Standalone Long-haul Low-cost Carrier Model Remains Challenging: ICF

 - April 17, 2019, 10:51 AM

JetBlue Airways is planning to launch services from its Boston and New York hubs to London notwithstanding recent examples that prove that entering the transatlantic market as an independent and low-cost carrier is not a walk in the park—and financially a hard battle to win. Norwegian Air Shuttle is in the midst of a comprehensive restructuring and both Primera Air and Wow Air collapsed. Wow filed for bankruptcy in March after months of financial struggle and two failed merger attempts with its larger rival Icelandair. A potential rescue operation by Indigo Partners also came to nothing.

Though Wow is not an indictment of the entire long-haul low-cost modeI, its collapse gives some clues about the difficulty of the long-haul low-cost model, Samuel Engel, head of aviation of ICF, told AIN. All of the same challenges that entries faced in the past are still there: the seasonality of markets such as the North Atlantic where traffic is double in summer what it is in winter, access to business traffic, and distribution of travel segments, he noted. “We haven’t seen any evidence yet that a long-haul low-cost airline has an easy time standing by itself. It seems a long-haul low-cost needs to be either a quite large airline like Norwegian, though even that is an open question, or a tool of another network carrier such as Level for International Airlines Group (IAG) or Rouge for Air Canada,” Engel asserted. Unlike Wow, which focused entirely on the North Atlantic and did not have ways to fill the aircraft in winter except by heavily discounting fares, a larger airline or group can move aircraft in and out of the North Atlantic, he said.

Icelandair Group’s recent acquisition of a 51 percent stake in Cabo Verde Airlines could offer a smart way to take advantage of the counter seasonality, Engel observed. “Arguably, Cabo Verde is to the South Atlantic what Iceland is to the North Atlantic. You could imagine Icelandair shifting some of their fleet in the Southern hemisphere and deploy their expertise to the South Atlantic. They were the original backpacker’s airline and have a long and proud history of making the connecting long-haul-low cost model work at the right scale.” But the model is starting to show some cracks. Like Norwegian, Icelandair embarked on a restructuring last year and changed top management following two profit warnings and a too rapid expansion. It posted a $55.6 million net loss for 2018. 

The Boeing 757 is one of the reasons why the model worked so well for Icelandair, Engel pointed out. The 757 is “impeccably suited” for that operation, especially the last 15 years when the aircraft were largely a low capital cost. But the Reykjavik-based airline in spring 2016 took on some—larger—Boeing 767s, which is a divergence from its historic model, and it acquired—more expensive—Boeing 737 Max 8s. The worldwide grounding of the Max has forced the airline to temporally reduce frequencies by 3.6 percent and wet-lease replacement, which could add to its financial woes. The grounding of its three Max 8s and an ongoing redesign of its network prompted it also to scrap two routes, to Halifax and Cleveland.

While the Max issue is giving headaches to airlines worldwide, the newest generation Airbus and Boeing narrowbodies do create opportunities for long-haul low-cost carriers, said Engel. ”We now have these incredibly capable, smaller gauged aircraft with a unit cost per seat kilometer that is pretty close to the unit cost of a widebody. They appear to be an effective tool to serve some smaller city pairs and open up new markets.”

JetBlue will use Airbus A321LR single-aisle aircraft for its transatlantic venture. The airline will initially convert 13 aircraft in its existing A321 order book to the LR version with the ability to convert more. JetBlue has created an internal team to begin the certification process for ETOPS. Services are due to launch in 2021 pending regulatory approval. In its announcement last week, JetBlue acknowledged that “a handful of low-cost carriers have attempted to enter the transatlantic market with a no-frills, bare-bones approach,” but it vowed it would be different. “Particularly in Europe, JetBlue will raise the bar on what travelers can expect from a low-cost carrier,” JetBlue stressed. It will offer a “re-imagined version of Mint,” its premium transcontinental product. “The success Mint has had on driving down the exorbitant airfares that our competitors were charging, stimulating new demand, and forcing the entrenched carriers to up their game, is a big reason we believe London is the next natural market for JetBlue to be successful,” said JetBlue president and COO Joanna Geraghty.