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In it for the long haul

Can low-cost carriers go the distance in the battle for the long-haul flight market?


LOW-COST, LONG-HAUL CARRIERS TAKE OFF:In a market rife with price wars and overcapacity, is the low-cost carrier model sustainable?

Scoot, which will have four Dreamliners with crew bunk beds by year-end, is eyeing more long-haul routes in the future. Berlin, Barcelona, Rome and Istanbul have been mooted by market watchers as potential candidates.

"Our transatlantic routes have shown the huge demand for affordable long-haul travel, so we're very happy to expand into new markets, like Singapore. Singapore is a key tourist destination, both for business travellers and leisure travellers." - Norwegian Air Shuttle's spokeswoman

FANCY flying to London or the US for under S$1,000? Passengers can now fly long-haul for cheap as the long-haul, low-cost sector is gaining ground amid new fuel-efficient aircraft and cheaper fuel prices. According to the Centre for Aviation's (CAPA) calculations, there have been over 15 long-haul low-cost carriers (LCCs) launched around the globe since 2012 - a staggering number in a span of five years, with Australia's Jetstar and Malaysia's AirAsiaX counted as the early trailblazers in 2006 and 2007 respectively.

Low-cost Norwegian Air Shuttle, better known as Norwegian, commenced long-haul operations in 2012 and has since leapt to the second spot in the worldwide rankings of the largest long-haul low-cost operators (by seat capacity). AirAsiaX, meanwhile, is the biggest.

Among the new players are IAG-backed Level which landed in the market in June, as well as Air France's Joon (formerly codenamed Boost), a lower-cost offering that has indicated that it is keen to launch flights between Europe and Asia down the line.

"There's demand for a long-haul, low fare, certainly," says CAPA analyst Brendan Sobie. "There's growing demand."

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As at June, CAPA estimates that the number of seats from the long-haul low-cost sector totalled over 500,000 per week or 0.5 per cent of the global market. While the number is small, CAPA estimates this will double to over 1 per cent within the next one to two years as a business model that was once greeted with scepticism grows more common place.

"More people are travelling further and they don't want to spend that much on the flight," he says, pointing to an emerging middle class in South-east Asia and China.

"The LCCs are well-positioned in theory if they have the right aircraft and network to take this bottom-end of the market." In this respect, next-generation planes, such as the Airbus A350 and Boeing's Dreamliner, are well-suited to the task.

The growth of these players could make things tougher for full-service carriers, especially in South-east Asia, which are already being hit on all sides, from the short-haul budget operators to long-haul carriers such as the Gulf trio and Chinese airlines.

But for some airline groups, the long-haul low-cost model also makes sense from a network perspective, leading them to introduce their own long-haul units.

For instance, Singapore Airlines (SIA) subsidiary Scoot can take on routes where SIA doesn't fly to or cannot operate profitably. In addition, in the wake of its merger with Tigerair, Scoot can better leverage on connecting traffic from its short-haul routes to feed its long-haul routes.

Scoot, which launched flights to Athens in June using its Dreamliner aircraft, will start flying to Honolulu (via Osaka) from Dec 19. Promotional round-trip fares for Singapore to Honolulu started from S$550 for Economy and S$1,555 on ScootBiz, while its website shows that fares for January-February 2018 period will go from S$950 and S$2,090 respectively. A quick search online showed that round-trip January fares for a flight to Honolulu onboard full service carriers ranges anywhere from S$1,300 to S$2,600.

Scoot, which will have four Dreamliners with crew bunk beds by year-end, is eyeing more long-haul routes in the future. Berlin, Barcelona, Rome and Istanbul have been mooted by market watchers as potential candidates.

"(We) believe that the conventional point-to-point low-cost business model will be challenging for long-haul, especially considering Singapore's small market size," said a Scoot spokesman. "We believe that driving connecting traffic from regional markets through our Singapore hub onward to our long-haul points is key to sustaining long-haul operations."

The maverick

Europe's fastest mover Norwegian could also make the ride very bumpy for other carriers winging it in the same skies. Norwegian, founded by a former fighter pilot, is now the third biggest budget carrier in Europe. It's been credited with shaking up the aviation industry in some markets.

Here in Singapore, Norwegian started operating direct flights to Changi out of London's Gatwick in late September, which is the world's longest LCC route. Also using the Dreamliner, Norwegian offers 344 seats in a two-class configuration - namely, economy and premium.

London was likely an easy choice for Norwegian, given that only two other full-service carriers - SIA and British Airways - currently operate direct daily flights between Singapore and the capital city. Qantas will rejoin the fray when it routes its daily Sydney-London A380 service via Singapore from March 2018 but Norwegian will be the only LCC among the four carriers. (Five years ago, Qantas switched its stopover for its Australia-London flight from Singapore to Dubai)

Today, Norwegian, clearly aiming to be a highflier, has some 60 intercontinental routes operated by a fleet of Dreamliners with an average age of 3.6 years. Instead of one hub, it has crew bases at multiple hubs, such as London, Bangkok, New York, Paris, Barcelona and the Scandanavian capitals. These hubs also means that it can fill its aircraft with traffic from across Europe. And with Norwegian's transatlantic flights, passengers could fly from Singapore to London and then connect onward to the US.

According to figures on its website, Norwegian's load factor - how full its planes are - stood at 94 per cent in July and it flew around 3.36 million passengers that month, up 15 per cent year on year.

The carrier, which already flies to Bangkok, is now hoping to operate to North-east Asia.

"Our transatlantic routes have shown the huge demand for affordable long-haul travel, so we're very happy to expand into new markets, like Singapore," a spokeswoman for Norwegian says. "Singapore is a key tourist destination, both for business travellers and leisure travellers."

While it is "very keen" on launching new routes in Asia, the challenge is that it lacks overflying rights from Scandanavia over Russian airspace.

"To realise our ambition of expanding eastwards into North-east Asia, we hope to get the overflight rights in the Siberian corridor, as competition is a win-win for all," she added.

Airport operator Changi Airport Group (CAG) says it plans to continue working with the carriers operating out of Changi - as well as prospective airlines - to boost its long-haul connectivity.

The airport has been keen to build itself as a base for long-haul, low-cost for several years, market watchers say.

"Low-cost long-haul is an emerging sector which offers opportunities to grow the Singapore air hub," says Ivan Tan, Changi Airport Group's senior vice-president for corporate and marketing communications. "With new and more fuel-efficient aircraft like the A350s and the Dreamliners, long-haul routes will hopefully continue to be sustainable. We believe there is potential for the long-haul low-cost airlines to open up new cities and capacity for Changi to more cities in Europe and North-east Asia."

Budget flights to Asia

Currently, Scoot, Norwegian and Jetstar are the only budget carriers offering long-haul flights out of Changi Airport.

While Jetstar axed its Singapore-Auckland route in 2014 due to poor performance, it still flies to Melbourne.

"Jetstar was the first low cost carrier in the region to commence long haul flights in 2010 with its inaugural flight to Melbourne from Singapore," says a Jetstar spokesperson. It currently operates four weekly return flights between Singapore to Melbourne using the Dreamliner. Its long-haul operations from Australia includes Bali, Japan, Hawaii and Thailand.

CAPA's Mr Sobie reckons that Norwegian could launch another service to Changi from one of its other European hubs such as Barcelona. From Bangkok, it already operates three routes to Oslo, Copenhagen and Stockholm.

And Norwegian isn't the only one that has been introducing budget flights to Asia. Dusseldorf-based Eurowings, for instance, has launched flights from Cologne to Bangkok as well as to Phuket. Other long-haul LCC offerings over the ten hour radius include Beijing Capital's Qingdao-Vancouver service and Lion Air's Jakarta to Jeddah service. These long-haul flights are now feasible again thanks to cheaper fuel prices and next-generation, twin-engine aircraft such as Boeing's Dreamliner and Airbus A350.

Game changers and cut-throat competition

The scenario was very different as little as five years ago, when jet fuel prices were significantly higher.

Oasis Hong Kong, for instance, used to operate flights to Vancouver and London but was forced to suspend operations in 2008. And AirAsiaX - the long-haul arm of AirAsia - had to axe flights to London and Paris in 2012, which it used to operate using the four-engine A340 plane.

Meanwhile, the narrowbody A321neoLR, a new aircraft variant with more range than Boeing's 737 Max 8, could prove to be a "potential game changer", when it enters into service in 2019, reckons CAPA. "They'll open up potential new long haul routes which are too thin for widebody aircraft."

But even with positives such as next-generation aircraft and cheaper fuel, the biggest hindrance to the long-haul, low-cost model here could well be the cut-throat operating environment in South-east Asia, where stiff competition and overcapacity are rife as even full service carriers have found out.

AirAsia X, for instance, appears to have put a pause on plans to fly to Europe and the West Coast in the US, choosing instead to focus on Asia. While it did launch flights to Honolulu, the service (like Scoot's) is via Osaka, which allows it to pick up passengers from Japan.

"We have decided that ultra-long haul is not relevant now," wrote AirAsia boss Tony Fernandes in a tweet in June this year. "Won't get seduced into price wars over London."

Cebu Pacific is also shelving plans to fly to Honolulu and other parts of the US in order to focus on the domestic and regional markets.

Profitability will loom large for the long-haul, low-cost carrier. AirAsiaX, which turned in a profit of RM57.7 million (S$18.5 million) in 1H17 (albeit down year on year due to higher costs), appears to be steering clear of Europe. Norwegian, with its aggressive expansion, has had a turbulent few years, posting losses one year and profits the next. Norwegian was named Airline of the Year for 2017 by CAPA, whose award citation noted: "Sustainable profitability with the rapid growth model is the next challenge."

"Long haul is always harder than short haul for LCCs," CAPA's Mr Sobie told The Business Times, noting that fuel accounts for a larger proportion of costs for long-haul flights. "It's still very challenging, even with the new aircraft."

In addition, there is intense competition from one-stop carriers such as Emirates, Qatar and even the Chinese players. These airlines offer competitively priced one-stop services to Europe and the US via their individual hubs in the Middle East and China.

While fares to Europe and North America are already at all-time lows, this means that LCCs need to price their product even lower in order to lure passengers. And though passengers need to fork out for ancillaries such as in-flight entertainment, luggage and meals on an LCC, these come as part of the fare on full service carriers.

With South-east Asia being "the most competitive market", "more rational behaviour" is needed from the broader aviation industry when it comes to capacity, Mr Sobie asserted.

Low-cost carriers launching long-haul routes should opt for niche routes, where there is less competition, or even turn their focus to different markets where prospects may be brighter, he suggested. For instance, Europe-North Asia might be less competitive than Europe-South-east Asia.

"Launching (long-haul) routes are expensive," he added. "Long-haul routes also take longer to build up than short-haul ones. You have to make sure you're in it for the long haul."