PRESS RELEASE                                

6 November 2018

What should a Low Cost Long Haul Operation look like?

Since Jet Star started operations in 2006, the number of Low-Cost Long-Haul (LCLH) airlines has steadily increased.  However, the market faces challenges that highlight the uncertainty around LCLH business models. 
 

LCLH business models are heavily influenced by the ownership structure and/or the parent legacy carrier, combined with their ‘pick & mix’ approach to elements of the regional or short haul low cost  operating models and pared down elements of a full service carrier.   For some LCLH airlines this means providing more than one seating class, access to frequent flyer or loyalty programmes, ticket sales channels, route options and services available on board.   For this reason, each LCLH airline has a different business model and like-for-like comparisons are difficult to make, although they will all be subject to the same challenging trading environments and increasing costs, such as oil prices.

Paul Lyons, Head of Advisory at IBA said “A key differentiator for these operators is the network strategy that they deploy, often focusing on locating in airports which provide access to the passengers of other operators, or taking advantage of a feed of passengers from their parent legacy operator.  Most commonly, the airlines have a high commonality of aircraft, ensuring that there is flexibility across the fleet and staff, as well as minimising costs from maintenance and training.”

Fleet is a key factor in the success of a LCLH airline and most operate widebodies, with the Boeing 787 and Airbus A330 proving the most popular. The main trade-off between these two is the lower acquisition or rental cost versus the efficiency and lower operating costs.

Mike Yeomans, Head of Valuations at IBA explains “The 787 offers longer range and capacity than the 330 but has a higher cash operating cost per seat – this is shown on the following charts (with the size of the circle denoting the aircraft active in the fleets of LCLH operators).  The seat vs range chart also shows a large gap in the market for an aircraft circa 5000 miles and 300-400 seat capacity, which we expect to be filled by the Airbus XLR (A321XLR) or Boeing NMA (New Middle-Market Airplane).” 
 
 
 
 
 

Yeomans continues “Narrow bodies have not proven themselves in the LCLH model and we are not seeing the sort of uptake of the 787 Max or A320 neo that was once anticipated. This may be explained by the current poor demand for WOW’s long haul flights where it utilises the A321neo.”

So is the future for LCLH airlines clear?  Paul concludes “We need to see consolidation in this market, or growth from the current operators.  Recent moves by IAG, owner of LCLH Level, to acquire a 5.5% minority stake in Norwegian, could be a prelude to a merger or takeover, which would create Europe’s leading airline group by seat capacity.  Whilst global expansion of LCLH has been huge, we don’t see any reason for this to change.  What must happen is that the operating and business models can cope with external cost influences, at the same time as managing costs within the business.  We expect the introduction of the long haul narrowbody to drive growth in this sector and it will be interesting to see how the LCLH airlines transition to new aircraft.  This is a fascinating market for operators and investors alike.  There are going to be successes but we shouldn’t underestimate the risks, which all make for exciting times ahead.”

-ends-

Notes to Editors

Charts contained within this release have the following assumptions

·         Based on 3,000nm sector length

·         US$ 3.50 per gallon fuel

·         Seat capacity is based on low-cost long-haul operators

Note the Airbus A321neoLR is yet to enter service

ABOUT IBA

IBA provides independent expert business analysis to commercial and business aviation clients, aircraft/engine manufacturers and operators. Established in 1988 IBA’s services to the aviation industry are:

·         asset valuations

·         technical and engine management

·         advisory

·         consulting and commercial services

·         industry and sector research and analysis

IBA was awarded Airline Economics’ ‘Appraiser of the Year 2018’.

For further information on please contact:

Claire Scotter, Public Relations:

claire.scotter@iba.aero or media@iba.aero

+44 (0) 1372 224488