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Assessing the Long Haul low cost business model Peter Morris Chief Economist Airneth Den Haag, April 2010. Key Question. Outline. How did ‘short haul low cost’ gain traction? A look at the ‘Established Network model’ on long haul Variety of long haul models - PowerPoint PPT Presentation
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Assessing the Long
Haul low cost business
model
Peter MorrisChief Economist
AirnethDen Haag, April 2010
Key Question
Outline
How did ‘short haul low cost’ gain traction? A look at the ‘Established Network model’ on
long haul Variety of long haul models Case Study:
Impact of new player on Long Haul – Oasis Key cost concerns Opportunities Summary
The golden rule is: There are no golden rulesG.B. Shaw
The Aviation Industry has seen…………..
Regulation and liberalisationRobust growth of 5%pa+ averageEconomic and other shocks - and
repeated recoveryConsolidation and rationalisationNew markets and changing
business models- generally unforeseen
An industry that both resists and accepts major change
Remember - One of the first ‘low cost long haul’ airlines is now an ‘incumbent’
And now adopting a strategy to defend its market- against other competitors, and any new‘start-up’ threats
How did ‘short haul low cost’ gain traction?
Why did ‘low cost’ grow?
Deregulation Convergence of previous business model on
short haul with ‘comfortable’ competition New entrants used:
New distribution outlets (internet) Higher asset utilisation (fleet, staff) Lower costs- airports, aircraft, distribution Ancillary revenues (add ons, specific charges, partnerships) Stimulate new traffic from lower faresSimplicity!
Response of incumbents was inhibited by: Legacy links, high costs, financial crisis, complexity
Why short haul?
Regional deregulation (US, Europe…) Commodity product - with significant price
elasticity Utilisation improvement from 8 → 12h per day
per aircraft Artificial pricing barriers by airlines Regional sales proposition acceptable and
trusted Many secondary destinations with poor service +
alternate airports Proven model (USA)
Why NOT long haul? Regulatory restrictions Price segmentation (3 class etc.) and business
customers key Higher entry costs (aircraft, set up, marketing
etc.) Connecting passengers Long haul aircraft utilisation Secondary airports of limited scope and
availability for large jets No market for ‘nowhere to nowhere’ routes Incumbents able to price low at the margin to
compete + connecting airlines More difficult to attract new revenues, and many
of the costs the same (e.g. aircraft, fuel)
Where does the cost advantage lie?
In Europe for short haul services
Low cost differentials have been maintained
Low cost airlines gain more profitability from lower revenues
A look at the ‘Established Network model’ on long haul
Key strengths of network airline model
Network connections provide feed in to/ from hubs
Product differentiation (Class of service) allows coverage of wide willingness to pay, and charge ‘marginal fares’ for the last travellers
Established brand has value Alliance relationships Travel agency network, corporates important Experience of international markets Critical mass…….
Some weaknesses?
Class fare differentials have grown to unrealistic levels (6-10X for premium vs. economy)
Large players too big and inflexible to react swiftly (e.g. fleet refurbishment takes years)
The network ‘guarantees’ have a high cost High growth markets create many new niches ‘Personal service’ often just cosmetic, and unable
to deal with detailed issues
Variety of new long haul models
Summary of the ‘low cost long haul’ entrants
Cover a widening spectrum Most are relatively new, and many are targeting
high growth markets (Asia, Middle East) Some are parented by incumbents, and proving a
useful market exploration tool as well (perhaps) as a warning to airline staff
Some are driven by the charter market seeking to diversify
Some have targeted ‘business class only’ markets (e.g. Maxjet, Eos, Silverjet)
Some have gone (e.g. Oasis, Maxjet, Eos, Silverjet)
Europe
Fleet: 168 A319’s and A320’s Longest routes include London to Luxor, Sharm
el Sheikh and Tel Aviv.
Fleet: 267 737-800’s Long routes include UK and Scandinavia to the
Canary Islands
Fleet: 35 737-800’s Longest routes include Copenhagen and Oslo to
Dubai, Scandinavia to the Canary Islands
Europe
Airberlin Vueling Airlines Jet2 Iceland Express Monarch Airlines Smartwings Thomson Airways Transavia Airlines TUIfly
North America Fleet: 352 737-700’s Routes: Transcontinental domestic services
Fleet: 118 A320’s Routes: Transcontinental domestic services
Fleet: 135 737NG’s, 1 leased Boeing 757-200 Routes: Canada to the Caribbean and the US
(including Hawaii). Transcontinental domestic services.
North America
Air Tran Air Transat Frontier Spirit Airlines Sunwing Airlines USA 3000 Airlines Virgin America
South America
Fleet: 94 737-700’s and -800s, 767’s Longer routes within Brazil & to the Caribbean
and neighbouring South American countries
Fleet: 24 A319’s, 2 A320’s Routes: Mexico to US, including Guadalajara to
Chicago
Middle East Fleet: 21 A320’s, plus 40 more on order Routes: Longest sectors to India, Kazakhstan,
Nepal, Sri Lanka and Ukraine. Subsidiaries in Morocco and Egypt. Will start
subsidiary in Jordan.
Fleet: 15 737-800’s, 38 more on order Routes: Longest sectors to India, Nepal, Russia
and Sri Lanka from Dubai
Fleet: 21 737-800’s Routes: Long and medium haul services from
various destinations in India to the UAE, Oman, Malaysia and Singapore.
Asia/Pacific Fleet: 2 A340-300’s, 9 A330-300’s. 22 more A330’s
and 15 A350’s on order. Routes: Kuala Lumpur to Australia, France, Iran and
the United Kingdom. Indonesia AirAsia and Thai AirAsia operate many
routes within Asia, longer sectors include Bangkok to Delhi.
Fleet: 9 A330-200’s. 10 787-8s on order. Routes: Australia to Japan, Vietnam, Indonesia,
Malaysia and Hawaii. Singapore to China, Thailand and Vietnam.
Fleet: 5 777-300ERs, 8 more on Option. Routes: Brisbane, Melbourne and Sydney to Los
Angeles. Sydney to Abu Dhabi.
Fleet: 52 737-700/800’s. Will acquire 2 A330-200’s Routes: Australia to Indonesia, Thailand, Papua New
Guinea and the South Pacific Islands
Asia/Pacific
Tiger Airways Jeju Air Jin Air Lion Air Cebu Pacific Air
Ceased operations Fleet: 3 767’s Routes to Jakarta and Sydney + Charter & non scheduled
flights to Japan and Vietnam
Fleet: 4 747-400’s Routes from Hong Kong to London, Gatwick and Vancouver Future to service more long-haul destinations including
Sydney, Melbourne, San Francisco and Manchester
Fleet: 767’s, 737-800’s and 757s + 2 - 787s delivery in 2010/2011
Routes operate like traditional charter carrier with seasonal routes and destinations
Fleet: 767-300ERs and 757s Routes linking the US and Canada with the UK as well as
Canada with Paris
Fleet: 737-800’s and -900ER’s, 757’s and 767’s Routes: UK to North America, North Africa and Europe
Case Study:Impact of new player on Long Haul - Oasis
Immediate journey at a premium on major carriers
Fare Comparison LON- HKG Feb 2008
Oasis
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
GB
P
Economy- LON Economy-HKG
Source: ASCEND review of company websites and best internet agents
Booking in Feb 2008 for Feb 2008
Oasis desperate to attract premium revenue
Fare Comparison LON- HKG Feb 2008
Oasis
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
GB
P
Business-LON Business-HKG
Source: ASCEND review of company websites and best internet agents
Booking in Feb 2008 for Feb 2008
More convergence for a future journey
Fare Comparison LON- HKG April 2008
Oasis
0
100
200
300
400
500
600
700
800
900
1,000
GB
P
Economy- LON Economy-HKG
Booking in Feb 2008 for April 2008
HKG fares higher in April- Oasis going leaves only connections such as QA and TG
Fare Comparison LON- HKG April 2008
Oasis
0
500
1,000
1,500
2,000
2,500
3,000
3,500
GB
P
Business-LON Business-HKG
Booking in Feb 2008 for April 2008
How did Oasis affect the market?
Probably added 20% to passenger traffic (100,000 passengers) with additional stimulation due to competition
Did not get traction in the premium market despite a good value product (timing, airports, flyer corporate loyalty)
Achieved good load factors in economy
2006 2007
BA+CX+VS+N
Z
1.416m 1.453m
Oasis n/a 0.207m
Total n/a 1.660m
Economy fares
-3%
Premium fares
+9.7%
Fare changes Jan- June 2007 vs 2006Sources, UKCAA, IATA
Key cost concerns
Step jump in fuel price has changed economics of the industry
Fuel costs rose significantly- some regions helped by hedging, others impacted by long sector distances or poor fleet efficiencyN. American labour costs fell dramatically
Source: IATA
Fuel costs and labour proved key cost issues
Opportunities
Global aviation trends by route area
Source : Ascend analysis and OAG from BACK Aviation
Prospective Airline Startups by Region February 2008
0
10
20
30
40
50
60
70
Africa Asia/Pacific Central/SouthAmerica
Europe Middle East North America Russia/CIS
Definite Firm Tentative
Asia Pacific still clearly in the expansion stage……
Source: ASCEND
Asia Pacific and Middle East half of potential world startups
Can Long Haul, Low Cost succeed?
It has more challenges than for LCC short haul More competition Ticket and travel product more complex Fewer defensible ’new wave’ attributes
The ‘linked’ new entrants look set to succeed lone participants have a challenge to reach
critical mass Fuel price (and taxes) are increasingly raising
real cost of long haul trips, with no end in sight Emirates could soon be offering the ultimate
‘long haul low cost’ with 750 seat A380’s
In Summary
‘The reasonable man accepts the world as he finds it. The unreasonable man tries to change the world to his point of view.Therefore all progress depends on the unreasonable man’G.B.Shaw : Man and Superman
‘If the chariot ahead has overturned, let the chariot behind beware’
Jia-Yi , Han Dynasty
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