By Bjorn Fehrm
March 28, 2018, © Leeham News.: Robert L. Crandall, the former CEO of American Airlines, questioned the viability of Long-Haul LCC (LH-LCC) in a discussion with LNC two weeks ago.
Given the limited network of a dedicated Long-Haul LCC like Norwegian Air Shuttle (Norwegian) or WOW air, the legacy airlines can spare as much capacity as is needed to block the LH-LCCs from gaining traction on attractive city pairs. “At some stage, it’s going to be who’s going to be prepared to lose the most money,” was Crandall’s verdict.We shall examine the LH-LCC model and its chances in a series of articles. Here some first observations.
The Long-Haul LCC companies set their future on the greater public’s will to travel, once the cost is low enough. A trip from New York to London used to cost at least $2,500. Now one can buy a direct ticket with Norwegian for $550 or a two-hop ticket over Reykjavik with WOW Air for $800.
The LH-LCC flights are not for the business traveller. The prices above are for a weekend to weekend return flight, a typical leisure itinerary. If we instead book Wednesday to Friday next week, Norwegian charges $2,000.
The premise for LH-LCC is there is a major pent-up demand for leisure and adaptable low-cost business travel which can be captured once the prices go below 50% of normal fares.
The precondition for a viable LH-LCC is there is a demand which can fill the aircraft to at least 80% on the routes. Another condition is the average traveler spend must be beyond the lowest prices we have seen above.
American Airlines’ Crandall invented revenue management for the airline industry. Revenue management or yield management, as it’s also called, means the seats in the cabin are sold at different prices. The price you pay for a ticket depends on several factors:
All this is to fill the aircraft to the maximum because the cost for flying the aircraft from New York to London is almost 100% fixed. Only some airport handling and catering costs vary with the passenger number. Booking costs also vary with passengers, but with the booking of flights over the Internet, booking costs are negligible compared with other costs for the flight.
The LH-LCC consistently fills the aircraft to around 80% load factor, even in the off-season (like right now for New York-London). The lower interest for traveling to a rainy and cold London means the airlines sell the seats for a lower price. The revenue per sold seat, the yield, is lower.
To prep up the yield after having sold the cheap ticket to fill the flight to London, the LH-LCC works hard to sell you extras.
Let’s say you booked the flight for $550. It doesn’t include any seat assignment, no meals and no checked bag. You want this? Now you are at $750.
You want the flexibility to change the ticket? Now you are at $1,200. You want more legroom? Now you are at a Premium seat for $1,550.
For the LH-LCC, it’s about selling the best spread of tickets with the highest possible total revenue for the trip. It’s better to sell the last 10 seats for half the price, then not sell them at all.
What counts is to generate enough revenue on the flight between the airports to cover the costs of flying the aircraft and its crew.
This is counted over the seasons of the year, and for upstart routes after a first quarter or two. If the flight is not following its seasonal revenue curve after a couple of quarters, it will be axed and the aircraft and crew will operate some other route.
When we look at the costs of operating an LH-LCC aircraft and what revenues are needed to cover these costs, there will be some parameters we will need to know the meaning of:
ASK: Available Seat Kilometers. This is the distance the aircraft flies’ times the seats the aircraft carries. It describes the transport capacity entered on the route. It’s also used to describe the total production capacity of an airline.
CASK: Cost per Available Seat Kilometer. This is the cost of operating the aircraft divided with the ASK. This is given both as including fuel and excluding fuel costs.
RASK: Revenue per Available Seat Kilometer. This is the route’s total revenue divided by the flown Available Seat Kilometers. It’s also given as the airline’s total revenue divided by the airline’s total ASK.
In the next article, we will look at the costs of typical LH-LCC operations and calculate the minimum revenue needed to cover these costs. With this knowledge, we can discuss how we fill the aircraft with what ticket prices.