Low-fare, Long-Haul: Second Time Around

In the past decade, low-cost airlines have sprung up throughout the world to revolutionize short-haul air travel. Now, following the success of low-fare carriers such as Europe's easyJet, Malaysia's AirAsia and Brazil's Gol on shorter routes, people are wondering if the same business model could work equally well for longer flights.

If this proved the case, the days of huge network carriers such as American Airlines, Air France-KLM and Singapore Airlines could be numbered. But there are arguments for and against the notion that low-cost airlines could eventually dominate the long-haul international market.

The idea of low-fare, long-haul airlines isn?t new. Sir Freddie Laker pioneered the idea with his SkyTrain DC-10s between London and New York in the 1970s, and PeopleExpress took up the mantle in the 1980s. Both airlines ultimately failed.

The main argument against such airlines succeeding is that, on long-haul routes, all airlines face certain levels of cost. For example, they cannot stick too closely to the "no frills" concept: they need to provide in-flight food and entertainment to keep passengers happy, said aviation financier Bertrand Grabowski, a member of the board of managing directors of DVB Bank.

Also, while low-fare airlines usually prefer to serve cheap secondary airports, this may prove challenging with long-haul services, where airlines may need to market themselves to large numbers of people connecting from other airports.

Turnarounds of long-haul flights usually take much longer than for short flights, and airlines can't achieve the "compact," crew-efficient operations that are possible with short-haul networks, said Grabowski. Also, cargo-handling costs would basically be the same for low-cost and traditional airlines on long-haul routes.

Reduced cost advantage

"We believe that the cost structures of low-cost carriers on short-haul routes are probably around 40 to 60 percent lower than the legacy airlines," said Grabowski. "We're not sure you can have the same kind of differential when you move to long-haul."

A cost advantage of 20 to 25 percent is more likely, he thinks. With this, low-cost airlines could compete in long-haul markets, but their progress would be "nothing to compare with the development of low-cost carriers in Europe and the U.S."

Another problem is that some fast-growing airlines appear to regard market share and recognition rather than profitability as their prime business goal and are prepared to keep fares artificially low. And no scheduled airline has yet truly proved the viability of a low-cost, long-haul business model over the long term.

But a compelling argument for the success of a new generation of low-cost, long-haul airlines is that several are now operating and doing well so far.

The new generation

The all-blue Boeing 767s of Canada's Zoom Airlines have operated scheduled services for several years to British and French airports. In 2006, the Ottawa-based carrier formed a UK subsidiary, which has begun low-fare services to New York and Bermuda from London.

Oasis Hong Kong Airlines, which began flying nonstop to London Gatwick in October 2006 with Boeing 747-400s, is filling more than 85 percent of its seats with paying customers, said the airline's commercial director Ken Chad. It recently started serving Vancouver and plans eventually to serve 60 major cities, all at least eight hours' flying time from Hong Kong.

Oasis has three key criteria for selecting a destination airport. "It has to be a major business destination; it has to be a major cargo destination, because we carry cargo in the belly holds of our 747s; and it has to be a low-cost carrier hub," said Chad. "About 26 percent of our traffic is self-hubbing with low-cost carriers."

Berlin, Milan, San Francisco, Oakland, Chicago and Los Angeles all feature in Oasis' route plans. Not coincidentally, all have airports that are large centers for low-fare, short-haul airlines.

Aircraft choice important

Aircraft choice could prove important in determining the success of low-fare, long-haul airlines. Existing low-cost carriers such as Germany's Air Berlin and TUI Group have ordered Boeing 787s -- which Boeing says will be 20 percent more fuel-efficient than today's similarly sized jets -- to move into long-haul operations.

Fly AsianXpress -- in which Sir Richard Branson's Virgin Group has taken a 20 percent stake -- has ordered 15 new Airbus A330-300s. The new long-haul arm of Virgin Blue, V Australia, has ordered Boeing 777-300ERs.

But Europe's largest low-fare airline Ryanair, which recently announced its desire to fly transatlantic routes with 50 widebody jets, is taking a different approach. Ryanair will wait for the aircraft market to soften before deciding if it can buy new or used jets cheaply enough to operate very-low-fare transatlantic services.

Oasis Hong Kong loves the 747-400. "It's quite expensive to operate -- unless you can fill it," said Chad. As long as Oasis can fill the 260 economy-class and -- crucially -- the 83 business-class seats on each of its 747-400s at prices 40 to 65 percent lower than its competitors, it will make money, he said.

Connecting service a disadvantage

Its competitive targets aren?t the other airlines providing nonstop service on its routes. Instead, Oasis targets carriers offering one- or two-stop connecting service. These airlines post the lowest fares, but since each takeoff and landing burns lots of fuel, their costs are higher than those of the nonstop carriers. Targeting connecting carriers is "proving extremely effective," said Chad.

Chad argues that because aircraft burn much more fuel on takeoff and landing than during cruise flight, long-haul routes are more suited to the low-cost model than short-haul networks. Each Oasis 747-400 is in the air for more than 15 hours a day, a utilization rate that short-haul airlines can only dream about.

Ultimately, the survival of low-cost, long-haul carriers may rest on their ability to attract business and high-end leisure passengers with low business-class fares. Oasis promotes the idea of "affordable luxury" so strongly that although it has been operating less than a year, some people have already flown business-class with the airline 30 times, said Chad.