Issue no. 225 April 2017
Low cost subsidiaries – Repeating past errors? This issue includes Page of long-haul low cost, in the ini al form of Norwe- gian Air Shu le opera ng across the Atlan c and into Asia, po- Low cost subsidiaries – T ten ally poses a serious challenge to established European, US Repea ng past errors? 1 and Asian network carriers. Yet it is not at all clear that the incumbents see Norwegian — whose North Atlan c market share is less than 2% — Aeroflot: State resumes control 3 and other new entrants, like WOW and Westjet — as really viable, as a major threat in the long term. SIA: Reconciling Premium tradi on with Budget Barriers to entry remain high, no- eventually abandoned. growth 8 tably the requirement for feed at high Vueling is admi edly a successful cost hub airports, the unit cost advan- short haul LCC within IAG, though Alaska Air absorbs Virgin tageachievedthroughhighu lisa on this is largely because of its dis nct America’s “great of widebody aircra and the ability brand as the de facto flag-carrier of emo onal energy” 13 to offer heavily discounted Economy Catalonia. Aer Lingus could conceiv- seats “cross-subsidised” by Premium ably play a role as a lower cost long traffic. haul carrier within IAG, but it appears Nevertheless, there is a growing that it is being integrated (mostly) suspicion that the Legacies could be into the an trust-immunised Atlan c repea ng the mistakes they made in JV, which means that its pricing and the 90s and 00s — hugely underes - capacity has to be ghtly coordinated ma ng the impact of a new low cost with BA and American, with the business model on their established three carriers opera ng as a virtually business — when the expansion of merged en ty. Ryanair, easyJet, Wizz, etc in effect Instead IAG has opted to set of taking on unions with the aim of ul- undermined their network models, up Level as a long haul low cost mately reducing costs at the main- forcing them into painful cost cu ng subsidiary based at Barcelona line airline, through the introduc on and route ra onalisa on. and ini ally opera ng two A330s. ofA/Btypewagescales.Thisiswhypi- One of the unsuccessful strate- Lu hansa’s low cost subsidiary Eu- lot unions can be so vociferously op- gies that is being re-enacted today is rowings has six A330s for long haul posed to low cost subsidiaries, with the establishment of lower cost sub- opera on, while Air France’s Boost Air France unions for instance. de- sidiaries, but this me for the long proposes A340s and later A350s manding that Boost’s pilots be on the haul sector. The short haul versions based at Paris CDG. same contracts as mainstream em- in Europe were unprofitable and gen- A fundamental problem with low ployees. The result, as all the Legacies erally could not be made to work as cost subsidiaries is strategic ambigu- know, is protracted strikes. v part of the parent airline group: BA ity: what exactly is their purpose? The subsidiary is an a empt to managed to sell off Go to 3i, the in- block off expansion of pure LCC en- vestment fund, and hence to easyJet, Conflic ng aims trants or even put them out of busi- while KLM offloaded Buzz to Ryanair, Management at the parent company ness. This is never, of course, an purchases which were soon deeply have to resolve a number of conflict- explicit aim, and in today’s li gious regre ed by the two LCCs. ing aims: world it is a dangerous strategy. In the US, Delta’s experiment v The subsidiary is designed as a with Song and United’s with Ted were v The low cost subsidiary is a means niche market operator. This strategy
Published by Aviation Strategy Ltd Aviation Strategy is meant to ensure that the sub- 777s will be reconfigured to 332 sidiary does not cannibalise the par- seats from 280, which will equalise, ISSN 2041-4021 (Online) ent. The problem is finding suitable BA claims, the opera ng cost per This newsle er is published ten mes a niches: pure leisure des na ons are Economy seat between itself and year by Avia on Strategy Limited Jan/Feb the usual choice, but then the sub- Norwegian’s 787s). By contrast the and Jul/Aug usually appear as combined is- sues. Our editorial policy is to analyse and sidiary is opera ng in essence as a Premium classes are being upgraded cover contemporary avia on issues and air- charter carrier, in a highly price sensi- with more sea ng capacity, gourmet line strategies in a clear, original and ob- ve market and one in which a Legacy food, refurbished lounges, etc). jec ve manner. Avia on Strategy does not airline has no real compe ve advan- The outcome will be a sharper dif- shy away from cri cal analysis, and takes a global perspec ve — with balanced cover- tage. feren a on between long haul Econ- age of the European, American and Asian v Finally, there is the possibility of omy and Premium, which is vitally im- markets. using a low cost subsidiary to transi- portant to BA and the other European on the parent airline to a more effi- Legacies (see IATA’s bubble chart on Publisher: cient opera on, through allowing the this page). The problem is that the subsidiary and the parent to compete Legacy carrier ends up with an Econ- Keith McMullan for routes; the closest to this radical omy product that to passengers is in- James Halstead strategy is Qantas/ Jetstar. dis nguishablefromthatofanewen- trant LCC, while total unit seat costs Editorial Team Meanwhile, BA appears to be remain way above those of a pure Keith McMullan coming up with a varia on on the LCC. kgm@avia onstrategy.aero parent/subsidiary airline strategy — Then the Premium class is ex- crea ng two different airlines on the posed: most a en on so far has James Halstead same long haul aircra . The proposi- focused on long-haul LCCs winning jch@avia onstrategy.aero on seems to be to duplicate its new Economy passengers but there is also short haul Economy product on long growing compe on for a segment Tel: +44(0)207-490-4453 haul — most visibly this means paying of the Business market — those Fax: +44(0)207-504-8298 for food and drinks (but not just air- travellers from SMEs, for example, line food but Marks & Spencer airline whose companies cannot nego - Subscriptions: food) and increasing sea ng density ate corporate discounts with the info@avia onstrategy.aero (from 2018 BA’s Gatwick-based network carriers. Copyright: ©2017. All rights reserved PREMIUM TRAFFIC REVENUES 6% Avia on Strategy Ltd South Atlan c Registered No: 8511732 (England) Registered Office: 4% Europe-S Africa 137-149 Goswell Rd Within Europe London EC1V 7ET 2% Europe-Middle East North VAT No: GB 162 7100 38 Atlan c Within Asia ISSN 2041-4021 (Online) 0% Europe-Asia Asia-SW Pacific The opinions expressed in this publica on donotnecessarilyreflecttheopinionsofthe -2% editors, publisher or contributors. Every ef- Pacific fort is made to ensure that the informa on Premium fare growth minus economy -4% contained in this publica on is accurate, but no legal reponsibility is accepted for any er- -15% -10% -5% 0% 5% 10% rors or omissions. The contents of this pub- Premium pax growth minus economy pax growth lica on, either in whole or in part, may not be copied, stored or reproduced in any for- Source: IATA. Note: the size of each bubble is propor onal to eachroute’s share of industry-wide premium revenues. mat, printed or electronic form, without the wri en consent of the publisher.
2 www.aviationstrategy.aero April 2017 Aeroflot: State resumes control