Fly the American

ir travel in the 21st century has Anever been cheaper, particu- larly for fliers between the US and the UK. Even in the wake of Brexit, Fly the American Way the past several decades of deregu- lating air travel and a better envi- ronment of cost competition has opened up many opportunities for How 40 Years of Airline Deregulation, Competition, travelers to fly cheaply - albeit at a and Innovation Have Shifted the Flight Path for cost. The low-cost, or ‘no frills’ airline model has generated much in Transatlantic Commuting the way of efficiencies in air travel, evidenced by players such as South- by Kester Keating west Airlines, Spirit Airlines, and xxxxxxothers in the US along with easyJet, RyanAir, and Norwegian Air Shut- tle in the EU. However, changes to bythe Kesterpolitical xxxxxxxxxxx landscapes like Brexit as well as the emergence of faster, cheaper air travel add an additional dynamic to the modern transatlantic flight experience - both for better and for worse. US Roots of Low-Cost Travel In the 1970s, the air travel com- munity of businessmen and leisure fliers alike was introduced to the mon aircraft within the fleet, quicker benefits of an otherwise unknown flight turnaround times (resulting in phenomenon: low-cost air fares. more flights per day), and a focus Herb Kelleher’s Southwest Airlines on getting aircraft off the ground - rising to prominence in the wake quickly led to a model that was not of the 1978 Airline Deregulation Act only profitable, but gained the atten- under the Carter administration - tion of other players in the industry revolutionized air travel by casting across the Atlantic. off the inefficiencies of ‘hub-and- It wasn’t long before the two spoke’ flight routing (flying through major players utilizing the low-cost carriers such as British Airways, Aer major connecting airport hubs to carrier model in the EU – RyanAir Lingus, Lufthansa, and Air France, to end destinations) in favor of the and easyJet – sought to learn from name a few. point to point system, which maxi- Kelleher’s model in the 1990s and Today, RyanAir and easyJet have mized time and cost efficiencies for 2000s in order to improve their own seen substantial gains from their the airline. This resulted in the low businesses. While neither Southwest improvement of the low-cost model cost model of flying, which allowed Airlines nor the European low-cost to the ‘ultra-low cost model,’ which Southwest to charge less in fares for carriers actually instituted a model includes spartan accomodations for its customers and to reap substantial that relied on transatlantic travel, the fliers, single model fleets, fast turn profits at the expense of legacy carri- model for cheaper flying and faster arounds, one-cabin class systems, ers like Northwest, Delta, and Ameri- turnaround was a success story, no frills, and the service of satellite can Airlines. Kelleher’s utilization of given that both airlines successfully airports in order to keep costs low cost saving initiatives such as com- undercut major European legacy and flight turnover high. RyanAir

20 The American some airlines are now charging to customers given the demand for lower fares and the perception that Fly the American Way amenities and ‘frills’ can be profitable if priced accordingly by the airline). Can traversing the Atlantic be just as cheap? As the market evolved through- out the 1970s through today, one of the great hurdles for air travelers has always been how to affordably fly between the US and the EU – the poster child of transatlantic flying. Legacy carriers have traditionally dominated this market space, and in some cases, airlines like Virgin Atlan- tic started as a business comprised heavily of these routes. So why haven’t the Spirit Airlines or the RyanAir’s of the world tapped more of this market? From the per- spective of the innovative airline, navigating the course has been tricky: costs are high with a +6 hour flight, and it has been difficult to nies like AirTran (ultimately acquired entice customers to fly without the by Southwest) and Spirit Airlines ‘frills’ or benefits that most low cost began utilizing the model in the US or ‘ultra low cost’ carriers eschew in market. With similar effect, the point their business models. While Freddie to point flight routing, baggage Laker attempted to create a low-cost fees, single cabin service, no frills flight between London’s Gatwick experience proved wildly successful, airport and New York’s JFK in the as companies like Spirit have illus- late 1970s with Laker Airways, the trated: the budget airline operates model ultimately collapsed under with an industry-high 16.2% margin the weight of massive corporate reported a 157% increase in share and an over 400% increase in share losses stemming from costs borne prices since 2013 as of 2015 with prices since the company went pub- by the airline catering to its custom- their increasing market share, which lic in 2011. ers while keeping fares low. Walk-on was bolstered by improvements to This has not, however, come with- flights and fierce competition for the service for the fliers (including relax- out a steep, growing resentment by route led to a price war, and within ing their notoriously stringent in- consumers, as frustration with the 5 years the company went bankrupt. flight baggage policy) and ultra-low low-cost model has made many fli- In the wake of Laker Airways’ fares. ers increasingly aware of the sacri- unsuccessful venture, only the larg- The improved ‘ultra low-cost car- fices airlines will make to keep their est legacy carriers benefitted from rier’ model proved inspirational for costs so low, including customer ser- the transatlantic route with sus- newcomers in the US market as well, vice, amenities, seat space, and the tained success, given the access to and in the 1990s and early 2000s the ability to make seating reservations favorable routes (e.g. JFK vs. Newark, idea boomeranged back as compa- ahead of time (a feature for which Heathrow vs. Gatwick, etc.), lucrative The American 21 tainly one-way costs on legacy carriers between airports on either side of the pond, subject to availability. Given the rapidly shifting dynam- ics in this space, several ‘known unknowns’ lie ahead in the transatlantic air travel space. The impact of Threat 1 to traditional carriers: JetSmarter brokers unused seats on private aircraft Brexit has taken a toll on flight routes for legacy carriers, as Delta Airlines premium and first class cabin ser- carriers like Norwegian have been announced decreasing its service vice offerings, and point loyalty sys- able to capitalize on favorable flight on UK routes, and the shock to the tems which allow fliers to upgrade volumes, governmental attitudes pound sterling has resulted in signifi- or lower the total cost of their flight toward competition in this sector, cant price shocks to fares and costs in return for brand loyalty. However, and fliers who don’t wish to shell for many airlines. Navigating Brexit’s in the past few years, this norm has out for a full-service (and fuller fare) long-term impact on transatlantic air been changing as consumers have flight. travel leaves much to guessing, as found alternatives challenging this In addition to traditional com- the UK’s negotiation with the EU will status quo. mercial airline businesses, legacy inevitably impact trade agreements carriers face another growing and flight costs which will only com- Flying transatlantic in the 21st threat to their established domi- plicate plans and budgets for people century: Brexit and Private nance: private flights. Improving traveling to the continent. Flights technology, aircraft, and compa- However, fliers stand to benefit While large carriers have com- nies offering chartered jet services from lower priced fares to the UK manded the skies over the Atlantic have improved access to private when coming from the US, espe- and have captured most of the mar- air travel – whether owned or char- cially as oil prices and sterling remain ket share for air travel, the recent tered – and with record low flight depressed. Some airlines, like Ameri- shake-up in the industry has ush- times recorded between New York can, have opted to keep their flight ered in serious changes. Most nota- to London, flying private offers an route frequency to the UK the same, bly, the emergence of Norwegian appealing alternative to commercial and data aggregators like CheapAir. Air Shuttle has offered a low-cost flights for time-sensitive, business com have begun advising fliers on option for budget-conscious fliers professionals. Start-up companies the impacts that Brexit will have flying transnationally, much to the like JetSmarter have launched ser- on travel arrangements. With such chagrin of legacy carriers and politi- vices selling unused seats on pri- changes and uncertainties in this cians alike. Benefitting directly from vate aircraft for a fraction of the cost market, we can certainly expect to the US-EU Open Skies Agreement (one-way flights from approx £100) see many important developments from 2007, the 3rd largest low-cost of whole chartered flights and cer- in the near future. carrier in Europe has become a thorn in the side of the full service airline business, as the US House of Repre- Threat 2: Norwegian benefits from the US-EU Open Skies Agreement sentatives recently authored a bill seeking to impede any of Norwe- gian’s future transatlantic business routes due to perceived unfair cost undercutting against legacy carriers (carriers which still command over 79% of the transatlantic commercial flying volume as of May 2016). By offering rock-bottom fares, low cost

22 The American From the Pacific to the

Pennines Paul Nixon +44 (0)20 3207 8364 Dedicated to serving clients’ diverse [email protected] financial interests on both sides of the Atlantic. www.lgtvestra-us.com

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