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Can the Low-Cost Model Be Adapted to Long-Haul Carriers ? Clarification of Different Models and Trends

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Can the Low-Cost Model Be Adapted to Long-Haul Carriers ? Clarification of Different Models and Trends CAN THE LOW-COST MODEL BE ADAPTED TO LONG-HAUL CARRIERS ? CLARIFICATION OF DIFFERENT MODELS AND TRENDS With the groundbreaking arrival of low-budget airline, French Blue, on Paris (Orly)-Punta Cana flights and the increased number of offers in the Long-Haul Low-Cost (LHLC) carrier segment (notably Eurowings which CONTACTS offers bargain-basement prices on flights from Cologne to Dubai, Cuba and Bangkok), the question of LHLC carriers is again at the forefront of airline sector news, especially after the announcement of Air France’s strategic plan, Trust Together. JEAN-BAPTISTE NAU, Senior Manager [email protected] MORGANE THURET, Senior Consultant [email protected] This study was drafted with the help of consultants from the “Air & Beyond by Wavestone” community. The LHLC formula draws on the same proposition for long-haul carriers gives rise Can the low-cost model simply be ingredients that made the traditional to a number of questions. transposed to long-haul carriers ? low-cost model a success and adapts The LHLC model is based on the ive key To underline the respective positioning of these to take account of the specific factors that have underpinned the success the airline companies under review from constraints of long-haul carriers; a stra- of low-cost carriers, and which have a comparative perspective, the following tegy that certainly seems to be paying enabled them to capture an increasing graph shows the positioning of certain of for several players, such as Air Asia X share of the market and generate high airlines relative to two axes: the market and Norwegian Air Shuttle. Despite the returns. For example, the operating for airline companies in the short to long implications of the generic “low-cost” margins of Ryanair, AirAsia and Southwest carrier segments and their positioning by term, the LHLC model is by no means a Airlines were two to three times higher service ofered. ixed low-cost concept. indeed, signiicant than the sector average in 20141. changes taking place in this segment are considerably modifying the original low- Key success factors of the standard low cost budget model. An in-depth analysis of model these trends indicates a global resha- Matrix of the positioning and markets ping of the airline landscape and the of the airline companies under review Enhanced operational eiciency harmonization of ofers. A new trend is emerging, focused on diferent customer- • Maximization of lying time and reduction in stop-over times experience concepts, with personalized TRADITIONAL • Procurement rationalization • Fleet standardization – optimization of maintenance expendi- Air France services, a more or less lexible ofering ture and training costs for cabin crew members and perceived value that ranges from the Silk Air KLM Singapore Airlines (technical and sales staf) quest for “status”, proposed by the long- Qantas Hop ! Air Caraïbes standing sector leaders, and the «good Lufthansa Optimized costs deal» implied by the low-cost model. Long-Haul Low-Cost • Annual number of working hours of crew members higher, POSITIONING light time only taken into account Air Asia Norwegian Air Asia X • Return to base every night avoids overnight crew costs and Southwest Wow other premiums (away from home per diems, meals, etc.) Scoot ADAPTING THE LOW-COST MODEL Ryanair Jetstar • Distribution costs limited (no computer reservation system, French Blue EasyJet Eurowings such as GDS), lack of, or simpliied, loyalty programs TO LONG-HAUL CARRIERS • Latest generation leet (consumes less fuel and requires less LOW COST maintenance) As illustrated below, several players have REGIONAL MARKET LONG-HAUL Leaner structure ventured into the LHLC segment and are © Wavestone (analysis of the activities of the airline companies beginning to produce promising results, under review) • Numerous activities outsourced (passenger handling, runway even though adapting the low-cost value management, airplane maintenance, etc.) • Decision-making process simpliied 1- Market Analysis – 2015-2018 Trends – Corporate Strategies • Less binding corporate agreements for the airline Simpliication of oferings and ancillary services • One class only, cabin “densiication”, additional services and options billed Targeted marketing strategy • Essentially a point-to-point transit strategy • Choice of most proitable routes • Choice of competitive airports, etc. 2 2 CAN THE LOW COSTMODEL BE ADAPTED TO LONG-HAUL CARRIERS ? The rigorous implementation of these Despite these difficulties, some airlines While all of these models are underpinned levers has caused a radical reshuling in are generating promising operating and by the same fundamentals, they do the airline market for short and medium- inancial results. This has given rise to four not necessarily benefit from the same haul carriers, especially since the trend Long-Haul Low-Cost company models. advantages in the ongoing market reshule, in attractive air fares has triggered latent notably vis-à-vis the sector majors. demand for short trips in Europe. Expansion of certain LHLC companies Four Long-Haul Low-Cost models While the medium-haul low-cost carrier segment has expanded by offering cheaper fares than traditional airline « PURE » « NATIVE » companies, this price differential is LHLC airlines with a low-cost parent Airline companies created as LHLCs considerably more difficult to achieve company No notable examples when this report was drafted but on long-haul carriers given their specific Air Asia et Air Asia X some may emerge in the future constraints : « PURE » « NATIVE » Operational-optimization potential limited « DAUGHTER » « MUTANT » Long haul carriers already spend most of their time in the LHLC airlines with a traditional parent Some airline companies have become LHLCs air with short stop-over periods that are diicult to reduce company Norwegian Air Shuttle became an LC airline in 2002 then due to the nature of the operations (cleaning, refueling) Lufthansa (Eurowings) created Norwegian Long Haul and NAI LATAM (currently undergoing transformation) Air Caraïbe (French Blue) « DAUGHTER » « MUTANT » Greater importance placed on comfort Singapore Airlines (Scoot) Passenger expectations are generally greater on long haul lights (more leg room, catering services, inlight entertainment, etc.) Advantages of Long-Haul Low-Cost airline companies Importance of premium revenues Cabin “densiication” may therefore limit premium oferings, which nevertheless are strong revenue contributors on long haul lights « MAJOR » Plane size « PURE » « NATIVE » « DAUGHTER » « MUTANT » Long-haul planes carry more passengers and are more diicult Optimized occupancy rates to ill than medium-haul carriers, particularly when taking of Network/ Alliances from less attractive secondary airports (notably in the business Hub strategy + – – + + – + + + class segment) Distribution capacity Services (e.g.: lounge Process optimization Low cost mindset* Innovation/ adaptation + + + + + + –– Synergies Cost structure Payroll Outsourcing Possible + + + + + + + + – synergies © Wavestone (analysis of the activities of the airline companies under review) Indi- under review) of the activities airline companies (analysis © Wavestone etc.) labor laws, regulations, (e.g. in local considerations does not factor rating cative *Quest for permanent gains, rapid decision-making circuit, process simpliication 3 Against this backdrop, Air France has This could see the emergence of a new those of Norwegian Air Shuttle3. Long- launched a NewCo spin-off (a separate type of hub allowing medium-haul low- haul low-cost carriers are boosting this entity as yet unnamed). This parallel cost carriers to feed low-cost long haul major growth driver by differentiating company, whose offer is relatively less lights; a trend which could have an impact their oferings: expensive than that of its parent without on current airport models in terms of being low-cost, is targeting a different airline assignment, baggage handling and / Densiication of economy class seats, which, when combined with category of clientele and is envisaged as light connecting paths, etc. premium-class services, generate an innovation laboratory for the group. additional revenues (e.g. Frenchblue In this context, the Daughter model and, ofers upgraded services on 28 of the to a lesser extent, the Pure model stand to 378 passenger seats in its A330-300) AN EVER- EVOLVING BUSINESS beneit from the fact that they can draw MODEL on the alliances, network and hub of their / Low cost Daughter airlines enhance parent company to optimize occupation their brand appeal, either by using the loyalty programs of their pa- Since its launch, the low-cost model has rates. rent company (e.g. JetStar/Qantas undergone several changes that are now Frequent Flyers, Air Asia X/BIG of being adopted by the diferent long-haul Diferentiation and additional ser- Air Asia), or by developing their own low-cost models. vices and options (e.g. Westjet Rewards). Additional paying options are key to the Steady shift towards major airports Likewise, the shift towards major airports low-cost business model. For example, and other hubs could also beneit players who can rely these options account for 25% of on parent-company backing. While the irst low-cost models tended to Ryanair’s revenues (~ €15 on average per operate through secondary airports for passenger in 2015)2, and 15% of inancial reasons, recent trends show that more and more players are refocusing on major airports, particularly since LHLC airlines
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