Pontifications: An old pro thinks long-haul LCC model is about who loses the most money

By Scott Hamilton

March 26, 2018, © Leeham News: Long-haul, low-cost carriers are likely here to stay but the impact will be limited.

This is the conclusion of Robert L. Crandall, former CEO of American Airlines, who faced the USA’s first ultra-low-cost carrier and won.

Crandall, 82, retired from American in 1998, He faced the emerging low-cost carriers in the US, all based in large part on the Southwest Airlines

Robert Crandall. Photo via Google images.

business model.

Despite painful skirmishes and in some cases, all-out wars, Crandall navigated American through the turbulent skies, making American the largest US airline and seeing nearly all of the upstarts cease operations.

PeoplExpress was the USA’s first ultra-low-cost carrier. Founded in 1981, over-expansion and aggressive response by the US majors—led in large part by Crandall’s strategy—PE collapsed in 1987. It merged into Continental Airlines, bankrupt in all but name.

PeoplExpress model

PeoplExpress was the first carrier in modern times to charge for everything, including 50 cents for soft drinks, checked baggage, etc. Fares were extraordinarily low. It began operations out of an abandoned terminal on the opposite site of Newark Airport, boarding passengers in the rain, wind and snow.

It was an instant success.

Within two years, PE acquired a Boeing 747 from defunct Braniff Airways, itself a victim of over-expansion and a brutal war with Crandall’s American, and began service from Newark to London.

Crandall’s American introduced Super Saver fares which required a stay over Saturday night but otherwise offered American’s standard full service of amenities, including meals, checked bagged, assigned seating and frequent flier miles.

Other airlines followed.

PeoplExpress couldn’t compete, but its eventual demise probably had more to do with the over-expansion and acquisition of financially ailing Frontier Airlines (the first one) and commuter Britt Air.

Texas Air Corp bought PE and merged operations into Continental.

Today’s ULCCs

Today, some low-cost carriers and ultra-LCCs in Europe and Asia expanded beyond their traditional platforms and extended into long-haul operations with the new A321neo and 737-8 MAX single-aisle aircraft; and the Boeing 787 and Airbus A330-200s.

“I think they are going to continue to carry some share of the market,” Crandall told me in an interview two weeks ago. “It’s impossible to know how this will develop. Legacy carriers will always put out as much capacity as they can to prevent the LCCs from offering frequencies.”

Some, like IAG, parent of British Airways and Iberia, and Air France-KLM Group, already created long-haul, low-cost carriers of their own to compete against Norwegian Air Shuttle’s growing 787 operation and Iceland’s WOW, an A330-200 LCC.

“At some stage, it’s going to be who’s going to be prepared to lose the most money,” Crandall said—echoing the era of US deregulation with a plethora of LCCs began service and the legacy major airlines bled hundreds of millions of dollars fighting them.

Norwegian’s rapid expansion with 787s and now 737-8s is taking a huge toll on its balance sheet. LNC’s Bjorn Fehrm has written several posts analyzing Norwegian’s finances. Reuters last week reported that Norwegian’s first quarter loss is likely to be worse than expected. The airline last week completed a $168m private placement to raise money. (I intended to fly Norwegian from Seattle to London for the Farnborough Air Show; I’ve canceled that reservation and rebooked on American/British Airways instead, doubtful about Norwegian’s deteriorating financial condition.)

Crandall thinks the legacy carriers will continue to dominate.

“Legacies will have the advantage in that they will carry a different mix of traffic,” he said. “The LCCs  will for most part work off coastal cities because they don’t have feeds. The legacies will force them to lose so much money they will force them to go away.”

23 Comments on “Pontifications: An old pro thinks long-haul LCC model is about who loses the most money

  1. I tend to agree. A LCC ‘cabin’ to the rear of existing ‘flag’ carriers at higher density [a330 example: 9-abreast/pre-reclined/buy-onboard/ancillary] would serve the market and allow airlines to offer lead-in/student/backpacker fares and provide a differentiated service for those fares. Having the differentiated ‘cabin’ makes it easier for crew to serve and manage whatever the ‘product’ on offer is.

    Regular and/or comfort and/or premium economy [as needed] can sit in there usual positions behind business in the more normal 2-4-2 layout with the usual stuff included.

    My worry is what happens in a downturn. The Transatlantic seems to be getting very crowded. Any upset there, and the all airlines may share the pain.

  2. The one thing that possibly makes it different this time is product differentiation. In the past the LCC seemed to ape the existing carrier in all but cost and service, both flying from and to the same locations but possibly not the same airports. The fundamental change is the ability to service new city pairs that are currently not offered by using SA rather than TA. This complicates the ability to compete for the full service airlines.

    To me the ticketing of airlines is more often the issue for smaller airlines. The web seems to be making it more and more difficult to access all airlines and all fares in spite of purporting to do otherwise.

  3. The question is also who has the deeper pockets. Ryanair and Easy Jet are among the most profitable airlines. They can afford a price war, but can legacy carriers afford it too? I’m not sure many are in a good position.

      • “Despite painful skirmishes and in some cases, all-out wars, Crandall navigated American through the turbulent skies, making American the largest US airline and seeing nearly all of the upstarts cease operations.” He was the first to understand the power of controlling a reservation system. Once American was forced by Congress to give up it’s dominance of the system, AA results began to deteriorate . Today it’s a different world with different airplanes ( 737 fly transatlantic ) and different way to buy a ticket.

      • True, but if those would start a long-haul operation, they could finance a price war for an extended time.

        • But there are many city pairs with small airports from which the majors don’t fly and a small airplane service might create enough local demand . For instance Stewart New York to Berlin or Cologne Germany to JFK . Many opportunities exist for an LCC to offer competition on pairs currently not directly saved by the majors.

  4. With 9-abreast seating and 30-31″ pitch on legacy carrier’s 787’s there really isn’t much to differentiate from a LCC – assuming the “premium” parts of the aircraft are paying their way it makes it hard for a pure LCC to compete.

    • I agree, the difference in Intercont over night flying between a regular airline and a LCC is not that great if stuffed into economny seats. The planes have similar utilization/week and a young LCC’s have lower cockpit and cabin costs for awhile before they have similar age distribution on staff. LCC might offer a bit lower salaries and worse hotels.
      The difference is much bigger in staff cost, aircraft&crew utilization and secondary airport fees for domestic/regional flying. Many LCC’s have their Aircrafts airbone>10hr/day and the moderna 737NG’s and A320’s can take it.

  5. Yeah, one has to wonder if Norwegian’s over-expansion into long haul can survive the combined effects of the big 3 anti-trust immunized joint venture trans-Atlantic alliances (oneworld, SkyTeam, Star), and the separate one Delta has with its nearly half-owned partner, Virgin Atlantic on one side of the equation and their big hubs on both sides of the pond…

    …and the low fare operations being started by IAG (Level) and AF-KLM (Joon)…

    …and as if all that isn’t enough firepower, the connecting hubs and brutal fare war of Wow! and Icelandair via their Reykjavik hubs…

    That’s a whole lot to contend with for even the heartiest, and Norwegian is far from hearty these days…

    I bet BA would just LOVE to get its hands on Norwegian’s slots at LGW…and those Boeing 787s certainly have a lot of life left in them for airlines hungry to jump the line and get those planes into their fleets sooner than later!!!

    …not to mention the other new planes already delivered, or for which production slots are reserved that also are sooner rather than later…

    But the peak summer month demise Scott suggests seems a bit early…

    …after summertime or the dead of winter is usually when struggling airlines like this meet their deaths…

    Then again, Scott is better placed for precise industry intel than most…so perhaps it’s wise to read between the lines on his decision to rebook his trip to Farnborough onto BA…😉

    • Norwegian’s private placement probably gives breathing room through this year. (I rebooked before the private placement, BTW.)

      • Whats left as security for the ‘private placement’ ie junk bonds
        Is the security the airport slots?

      • It seems to me there’s a path forward for NAS that includes BA, and Norwegian’s investment bankers. (This is predicated on a reasonable NAS growth plan, showing some “daylight” on growth and profitability in a couple of years.) How about a 10 to 12 year term loan from Boeing Capital for $250MM (secured by a collateral assignment of to be acquired BA aircraft purchase rights), coupled with a $250MM to $300MM preferred stock offering, with stock options/warrants, and, a NAI a/c and “tail” painted with the name and portrait on the tail of the lead underwriter or investor principal. (Calling Ray Dalio and/or Paul Allen. Hey, never underestimate “vanity value”! LOL) What do you think Scott? Possible? P.S. There’s now precedent on BA financial assistance, given Boeing Capital and Monarch, as I recall.

        • I think all Norwegian 787’s are leased so they are already ownen by somebody else, hence you need to put the face of Steven Udvar-Hazy on a 787. I think he would agree.

  6. That also highlights the issues with Jetstar and Air Asia in this segment.

  7. Was it the old pro who convinced Scott to cancel his travel plans on Norwegian? I have to say that if nothing else the “optics” of the parenthetical about rebooking onto the old pro’s former airline were attention getting.

    • Id be careful about about an ‘old pro’ giving advice on an area they arent too familiar. His experience is primarily the US domestic market and didnt AA itself go bust ( Chapter 11 Nov 2011) after he left in 1995.

  8. For short haul spike to spike works for LCC’s. The answer for longer haul LCC possibly hub-hub that feeds their local networks. For this LCC’s will have to enter into code sharing agreements with other regional LLC’s.

    Use of large aircraft an option between LCC hubs, 77W, 380, etc that could be filled to the “brim” on <12 hour flights?

    380’s Could actually work with “premium” on top and the rest below.

  9. The key to success for the long haul LCC model is efficiency and capacity. The legacy carriers have the upper hand currently but that’s why Norwegian is trying to grow its services so fast, only I wouldn’t have tried to launch so many new markets (country hubs in Europe) unless I was pretty sure I could make a major dent in the routes.), it may have been better to concentrate on routes that have limited direct legacy competition. Mind you, we still have Europe-Asia market yet to be fully attacked by the long haul LCC model, that’s going to be an interesting battle with Asian and Middle East carriers.

    As for the Europe-USA routes, I would expect any long haul LCC expanding as fast as they possibly can and start looking at attacking the joint venture arrangments of the legacy carriers to dismantle such ventures through legal avenues.

  10. Those LH LCCs are not so cheap. Just try to book a flight from middle EU to USA with any of the LH LCCs and with legacy. For instance WOW is going to be for sure more expensive than BA or DELTA or LH or TAP ! Norwegian most probably about the same as those. Speaking about “Y” only.

    I just do not understand why someone buys a ticket with them, but obviously people do ?

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