, initially it took no advance bookings, with passengers having to queue at the airport or town terminal for each flight.

It failed in 1982 as a result of he economic downturn in the early sass, strong competition from other transatlantic carriers and the rapid depreciation of its base country currency. The nature of the Strains product changed considerably from its introduction, first offering booklet and advance purchase tickets and later adding a ‘Regency Class’ cabin (Banks, 1982). 2 The Lake venture was a stand-alone operation. Soon after its demise, in 1983, a US based low-cost airline People Express started international operations from New York to London Catwalk, later adding Montreal and Brussels.

This differed in being an expansion from a very successful low cost domestic base, and in providing connecting flights at its Newark hub. It also had some premium class seats, although (in common with Southwest and later Lacks) its mantra was simplicity. It also charged IIS$3 for checked baggage, a practice that seems to be making a revival. Over- expansion and management problems led to its demise in 1987. Since the failure of these two long-haul Lacks, the internet has become an effective tool for selling airlines seats.

This would have allowed them to go direct to the market, bi-passing costly travel agents that were often tied to network carriers. Laser’s alternative of the sale of seats on the day of departure at the airport or town terminal would never have been accepted by much of the potential market. Second, Lacks have developed a simpler means of fare differentiation by time of booking, which has become an effective alternative to the previously very successful revenue management techniques of the network airlines.

Since these two examples, European charter airlines have moved into long-haul markets and also started to market their flights as scheduled or at least part of their capacity sold as ‘seat only. Ryan’s and Raisin’s announcement of their intentions to move into long-haul markets has added to interest in the potential for such services. A previous paper addressed the degree to which the low-cost model could be applied to long-haul operations (Francis et al, 2007).

That study (based on 2003 data) concluded that a low-cost long-haul operation could only achieve a 20% cost advantage over network carriers compared to 50% on short/medium haul flights. Be operated by an 3 unconverted AWAY or 8737, the workhorses of the low-cost business model to date. This effectively means flights of six hours or more. The head of Boeing’s commercial aircraft division thought that there might be a market for low-cost transatlantic flights; any further and creature comforts will be required’ (Morgan, 2007). However, existing long-haul Y-class cabins offer seat comfort that is scarcely better than many short-haul Lacks.

Furthermore other in-flight amenities would certainly be available for purchase on a long-haul LLC. This paper examines the potential for long-haul Lacks, first by reviewing previous proposals, looking at costs and competitive reactions before assessing market stimulation and the need for feed. Regulatory aspects, in particular traffic rights, have not been considered, and there are still many restrictions in place in long-haul markets. However, the recent EX./US open skies agreement has removed any barrier to LLC entry on transatlantic routes and these perhaps offer some of the most likely focus initially. . Previous ‘LLC’ long-haul services and proposals The most recent experiment with long-haul low cost flying was based in Hong Kong. Oasis Hong Kong operated Hong Kong/London with a two-class 8747-400 for 18 months before failing; it originally planned a high density seating aircraft with low- cost airline connections available at the London end. This was modified to a two-class cabin, with London Catwalk selected rather than Standee. Although Getable operates Boston/Long Beach non-stop with a AWAY in 6:30 hours. There has also been a variety of ideas and even more concrete proposals for longhand services, many of them unable to raise the necessary finance. Caviar was due to start 8747-300 Cape Town/London Standee ‘low cost’ service with paid catering and FIE. It did not obtain sufficient financial backing Flyaway planned 8747-200 service from Buenos Aries to Madrid and on to Delhi/ environment (passenger interaction) A new Barcelona based carrier plans to start low cost flights in mid-2009, similar to carriers such as Oasis Hong Kong Airlines, Zoom Airlines and Air Asia X.

It will offer economy and premium-class services to four South American cities and the US, undercutting existing fares by 20-40% Tim Clark, Emirates President, put forward following scenario (Airline Business, 2005): an all economy class AWAY with 760 seats, stripped of major galleys (only beverage stations), passengers bring or buy in-flight meals/drinks, paid for FIE, keg baggage ere, flying from an LLC base such as London Standee.

He suggested that this would allow a London/Adelaide roundup fare of IIS$530, a substantial reduction from existing economy fares at that time. In 2007, Urinary announced plans to establish a low cost transatlantic operation in a separate company to its European services. This appeared to be in response to approaches from various US airports. The project awaits the next major downturn when the airline expects to acquire cheap enough aircraft to make the flights viable. The plan would be to have a fleet of around 40 to 50 long-haul aircraft, such as

Boeing sass, 5 Airbus Assess or Assess, and to base three or four aircraft across some of its existing bases to serve five or six US destinations. However, the service would be two-class, including a premium business product, not characteristic of shorter haul LLC operations. Offering fares as low as 10, it expects the services, to secondary airports such as Baltimore, Providence in Rhode Island and New York Long Island Slip Macarthur to operate at very high load factors, with sales of food, drink, duty-free goods and in-flight entertainment major revenue earners.

The above examples fall into two categories in terms of aircraft type: two-class, large, existing aircraft, or smaller latest technology types to match their seat-km costs; and very large high density all-economy aircraft (AWAY). The success rate of the first is not good, and it relies on high volume city pairs to generate sufficient traffic to fill the aircraft. The Urinary proposal has the advantages of requiring less volume and offers feed from existing bases, but depends crucially on obtaining new aircraft very cheaply.

The second type proposed by Emirates needs very high volume routes. On short/medium haul the large cuts in fares might generate additional traffic (short breaks, parties etc) that might make the route viable. But on long-hauls the disadvantages of travel time, Jet lag and total cost argue against this. Would Emirates itself offer this service at the risk of cannibalizing its own economy class traffic? Eurasia X was set up in 2007 with 20% of its share capital held by Eurasia and 20% by the Virgin Group.

From November 2007 it operated only two long-haul routes from Koala Lump with a leased AWAY aircraft: Hangout in China and Gold Coast in 6 Australia. These were offered in two classes (economy with 32″ seat pitch and XSL with 58″), the aircraft configured with 295 seats. From October 2008 it will start operating its own daily Assess services with all economy 392 seats, expanding its point-to-point network eventually to 45 cities as its 25 new aircraft are delivered by Airbus. Initially, it plans to operate to Tricky in India and Perth in Australia, with a Japanese city and London Standee added in early 2009.

The lowest air fare for its Perth service will be around MYRIAD one-way, compared to Malaysian Airlines’ lowest fare of MYRIAD (both excluding taxes). The London/Koala Lump flights fares are expected to start at MYRA,200 (IEEE). The Eurasia X concept is described as ‘low cost long-haul, no frills’, but will have assigned seating and two classes. However, the only premium class differentiator is a fully-receivable leather seat: all other frills such as meals will be common to both classes and available at a price. The charge for a checked bag will vary depending on weight.

Meals will be MYRRH and be available in three options. Seat selection will cost an additional MYRRH, and extra legroom or a seat upgrade will cost MYRIAD. Eurasia X clearly has any features that are similar to the recently failed Oasis Hong Kong. The key difference is in the choice of Koala Lump as its base or ‘hub’. First this is not as competitive as Hong Kong; and second passengers will be able to make their own connections there from Raisin’s short/medium-haul flights (and at London Standee to European LLC flights).

Oasis had suggested that 25% of its passengers ‘self- connected’ to and from other Lacks (although these were not a major feature of operations at its Hong Kong base), and it had been trying to negotiate an interline agreement with these carriers before it went out of business. 4. Long-haul charter carriers The European charter carriers have faced a serious challenge to their intra-E leisure business from the Lacks. Whereas unit costs for Lacks is 50-60% below that of network airlines, the charter carrier can manage only 40% below (Tuckering, 2007). It has also been focused on origin country sales and summer only destinations.

Thus over the past 10 years many European leisure carriers have re-positioned by converting many previously designated charter flights to ‘scheduled’, and also switching to longer haul destinations. L TU have made this move some years ago, now serving ironically leisure destinations in the US such as Florida, Los Angles and New York, as well as Thailand, the Maldives, Mauritius, China and South Africa. Interestingly, markets (Sobbed, 2008). Canadian LLC, Zoom, started transatlantic flights from Toronto to Cardiff: but this replaced peak season charters, rather than introduced LLC model to long-haul.

French carrier, Corsair, operates a daily all-economy class 8747-400 with 582 seats between Paris and some of France’s overseas territories such as Fort De France in the Caribbean. This is a long-haul domestic flight that is peculiar to France, but of interest here is that Corsair does not use these high-density 8747-sass on long-haul international routes. Such long-haul flights carry a mix of inclusive tour and seat-only sales, but they have not always been successful. For example, Britannic Airways used to offer charter flights between UK and Australia using BREWER aircraft.

This was discontinued due to competition, even though a number of network carriers also withdrew service to cities in Australia. 8 Charter airline long-haul services have up to now been restricted to leisure destinations. These are sometimes operated for a limited number of months seasonal) and generally low frequency (less than daily). They also offer a premium class with more comfortable seating and enhanced in-flight service. Almost 80% of I-J long-haul charter traffic in 2007 was destined for holiday destinations in either North America (mainly Florida) or the Caribbean. . Potential LLC long-haul operators Existing network or full service carriers have had little success in starting up their own LLC (Morel, 2005). They are thus unlikely to have an appetite to establish longhand Lacks Existing Lacks are more likely candidates with the largest European LLC already putting forward proposals in this respect, and Eurasia close to introducing their long-haul product. Those Lacks moving towards enhancing services such as asset might also link their existing flights to long-hauls perhaps providing a baggage transfer facility for an extra charge.

However, asset’s CEO was reported to have ruled out long-haul flying and also franchising its brand to another airline (Pilling, 2008). As discussed above, charter or leisure carriers still depend on tour operators, sell almost all their seats in origin countries, and package holidays, and end to operate at lower frequencies than needed by a competitive long-haul service. Start-up airlines specializing on long-haul operations will also continue to emerge, as did Oasis in Hong Kong.

Their business plans tend to follow trends, for example most recent start-ups focused on short/medium-haul low cost flights, but now these markets 9 are becoming saturated. More long-haul opportunities are also being created 6. Potential cost savings It has been established above that the most likely operator of truly LLC long-haul services would be either a start-up airline or a stand-alone operation of an existing LLC. Each of the main reasons for LLC lower costs on short-haul routes will first be examined, before quantifying potential advantages on long-hauls. . 1 . Faster turnaround of aircraft One key source of cost advantage on short-hauls is faster aircraft turnaround, partly due to operating at less congested airports. This allows more rotations per day and higher aircraft and crew utilization. For long-haul on the other hand, longer ground time from aircraft servicing and refueling would be needed. Network carriers already get up to 15 hours a day from aircraft. Any further increase will run up against time zones and airport curfews, leaving aside the market reaction to am departures.

Secondary airports may not have sufficiently long runways, and maintenance and handling support for less common long-haul aircraft may be not available or more expensive. 6. 2. No frills 10 On short-hauls Lacks offer all economy seating at slightly lower seat pitch than network carriers and paid catering (with limited hot snacks). No seat assignment takes place for faster turnaround, but this could be offered on long-hauls. Paid Len- flight Entertainment (FIE) would also make more sense on long-haul sectors, and Ryan’s unsuccessful trial of hand-held devices on short-hauls (Turner, 2005) could work on long-haul.

These could be pre-booked to avoid unnecessary weight of incorporating them in seat backs. 6. 3. Point-to-point markets only On short-hauls, Lacks try to get the maximum amount of revenue per aircraft by keeping aircraft flying as much as possible during the am to 1 1 pm operating day. This means short turnaround times which also means no seat assignment, completing cabin cleaning before landing to avoid these ground handling services and no connecting bags or passengers. On long-hauls, time zones, night curfews and flying mime would limit the number of daily rotations that one aircraft made.

This reduces the need for such simplicity of product, although many of the simple attributes might be retained for cost or ancillary revenue reasons. For example, the inspiration for many of today’s Lacks, Southwest Airlines, is now actively seeking cross-border icosahedra and interline partners, signaling a change of emphasis over its still short- 6. 4. Higher productivity on long-haul? 11 Most of the productivity gains on long-haul will come from high seat densities, although some of this will be lost if a two class seating configuration is adopted.

There is likely to be much less scope for working aircraft and crews more intensively than on short-haul flights. Network carriers will also have high density cabins in Y class and have the ability to drive fares in this cabin down to marginal costs. 6. 5. Passenger load factor asset achieved 85% on short/medium-haul services in 2006/07. This was not far above AAA member airlines’ passenger load factor which averaged 82% on all their long-haul flights, with 81% on the North Atlantic.

Achieving higher crew productivity might also be difficult: LLC crews overnight at base on short-haul; but there would be need to drop crews at outstations for long-haul. 6. 6. Lower input prices Lacks negotiate very hard on every input from third parties, and these techniques are being copied by many network carriers. New entrant Lacks can benefit from low aircraft costs (legacy airlines locked into higher costs) depending on the timing. More established Lacks obtained very low unit aircraft prices from large orders. New entrant Lacks can also hire younger cheaper pilots.

Lacks avoid GAS fees/agents by advertising and website/call centers, although this is less developed outside Europe and North America. New entrant Lacks are not weighed down by legacy systems and restrictive practices. Smaller orders will be made for long-haul aircraft by Lacks, such 12 aircraft offering less competitive pricing and less liquid used markets; on the other hand, some Lacks may save on buyer furnished equipment Bengali & Pompom (2002) derived the major sources of LLC advantage compared to a network carrier on short/medium haul routes.

These were adjusted for a reference stage length of km. The five areas listed in Table 1 accounted for three-quarters of total network carrier operating costs, with the largest being distribution and assenter services. Seat density gave a further 10% advantage, after allowing for all remaining costs, some of which would be higher for the LLC. Insert Table 1 here Some of the LLC reduction in overheads should still apply to long-haul, given the much lower share of total operating costs on long-haul.

Distribution costs gave the LLC an even larger difference but on long-haul this accounts for only around 6% of total costs, and since the Bengali & Pompom study network carriers have made significant moves towards internet distribution and reduced costs. 2 Table 2 is based n unit costs reported by Virgin Atlantic Airways to the I-J Civil Aviation Authority (CA, 2008). This cost data is shown in full in Appendix A. This airline is one of the few full service carriers that relies more on point-to-point markets than hub connections.

It operates only long-haul (average sector length of Just over 7,km in 2006) to points such as New York, Los Angles, Shanghai, Tokyo and Johannesburg, all denser I-J markets. These are the types of routes that a long-haul British Airways’ 2007/08 annual report stated that one quarter of all its bookings were through its own website baa. Com. For Eurasia own website sales were Just under 50%. 13 LLC would need to fill aircraft at reasonable frequency Owe avoid long-haul leisure routes where they would have no cost advantage over charter carriers).

Insert Table 2 here Virgin Atlantics passenger service costs amounted to EYE (IIS$48) per passenger in 2006/07. This is elevated by the high service standards in the premium cabins (covered by the higher fare revenue per passenger). A much lower figure would apply to a network carrier’s Y-class services, and it is this that would be avoided by a LLC through charging for in-flight catering, but the reduced cost and thus fare would be rower in relation to long-haul economy class fares than for short-haul.

The Bengali & Pompom study also estimated that unit crew costs would be 43% lower for Lacks, through lower salaries, higher crew productivity and reduced numbers of crew needed. The latter referred only to cabin crew, which in Virgin’s case has been inflated by the higher staffing ratios for premium cabins. There would still be a salary advantage for a long-haul LLC, but cabin crew productivity would be largely the same as for network carriers (apart from some carriers that have union imposed extractions on number of flights per month), with similar crew expenses.

Cockpit crew productivity should be similar, with somewhat lower salaries depending on availability of qualified long-haul pilots. Airport and handling charges would offer a much smaller potential for reduced costs: first the share of these in total costs would be much lower (Hooper, 2005); second, although secondary airports might allow lower landing charges and passenger fees, handling would be more expensive since there would be few flights per day over which to spread the fixed costs.

Selecting a LLC base at one end of the route would give omen advantages, but still small in relation to total operating costs. One factor that Bengali & Pompom (2002) did not address was aircraft costs (egg depreciation, interest and leasing). Initially a start-up long-haul LLC would have a higher cost of capital and no opportunity to get low aircraft prices from large orders. This may be mitigated by timing their start to coincide with a major industry downturn when lease rates are low, although they would only lock in low rates for a few years at best.

Some of the established Lacks such as Urinary and asset subsequently placed eve large orders tit aircraft manufacturers at substantial discounts on the list price. It would be difficult to replicate this on long-haul although the acquisition of cheap aircraft appears crucial to Ryan’s plans for starting such services. The UK CA also examined the scope for long-haul no frills (LLC) cost saving compared to network carriers and found that only 15% of operating costs per seat had a ‘high’ potential for savings, with a further 45% having ‘medium’ potential.

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