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
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 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, 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.”