Low-fare, long-haul: Second time around

By Chris Kjelgaard

Senior Editor

updated 1:36 p.m. ET Aug. 24, 2007

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."

Boeing Australian low-cost, short-haul carrier Virgin Blue ordered six Boeing 777-300ERs with which to begin long-haul, low-fare service. However, its long-haul operation won't be called Virgin Blue and won't have this color scheme.

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.

Kin Cheung / AP Although the Boeing 747-400 is an expensive aircraft to operate, it can be a terrific money-maker if most of its seats are filled at the right fares. Oasis Hong Kong Airlines operates second-hand 747-400s to London and Vancouver, offering low economy-class fares and business-class fares that are as much as two-thirds lower than those of its competitors.

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.

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