Updated: Oct 8, 2020
(Published in Aviation Business ME Magazine - Issue October 2017) www.aviationbusinessme.com
The emergence of longhaul low cost carriers spells a turbulent time ahead of the Middle East's big three airlines.
In the last months, the increasingly turbulent travel industry has led speculation in Dubai on how the two carriers owned by the Investment Corporation of Dubai, Emirates and FlyDubai might consider existing synergies and a closer tie-up. Clearly, any “extensive partnership” will pave the way for greater network integration and crossover of passengers out of their joint hub at Dubai International Airport (DXB) and by 2025 at Al Maktoum International Airport (DWC) in Dubai South. Sheikh Ahmed bin Saeed Al Maktoum, the chairman and chief executive of Emirates Group and the chairman of FlyDubai is very excited “This is an exciting and significant development for Emirates, Fly Dubai, and Dubai aviation”. Speaking at the Aviation Festival in London early September, CEO Sir Tim Clark presented a two-pronged approach to meeting and beating that challenge. Cooperation with FlyDubai is no surprise, of course, but the changes being made on both sides of the partnership are critical to its success. A simple solution would be to convert everything low cost to the FlyDubai brand, but it isn’t truly suited to that task. Clark noted that FlyDubai is built on a LCC base but it is more of a hybrid operation – business class seating, inflight entertainment, lounges and a loyalty program all on offer – than a traditional low-frills LCC. Then again, in the long-haul market LCCs tend to offer such benefits; often for a price. Integrating those features into a combined hybrid offering could be compelling, especially if we add the fact that the two carriers currently interline more than 17,000 passengers each week.
Delivering on the LCC promise is easier with FlyDubai, particularly in some of the smaller markets, but one must remember that Emirates operates with some LCC characteristics, even as a full-service airline. The LCC proposition is built on ancillary sales and, with a bit of work on the back-end systems, we might believe Emirates can convert to a similar model as a subset of its broader offering. If the ancillary model can be implemented, dependent on the digital transformation the entire airline industry is pursuing, Emirates may end up with a true airline-within-an-airline model.
A tale of airlines starting to look alike…
Consequently, and before to end up with potential options leading Emirates to take again the lead as disrupter with a powerful competitive position against the long-haul LCC challengers, let’s agree in short that there is no doubt that the arrival of the Low Cost Carriers Model was disruptive – it utterly changed short-haul airline strategy, tapped new markets and reconfigured attitudes to how to run an airline – and mostly for the better. Wherever a LCC sprang up, social behavior changed and other airlines watched and reacted as the foundations of their business model shifted. Once upon a time though you could talk about LCCs and people knew what you meant. That simple world didn’t last very long. The incumbent full-service airlines oved to adopt features of the new model; and the new LCCs, almost as soon as they had disrupted the market, started taking on the forms of their forebears. As the LCCs evolved, they adopted many of the same devices for enhancing yield and increasing sales through connectivity. The big difference was that these adaptations contained new genetic strains; they found new ways of achieving similar outcomes, but with a cost-saving and revenue-earning twist…
The full-service carriers (FSCs) correspondingly adopted many of the features of the new breed. Sometimes this involved improved efficiencies, like improved aircraft utilization, denser seating configurations, eschewing agency sales for online selling and, more deeply, enhanced corporate cost-consciousness. They also mirrored LCCs in “unbundling’, for example by reducing free in flight services such as catering, charging for bags and increasing booking change fees. Overall, the trend to blending, from both ends of the spectrum has been transformational.
Mirror, mirror on the wall, who is the ‘purest’ of them all?
Today very few airlines can genuinely lay claim to being ‘pure’ LCCs, and by the same token many Full Service Carriers can no longer genuinely lay claim to their designation, as they unbundle and charge for the ‘full’ service. Only a few pure LCCs remain worldwide designated now as the Ultra Low Cost Carriers (ULCCs): Ryanair, Monarch, Wizz and Pegasus in Europe, Southwest, Spirit and Allegiant in the US, Tigerair and AirAsia, VietJet, GoAir, SpiceJet and IndiGo in the extended Asia-Pacific region, VivaAerobus, VivaColumbia and Volaris in Latin America and last but not least Air Arabia, Jazeera Airways, flynas, Salam Air, and Flyadeal in the Middle East region. Often the aberration from the basic model can be justified by making the activity a revenue centrerather than a cost. Here th eprodict remains mainstream LCC, but in other cases the shift is to gain traction in other ways, like generating new traffic flows. There are always judgments to be made on ‘purity’ and the sands are constantly shifting. The LCC to full service metamorphosis is only for the bold and the beautiful. For LCCs to move substantially up the service scale, there are challenges, sometimes it can be a real ordeal. It is relatively easy to adapt to permit new forms that immediately generate ancillary revenues: one very recent move is Ryanair only allowing those who’ve paid for priority boarding to take two bags on board as hand luggage. The airline, insists the move is not motivated by profit. Since it relaxed its cabin baggage policy in 2014, allowing passengers to bring two bags, the “load factor” has increased from 82 to 97 per cent – meaning there are around 25 more cabin bags to be fitted in. The squeeze is delaying flights, and jeopardizing the swift turnarounds on which the business is based. “We will be taking a hit by reducing the checked bag fee” said Kenny Jacobs, marketing director of Ryanair.
The LHLCC are in the ascendance…
Overall, the previously disruptive force is now adapting to, rather than disturbing the system and the industry will continue to evolve rapidly, in a near-constant state of disruptive behavior. Perhaps, the only definitive rule is a such low margin industry is a focus on cost, cost, cost without unnecessarily upsetting people. Which model, that’s the question? The equilibrium, if there is to be any, will persist in being dynamic at best – anarchic at worst. Recently a new model is in the ascendance, but there is here also not template for the success of the Long-Haul Low Cost Carrier model (LHLCC), even though it is an undoubted game changer in the long-haul markets with potential danger for the Middle East Big Three airlines. If they can succeed owes much to the new generation of smaller widebodies, and to the formation of multi-brand airline groups, formed around a legacy airline. The definition of LHLCC is not important. If it looks like a duck and quacks like a duck and walks like a duck, it probably is a duck. It is a different and new product and it has the potential fundamentally to alter long haul operations. The goal is to provide a lower cost operation on routes that cannot and will not support the profile of premium economy that characterizes the traditional long haul network airline. And, where it is part of a group, it is able to provide the foundation for a wider network, with differing yield profiles. For those who still doubt the reality of LHLCs operations, the evidence is mounting that the future of long-haul is changing with today more than 14 LCC airlines operating scheduled routes longer than 7,000km (or more than nine hours) and more are on the way, mostly accelerated by the arrival of the new Boeing B787s and Airbus A350s. Significantly too, more than half of them are subsidiaries or part of a full service airline group. In some basic ways they imitate the connectivity of the traditional model, but with a scale able to be tailored more effectively to certain city pairs, the main targeted 95 mega aviation cities by 2040. We enter here in a new area of the aviation industry: if flying was, indeed, once glamorous and flying was a privilege, today it has lost its essential mystique to become slowly but surely a mass transport system similar to the train or metro where the comfort of superior service and luxurious premium cabins are not essential anymore as the passenger want to fly more frequently with the same budget…
The ability to use more than one long haul model in a particular regional market provides an opportunity to compete more effectively with other full service airlines, allowing better market coverage, tailored to the profile of each route. It will work best where there is also an appropriate ability to transfer between different models within the group; but it can also offer advantages in allowing transfers onto other ‘friendly’ airline partners, full service or low cost, thus expanding the range of partnership options too. In reality, we have to admit that these new LHLCC are inevitably hybrids; for example, they cannot achieve significantly higher utilization than their legacy counterparts, although typically they do tend to do little better. They may also often have a small premium cabin, even with lie flat seats and, to operate effectively, they will engage in connectivity, ideally at each end. Many features are similar, but they are not the same. There are important parts where they do differ from their older counterparts. Just the fact of being new means being relived of much legacy baggage. They have a low cost mentality, flatter management structure, can be more nimble and many more – reasons that have existed for many years. Where they are independent, like AirAsia, Norwegian or Wizz Air, they will generally need to mimic the full service carriers’ connectivity more directly, while remaining among the lowest cost operators in the world.
But where they are one part of an airline group, the equation can provide even greater flexibility: they can be mainly point to point on routes where a more costly operator cannot survive, and they can be better money spinners where previous network operations were marginal. Moreover, a LHLCC can also impose a powerful influence on the efficiency of its parent company. Fact is that the Middle East carriers should need to brace themselves; Norwegian Air's suggests that the carrier's commencement of operations to Dubai is imminent!
Strong head-wind for the Gulf Airlines
The Middle East Big Three (MEB3) have been indisputably the great aviation disrupters of the 21st century. Over the past decade, Emirates (EK), Etihad Airways (EY) and Qatar Airways (QR) have quadrupled the number of passengers they fly each year. They have tempted travellers with competitive pricing, superior service and luxurious premium cabins and turned the Gulf into the stopover destination in global air travel. In the process they even earned themselves a nickname: the “superconnectors”. But after years of what seemed like unstoppable growth, the three Middle Eastern airline upstarts are experiencing their own period of disruption. The projected fall in capacity growth for the three carriers appears not very promising for 2017…
Etihad’s grand plan to catch up with its regional rivals by buying stakes in airlines around the world is unravelling and, in doing so, has had a big impact on the European aviation market. Over the summer, two of Europe’s biggest airlines, Alitalia and Air Berlin, filed for bankruptcy after Etihad pulled the plug on further funding following a review of its acquisition strategy. “Unfortunately Etihad failed to learn from a very similar way followed by the Swiss National Airline Swissair at the end of the 90s, the famous ‘hunter strategy’ developed by McKinsey consulting firm leading to bankruptcy after been known as a ‘flying bank’. Etihad failed also to understand the differences between doing business in the Middle East and in Europe…” repeats since a couple of years Leonard Favre, Managing Director of 1BlueHorizon practice based in the Middle East.
Meanwhile, Qatar Airways, the Gulf’s fastest-growing supercarrier, faces its own problems following the unprecedented blockade. Qatar’s airline saw a collapse in bookings after Saudi Arabia, the UAE, Bahrain and Egypt implemented an air and sea embargo against the gas-rich state in June.
As state already initially, Emirates has most probably the best cards to rebound quickly as the new disrupter with a powerful competitive position. Listening a Sir Tim Clark in London, imagine one section of the A380 cabin offering reduced pitch and a limited baggage allowance. Should the company truly want to press its luck converting those rows to the much maligned 11-abreast option could be viable. The carrier could even consider removing the embedded IFE screens or making that a paid service. Integrating those features into a combined hybrid offering could be compelling and definitely very interesting to look at. We suggest to even go on step further taking into consideration the issue related to any second market for the older A380. In 2018, Emirates will celebrate the tenth anniversary of starting to operate the A380, for those under dry-lease contract, usually under 12 years terms with high depreciation. Considering the residual value of the older A380s, it is for sure interesting to build the case of having a fleet of older A380 with cabin reconfigured for very high density. To feed those aircrafts, a tie-up with Fly Dubai is for sure not enough and other partnership are required. Is Air Arabia as potential partner? It will be interesting to have his view on it at the coming Arab Air Carrier Annual assembly in Sharjah next month. Some observer are obviously those days looking toward Abu Dhabi, the question to have two Mega Carrier in the sole United Arab Emirates is a question we should be able to challenge.
Even though Long-haul Low Cost Carriers are squeezing Emirates from East and West, the airline has more than one card in his game to quickly leave the turbulence zone and therefore not a coincidence if Emirates CEO just announced that a planned order for either the Boeing 787 or Airbus A350 is “off the table for now”…