The concept of medium/long-haul low-cost travel may still be ahead of its time, but a number of Asian carriers are willing to give it a try
When AirAsia chief executive Tony Fernandes first looked at launching a low-cost carrier, his plan was to go long haul, offering no-frills services between Asia and Europe using widebody aircraft. But he says it took even an airline industry novice like him only a short time to determine that it would not work.
Instead, Fernandes and his partners focused on the short haul, and the Malaysia-headquartered airline group is now, without question, the largest and most successful low-cost carrier in Asia.
Yet there is always someone in the airline business willing to try something new in the hope of finding the “next big thing”, and several new medium/long-haul point-to-point carriers, mainly in Asia-Pacific, are in the planning stages. Some, such as Emirates president Tim Clark, bet that someone will eventually find a way to emulate the low-cost, short-haul model on a medium- or long-haul basis. But others believe it may forever remain an unachievable goal.
Some have tried and failed, such as the late Freddie Laker with his Skytrain in the 1970s. There are also independents who are making a go of it now, such as Canada’s Zoom. But none has really developed as a major operator in the same way as the successful short-haul budget carriers.
That may be the problem, say an increasing number of observers. They argue that the industry is looking for something that cannot exist, and should accept that instead of looking for direct similarities between short- and long-haul low-cost carriers it should be how the new carriers differ from the network players that is the crucial factor. In this way, success may well depend on one of the same things as in the short-haul market – differentiation.
Checklist for success
Going down the checklist of what the most successful short-haul low-cost carriers have in common, some of the existing and planned widebody low-cost carriers clearly fit the general mould. Starting with a clean sheet of paper? Check. In-flight frills only at an additional cost? Check. Point-to-point operations? Check. Single aircraft type? Check. Ensuring aircraft utilisation is high? Check. Operating to secondary airports where possible? Check. Cutting distribution costs by selling through websites or call centres? Check.
There are plenty of obstacles, however. These include the competitive response of the big network airlines, which can subsidise their low-yield, cheap fare offerings at the back of their aircraft with cargo revenue and high-yield revenue from front-end traffic. Major long-haul airlines also tend to have sizeable fleets, allowing them to spread costs over a wider base; natural feed through interline arrangements; and they already push the envelope in terms of high aircraft utilisation. In short, many full-service airlines are already fairly cost-competitive when it comes to the long haul, leaving less room for a new player to differentiate itself with radically lower fares.
But at least one major network carrier thinks it can make a go of it in the medium/long-haul low-cost arena, and that is Qantas Airways of Australia. While it already has a lower-cost international arm called Australian Airlines (that is going to disappear anyhow), Qantas is planning a much more aggressive play by making its domestic Jetstar subsidiary a medium/long-haul “value based airline”.
Indeed many believe it will take a large established airline getting into the game, rather than a new player entering the market, to truly lead to a new breed of medium/long-haul scheduled carrier offering ultra-cheap airfares on a year-round basis. These observers see it as perhaps a natural evolution in an industry of declining yields – incumbents have no choice but to find ways to get costs down and after pushing as far as they can with their mainline offering may be forced to start afresh with a totally new concept.
The plans Qantas has for Jetstar will effectively see the launch of a new airline, initially operating Airbus A330-200s point-to-point between Australia and Asian and Pacific cities from the end of this year. It will focus on destinations between six and 10 hours from Australia, and will quickly transition to a fleet of 10 new Boeing 787s. Jetstar will take delivery of the first aircraft in August 2008.
“Jetstar will have opportunities to fly to destinations already served by Qantas mainline, but from alternative Australian ports to the current Qantas services,” says Qantas. “Our aim for the group is to expand in our traditional markets with Qantas and to expand in new markets with the most suitable product, be it Qantas or Jetstar.”
Jetstar International will offer two classes of travel, economy and premium economy. There will be assigned seating, baggage interlining for international connections on selected airlines, and video on demand. Meals will be free in premium economy but available for purchase in economy.
The main aim? “We believe Jetstar will deliver the lowest-cost air operations of any international carrier operating to Australia, similar to our experience with Jetstar’s Australian operations.”
And it sees the type of aircraft that it will operate in its second phase of expansion as key to its success. “The Boeing 787 provides breakthrough technology, enabling us to fly further to more point-to-point destinations throughout the world at a cost equivalent to operating larger aircraft like the Boeing 747-400,” says Qantas.
Hong Kong entrant
Up in Hong Kong, meanwhile, Stephen Miller is planning to enter the long-haul low-cost market through independent start-up carrier Oasis Hong Kong Airlines, which recently acquired two ex-Singapore Airlines 747-400s.
Miller, an industry veteran who helped establish Hong Kong’s Dragonair in the 1980s and was its chief executive for several years, says Oasis plans to launch late in September with scheduled flights to London Gatwick. There will be two seating classes, business and economy, but few frills, and the overall aim is to offer fares that are significantly cheaper than those offered by airlines operating between Hong Kong and London Heathrow, thereby adding a new stimulus to the market.
Oasis also plans to operate scheduled services to Berlin, Cologne/Bonn and Milan in Europe, as well as to Chicago and Oakland in the USA. Its shareholders are Hong Kong investors. Miller says he came up with the idea for a long-haul budget carrier while watching television and seeing a European airline advertising cheap fares to points in Europe via its home base. “If we get a sizeable percentage of those passengers who would otherwise travel on one of the one-stop or two-stop carriers, we don’t even need to touch the current non-stop operators,” he says.
“This is a market which exists, we are just moving it from the one- and two-stop carriers to Oasis. We want to go into markets that are mature, but produce a different type of service to stimulate these markets. I believe the long-haul stimulation has not really started. We are riding on a wave of economic expansion, people are doing well, they are earning more money than ever before, but the actual stimulation factor is not really there yet through the entry of someone like us.”
To keep costs down, Oasis will base its pilots abroad, target daily aircraft utilisation of 16 hours, operate into hubs served by short-haul, low-cost carriers, have low distribution costs, put all staff on contracts and make wages largely incentive-based, as well as outsourcing as much as possible.
A key revenue source will be cargo, says Miller, who adds that this will help subsidise cheap fare offerings on the passenger decks. He expects cargo to account for 15-20% of total revenue. “Cargo is very important,” he says. “Unlike the [short-haul] low-cost carrier, this is not simply cream on the cake if you can manage it – it is a vital ingredient.”
Meals will be offered at no extra charge but they will be basic, says Miller. Passengers wishing to have a better meal will be able to purchase one.
“Long-haul low-cost is not bad [to describe the carrier] because we don’t have the baggage of the legacy airlines. We can start with a clean sheet of paper and have the lessons of what has gone wrong in the past. Not many people have done that on long haul recently – the last real one in established markets may have been Virgin,” says Miller. “I believe there will be a stimulation factor of 15-20% associated with our entry into the market.”
Next door, meanwhile, in the former Portuguese colony of Macau, Andrew Pyne is preparing to have a go at the medium-haul market. The former Hong Kong government air services negotiator turned Cathay Pacific Airways executive turned startup airline entrepreneur heads up Viva Macau, which plans to launch as early as this summer. Backed by local and foreign investors, it will start with three leased widebody aircraft, either A310s or 767s, transitioning later to purchased A350-800s or 787-8s.
A total of 12 aircraft may be ordered, with either type giving the airline the capability to fly non-stop to North America. There is little to choose between the two types, both being able to carry some 250 passengers a distance of about 16,000 km, but price and earlier availability may give the Boeing product an advantage.
Pyne says average sector length will be about six hours, although Viva Macau will also offer long-haul services into Europe. There will be a “small front-end product that is emphatically not a business class” and frills will come at an additional cost.
He sees Macau as ideal for a medium-haul, low-cost carrier. Tourism is growing quickly – there are 10,000 hotel rooms today, but this will rise to around 75,000 in five years – providing great inbound appeal. He also sees great outbound potential, as Macau is on the edge of an area of 60 million people in China’s fast-growing Pearl River Delta.
Pyne says costs in Macau are much lower than at nearby Hong Kong, particularly at the airport, and he claims unit costs will be around 40% below those of Hong Kong-based Cathay. Staff costs will be much lower, distribution costs will be kept down by “certainly keeping away from GDSs”, the company will outsource as much as possible and aircraft utilisation will be around 15-17 hours a day, says Pyne.
“I think every airline has to try to be low cost, even if they are not actually low-cost carriers. The proof of the pudding is not so much in what you call yourself but in what your unit costs actually come out at,” says Pyne.
He sees Asia as a natural market for a widebody low-cost operation. In Europe, for example, the liberalised aviation market provides plenty of opportunities for short-haul flying, but in Asia the aero-political impact is greater as so much of the flying is international. As a result, says Pyne, this is one area where the short-haul operator has no major advantage over the medium- or long-haul operator.
Like Miller, Pyne also sees cargo as being very important to the business, accounting for around 25% of total revenue, which will give him a distinct advantage over the short-haul carriers that do not have any real cargo focus.
“We are sitting on the edge of an area which generates about one-third of China’s exports. If you are sitting on the edge of a huge cargo-generating region you’re missing a major opportunity if you ignore cargo,” says Pyne. “Having that cargo support is going to be a very useful way of maintaining low fares on the upper deck. It gives us a capability of cross subsidies.”
Whether the new players make it or not, Robert Martin, chief executive of fast-growing aircraft lessor Singapore Aircraft Leasing Enterprise (SALE), is one who sees room in the Asia-Pacific for a new kind of airline, operating as a medium-haul, low-cost carrier with sector lengths of up to six hours. “I do believe in mid-size widebodies operating in the Asian region and effectively doing what the charter carriers have been doing in Europe for many years,” he says, noting that the charter phenomenon never really came to Asia.
“I see medium-haul widebodies flying medium-haul routes in pretty much economy class. That is a market that I see will grow,” says Martin. Driving it will be what he dubs “RIC”– Russia, India and China, where the outbound markets will boom as the economies continue to grow.
“The thing that stimulates travel is the low-cost provision of it,” says Martin, and “so far we have only seen the tip of the iceberg in terms of outward-bound tourist traffic”.
He adds: “I don’t think it is going to be so much taking away those passengers, it is going to be more a case of stimulating a market in the same way as we are seeing stimulation in the low-cost markets in the short haul.”
New airline breed
Martin says what may be a key driver of the development of this new breed of airline will be the far more efficient new generation of aircraft, the A350 and 787, which can help bring about a step-change in airfares. SALE is itself currently assessing whether to place orders for such aircraft.
“These aircraft are going to be a lot more efficient than the existing ones and I think that is where we are going to see this market begin to grow,” Martin remarks. “So in the same way that people talked about low-cost carriers in Asia for about five years before we actually saw many aircraft flying, the same thing will happen in this market. There will be a lot more talk before there is any action.” Having high aircraft utilisation will be key to success, he says, while another requirement will be a high level of startup capital and a good-size fleet of aircraft.
“If you take the total number of widebodies in the Asia-Pacific region and then say that to make a substantive mark on that market how many aircraft does someone have to have, if someone is talking about five or six aircraft, in my view they are not going to survive,” he says. “But if someone is talking about 20 aircraft, that probably gives them economies of scale.”
It could just be that it is only a matter of time before someone makes a real success of long-haul, low-cost. Whatever the argument, there is change coming to medium/long-haul markets with the entry of an aggressive new player like Jetstar. And its success or failure may finally provide the answers to the questions that have been asked for so many years about whether the concept can work. If it succeeds, there may be much more to come. ■
NICHOLAS IONIDES / SINGAPORE