The Ultimate Battle in the Sky – Reinventing the Long-Haul Travel Experience
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Viewpoint The ultimate battle in the sky – reinventing the long-haul travel experience Arthur D. Little explores the future development of long-haul air travel Since the mid 2000s the air-transport industry has been in an era of hyper-competition. Medium-haul has been irreversibly disrupted, and the sector has become a mass-market industry. Now airlines are preparing for the next battle in the sky: the fight for the long-haul traveler. With lower regulatory barriers and the latest long-haul aircrafts delivering on their promises, new business models are emerging, from “long-haul, low-cost” (LHLC) to the revisited “ultra-long range”. Therefore, no one seems immune: neither legacy airlines around the world, nor the mighty Gulf carriers. All may have to rethink their strategies. Winning the long-haul battle is key to compete in the Also, after the struggle for the medium-haul market, the up-coming “hyper-consolidation” era outcome of this “ultimate battle in the sky” will position airlines when it comes to the next era in the industry post the “hyper- The low-cost model is finally emerging for long-haul flights, and competition” era, i.e. the “hyper-consolidation” era. even still being in its infancy, it is raising the question of the economic sustainability and the future of legacy carriers. Keep on succeeding in the long-haul segment will thus enable some airlines to become global industry shapers, some could Indeed, we observe that the disruption cycle in long-haul rather be “hunted pearls” – that will be acquired and maybe travel will be much shorter than in the medium-haul segment disappear, but surely maximize the return for their shareholders where it took 20 years to reshape the industry. Airlines must thanks to niche leadership or a unique combination of strengths therefore act quickly and strongly in transforming and positioning – and most of airlines could become “valueless/ commoditized”. themselves to reinvent the long-haul travel experience and its associated business and operating model. Disruption cycle in medium & long-haul air travel Emergence Growth Reconfiguration Stability Number of competitors Long-haul 2020 ? Medium-haul Long-haul today segment today Medium-haul >20 years Long-haul 10 to15 years ? Time 1996-2002 2002-2010 2010-2016 2016+ 2010-2015 2015-2020 2020 - <2023 ? 2023+ Pioneers invent a disruptive Many copy-cats enter the market Innovators consolidate (market exit, Market shares stabilize business & operating model mergers and acquisitions) Incumbents activate defensive Disrupters and incumbent players strategies Incumbents players go offensive convergence towards an hybrid model Source: International Energy Agency 2012 (IEA) 1 Viewpoint Long-haul low-cost: new life for an old concept Boosting revenues is the secret key to the success of the long-haul, low-cost model Examples of LHLC carriers date back to 1948, when Loftleidir offered no-frills flights from Reykjavik to New York, and 1977, Developing a viable business model for long-haul, low-cost when Laker Airways entered the London-to-New York route. flights is challenging. Our analysis shows that long-haul, low-cost More recent attempts to develop the market have been made airlines can maintain the same margins as their network peers, by Zoom Airlines (Canada) and Oasis Hong Kong Airlines, both of even with a 20% decrease in revenues per flight. But LHLC which ceased operations in the late 2000s. carriers are flying in thin air, as this -20% might not be powerful enough to grab market shares compared to the -50% that Since the early 2010s, LHLC carriers have however entered medium-haul, low-cost carriers (LCCs) have achieved. every major inter- and intra-continental market. Drivers for expansion were the maturity of the short- and medium-haul Competing with the lowest cost base possible is, of course, a models, as well as technological advances in terms of fuel pre-requisite, however maximizing revenues per seat is the real efficiencies and operating costs brought by new generation of key to enduring success. aircrafts – the B787, the A350 and the revamped A330. Fixing the basics on the cost side: We have identified five Long-haul, low-cost routes in 2016 areas in which low-cost carriers could exploit a significant cost advantage. Overall, the operating economics associated with long-haul flights present a potential of ~20% cost advantage compared to network carriers’ cost structure. This comes from: n Consuming up to 20% less fuel than airlines flying old- generation aircrafts, thus gaining an overall cost advantage of around 6% for LHLC carriers n Up to 25% savings would come from reduced cabin crew, more productive cockpit crew and lower employer contribution Source: SRS analyzer, Arthur D. Little; ASC = available seat capacity in 2016 n Going from an average of 12h up to 16–18h per aircraft, Today, the 19 LHLC airlines represent only 3% of the total long- thanks to a point-to-point network strategy haul market, operating 50 scheduled routes. But their offerings n Limited catering and in-flight services (handling and airport tripled for the period 2010–2016, going from 3.7 to 12.7 million charges would be similar when serving same airports) in available seating capacity, with focus on gaining critical n Lower spending on sales and marketing, with typical low- mass in the existing-routes portfolio: in 2016, new routes thus cost carriers selling almost 80% of their tickets directly, and represented only 4% of a 28% total capacity increase. Most more intensively leveraging cheaper digital marketing destinations are within approximately eight hours’ flight duration, the “sweet spot” for optimal asset utilization and lowest cost. LHLC cost per flight advantage vs. legacies LHLC penetration rate in 2016 (major routes) ~20% Marketshare of LH PtP airlines per 100 Market share of LH PtP players main markets (2016) 100 94.3 -6 79 1 5.3% -4 -5 -3 -3 80 75.2 0.4% 67.4 7.9% 60.7 60 1.1% 39.9 40 1.5% 20 16.9 13.3 12.1 Network Fuel Staff Ownership Handling & Sales & LHLC 0.4% 1.0% 4.8% carrier cost Catering Marketing carrier 0 NA <=> EU <=> Intra NA <=> EU <=> EU <=> NA <=> Others Source: Arthur D. Little analysis Size of the market M seats offered) M seats market the of Size EUR APAC+ APAC APAC + LATAM AFR LATAM ME & ME ME Winning the battle on the revenue side: LHLC carriers Source: SRS analyzer, Arthur D. Little analysis leverage on three major drivers: i) cabin-seat density, ii) unit revenue per seat (fare price and ancillary revenues) and iii) cabin However with ongoing aircraft deliveries and limits on mix between seat categories (economy, premium economy and penetration rates for existing routes, we expect expansion business). on new routes: indeed (a) Europe APAC and the Middle East, and (b) APAC and the Middle East North America are Higher seating density can provide a 25% revenue advantage showing similar passenger-traffic volumes and are currently compared to network carriers for any given flight. AirAsia X, more unexploited by long-haul new entrants than the already with 377 seats on an A330-300 (compared to Malaysian Airlines’ penetrated North America Europe, the intra-APAC and the 290-seat configuration), and Norwegian, with 291 seats on a Middle East markets. 2 The ultimate battle in the sky – reinventing the long-haul travel experience 1 1 Viewpoint 787-8 (compared to British Airways’ 214-seat configuration), are Overall, the competitive landscape will be structured around striking examples of the ability to increase cabin capacity. four strategic models that will fiercely confront each other by achieving different operating model and product strategies. However, in order to attract passengers and deliver on their promises, LHLC carriers are indeed doomed to offering In terms of network structure, there are alternative models significantly lower fares than legacy carriers, typically -25% for a emerging. The initial standpoint for network strategies of low- comparable seat category. cost airlines is to focus on point-to-point (Air Canada Rouge, XL Airways). However, some LHLC airlines rely on their own Another challenge for low-cost carriers is the disadvantage of feeding capabilities (Air Asia X, Norwegian, WOW, etc.); others their cabin mix vs. that of legacies. Indeed, premium traffic may establish alliances to leverage specialization between short- and account for only 10–20% of network airlines passengers, but medium-haul and long-haul partners, replicating the code- represent up to 40% of revenues on long-haul flights. sharing partnerships between full-service providers (e.g., Scoot, LHLC revenue per flight disadvantage vs. legacies a member of Value Alliance). A virtual hub is another plausible -17.2% option, in whichMarketshare a third party of proposes LH PtP either airlines self-connecting per 6 flights or connecting services, for example, at Gatwick, Milan or 100 25 main markets (2016) 37 83 Delhi airports. Another pillar for successful LHLC and maximization of revenues is product differentiation and quality of service. Main features of strategic models in long-haul Network carrier Cabin seat Fare price Cabin mix LHLC carrier density & Ancillary 1 class 2 class 3 class 1 Cabin mix Source: Arthur D. Little analysis Ultra Minimal Basic Friendly Upscale Low-cost Overall, the revenue advantage that a network carrier could 2 Services Simply expect from its ability to drive premium traffic and operate a Pure O&D Self connecting Optimized 3 Connection organized “premium cabin mix” could be as high as 35–40% per flight. asic Product offering Product B Loyalty None Mono airline Open Alliance 4 Strong, innovation-driven sales of ancillary products are thus program Unique Concentrated Fragmented required and heavily implemented to reduce the gap between 5 Aircraft type network carriers and low-cost competitors to as low as 5–10%.