By Bjorn Fehrm
April 04, 2018, © Leeham News.: In the first article about Long-Haul LCC and if it’s a viable business, we looked at ticket pricing strategy used by airlines to maximize revenue on a route. Now we look at the cost side of the equation.
The cost level for a Long-Haul LCC is of utmost importance. A lower cost level than the Legacy carriers flying the same routes is the only way the company can compete. It’s seldom it offers origins or destinations not offered by other airlines. Its mission is to offer a popular air transport service at a lower cost.
Before we start to discuss how a Long-Haul LCC works to keep its costs low, we need to understand which cost types are important. First the overall cost types:
Of these two major cost items, the Operational costs are dominant. An LCC lives of low SG&A costs and a Long-Haul LCC is no different. Typically the SG&A costs are around 10% of total costs, with Operational costs being the rest.
We will look at the operational costs of flying our New York to London route with two different aircraft types. A narrowbody and a widebody. The narrowbody will be of the Boeing 737 MAX 8/9 or Airbus A321LR type. The widebody will be of the Boeing 787-9 or Airbus A330-900 type. The cost levels of these aircraft are close. We will use an average cost level between them for the discussion.
Which of these are the best for the route is not our target for the articles, we want to understand if a Long-Haul LCC model is viable. For this, the average costs will be fine.
The operational costs for the airliners are divided between:
Historically the dominant cost. With present lower fuel prices, it has come close to the other large cost item, crew costs.
Crew cost
This is an important cost item for a Long-Haul LCC. It’s the second most dominant cost and the crew cost level will decide the competitiveness of an LCC. The largest cost is the Flight Crew cost. It doesn’t scale with passenger number (which Cabin Crew cost does) other than between Narrowbody and Widebody. To a certain level, the wage and therefore cost difference between a Narrowbody and Widebody flight crew is motivated by the number of passengers flown.
Normally the Flight Crew cost contains the cost for a Captain and a First Officer on the route. On flights over eight hours, a third Flight Crew member needs to give duty hours relief to the Pilots. This is often a Pilot only cleared for cruise duty, typically a new recruit gathering experience. Our crossing of the North Atlantic does not require a third Flight Crew member, it’s a six-hour flight.
Regulations for most airlines prescribe a Cabin Crew member for every 50 passengers. Therefore our Cabin crews numbers and by it cost will differ between the aircraft types. The cost per passenger mile will be similar, however.
Countries charge airlines who use their airspace Navigation or Underway fees. The fees shall cover the country’s cost of upholding a controlled and safe airspace. This requires setting up and maintaining a navigation infrastructure and staffing the required Air Traffic Control (ATC) centers.
The US doesn’t charge for domestic aircraft using the US airspace but it charges foreign airlines using the US airspace (as our Long-Haul LCC is European we will be charged for our flight from New York). The Underway fees vary by country but are generally based on the aircraft’s registered Maximum Take-Off Weight (MTOW).
Airports charge landing and handling fees to pay for its infrastructure and services. These charges vary from airport to airport. The larger and more attractive the airport, the higher the fees.
Maintenance costs for the aircraft are divided between the airframe and engine maintenance costs. Of these, the engine costs dominate. Often the relationship is two-thirds engine and one-third airframe costs for maintenance.
This is why airlines use derate (reduced thrust) for Take-Off and Climb. The lower the maximum thrust used during the mission, the longer the engines can stay on the wings before needing a visit to the overhaul shop.
The above costs are summed as Cash Operating Costs (COC). These are the costs an airline has to pay beyond capital costs for the aircraft.
To go from Cash Operating Cost to Direct Operating Cost (DOC) we need to add the costs of owning or renting an aircraft.
Owning an aircraft means we need to consider the cost of the capital frozen in the aircraft, whether we have loaned the money to buy it or not. With today’s low lending costs for aircraft investments (aircraft are considered a good collateral for loaned money), it’s unusual for airlines to invest more own capital in its fleet than necessary.
About 40% of the world’s aircraft are rented (leased) from aircraft leasing companies. These companies are specialized in financing aircraft on good terms and looking after the aircraft’s status when it rents them to airlines. Any missed rent payment or mismanagement of the aircraft by the airline and the leasing company will repossess the aircraft, to lease it to someone else.
To safeguard for any accidents (small or large) that might happen to the aircraft, the aircraft are always insured to their full value. The cost for the insurance is included in the Capital costs.
When ownership costs and insurance costs are added to Cash Operating Cost we have the airlines Direct Operating Cost.
In the next article in the series, we will give examples of these costs for our Narrow and Widebody fleets.
Underway Costs: Is that in the Air for ATC?
Does a larger aircraft pay more?
If so why?
I can see it for landing fees based on a size aircraft but ATC costs would seem to be the same regardless of large or small (miner difference in separation maybe?)
The countries charge Underway = airway use cost according to the size of aircraft. It has nothing to do with the space they occupy, (they all take up one traffic slot in the airspace) but rather their capability of payment (larger aircraft can pay more as they carry more passengers to divide the cost over).
Thank you, probably makes the business jets and regionals happy and the Airlines less so!
Well, the issue is not sooo simple.
1) The Classic Large Carriers (CLC) are using Long Haul (LH) overpricing to support the competition on Short Haul (SH) regional networks against the Low Cost Carriers (LCC).
2) Classic LH operation is initiated from Major Airports that use Major Airport Fees, while LCC operation is conducted between Minor Airports that use Minor Airport Fees.
If we consider 1) and 2) above, in my humble opinion, there might be a one way $100 or more gap between CLC and LCC on LH operations (considering only apple to apple cost). On a return trip this is a major opportunity, right?
If SH LCC integrate their operations with LH LCC then CLCs have a problem.
Im not sure how long haul LCC can maximise its average hours per day its planes are flying- that seems a competitive advantage it has on its short haul.
This story compares some specific planes from different types of carriers and the total flying hours per week using ‘Flightradar 24’. These are not fleet averages but give a good idea.
https://www.telegraph.co.uk/travel/travel-truths/a-week-in-the-life-of-a-plane/
But Ryanair had by far the greatest number of flights for the one plane( 737) – 46 in a week. You could say it was ‘very short haul’
The longest flight time and fewest flights was the Qantas A380, A British Airways 747 was less again.
Easyjets A320 has its weekly hours roughly the same as a BA 747, Ryanair has 76hr in air for its 737 but the most was the A380 at 110 hrs
I will add in what I have long thought but did not have good data for.
I am looking at a trip and trying to get to an somewhat obscure US large city (its true) from where I am.
Working through the whole thing I got curious what aircraft was on the short hop of the route.
It turns out for 250 miles its a 737-900. That aircraft has two short hops (did not try to track further.)
That’s a regions route and even turbo prop.
Someplace in there it must make some long hops and get a return
So the point is, its all abut the whole structure, routes and no single focused trip tells you what the real story is.
Its across a whole route and then even whole networks (it might make short hops all the way across the country while the whole fleet makes more cross continental flights and it just slots in better not to have a small sub fleet) .
I would think regional fill in would make more sense.
Ergo, somewhere there are people in rubber rooms assessing a whole operation and making the best average decisions not the best spot decisions.
That been my long held belief, analyzing aircraft across and average does not work, that aircraft has to be analyzed within an Airlines route structure and operations patterns.
One element you have overlooked is the hub bias of legacy airlines doing long haul.
If you take the UK and BA — it is not now a national airline but a capital city airline and for the main part only a single airport airline.
The US might be different in that each of th3 three main groups have a number of hub airports. However they all have a focus and this offers the opportunities that any new LH-LCC could exploit.
Then comes the real low cost element — if the network of tomorrow is to be a complex spiders web than the simpler hub and spoke layout of today then new types of planes will be required.
LH Legacy is based on carting at least 125T of OEW between two huge airports for onward SH distribution.
LH-LCC will need something a lot lighter to make things work.
We currently have one data point — 50T of OEW will get you a range of 4K NM nominal for 190 mixed seats and the market has noticed.
How would things change if 60T of OEW could get you out to 5K NM range or 70T OEW took you to 6K NM range?
All part of the current MoM’ster dance.
On another angle regarding LH-LCC airlines — buying second hand?
What is the going rate for a 20 year old aircraft that can do 5K or 6K NM?
Going rate for a similar 15 year old plane?
How would the monthly maintenance costs compare with new?
How much a seat to upgrade the interior?
Any A340 -600’s sitting idle under a desert sun?
How much to leas3 one for @ year?
Flying into Tier-2 airports works for short haul LCC because that airport is likely the “final” destination for the specific leg of the trip.
For long haul your first airport in many instances not the final destination and connections are required. The LH-LCC’s in avoiding higher tariffs flies into Tier-2 airports with lesser connectivity resulting in (substantial) additional costs to passengers (and time lost) to get a connection flight, etc., in many instances.
Resulting from this it could effectively be cheaper to fly “low fare” on a Legacy airline into a Tier-1 airport with better connectivity (flights, rail and road) and also potentially better near airport accommodation.
Airport selection therefore very important for a sustainable LH-LCC route.
Look at the situation in the UK.
LH means in the main flying from London — especially if you are heading west.
If that is the case then you are adding 3 hours to your journey and you are flying 125T / 150T / 190T / 275T OEW all of which have a certain load factor / passenger numbers that needs to be achieved before they make money.
Flying east is somewhat better in that the ME3 have many flights to smaller regional hubs to feed into their mega hubs and then out again.
However this has a cost.
12 hours direct becomes 17/18 hours using a ME3 hub.
They can offer a huge range of destinations but it does have a cost in fuel used and time required.
LH-LCC is out there but it is not flag carrier LH done more efficiently it is a whole new paradigm of travel.
It is all about CapEx.
Either go smaller or go cheaper.
Main thing is go different.
What can 50T OEW deliver?
What 60T / 75T / 90T OEW deliver?
4K / 5K / 6K NM range nominal?
For me 6K NM is the magic number.
What can the second hand market deliver — 15/20 year old B7double7 or A330 — what can they deliver at what cost?
With SH-LCC — people like RYA and EJ do not cover every city or airport pair. They just offer what fits their business model — pile it high and sell it cheap.
They are not mature yet — many things will change.
The US and SWA are much more mature.
With LH-LCC innovation will come from the ROW.
Hi Bjorn,
Will all the subsequent articles be posted behind the pay-wall?
Best,
Bob
No, just the one where we go into details about the cost items. We don’t need this detail for the article series, we will use these costs on an aggregated level in Part 3 and any following articles. These are all free wall.
Hi Bjorn,
Thanks for that! And thank you and Scott very much for finding this great mix between paid and free articles. I have been reading this blog with much interest and enjoyment from day one and prior to that the old Leeham site.
Best, Bob
Looking at a niche market regarding LH-LCC — West Central Scotland to the Eastern seaboard and US Rust Belt.
Why — don’t ask.
Mixture of distances involved — short to long: Halifax vs Cleveland / Detroit plus NYC, Toronto and Boston.
Rough cut numbers using a A321 / CEO Model:
Max revenue / pass + freight = £30mill pa or £600K pw @ 105 hours usage.
Average flight distance = 2,800 NM / 14 flights per week.
Fuel cost @ 245T usage per week = £110/120K per week.
A321 CEO = 17.5T for 2,800 NM flight / informed guess.
Crew Costs (1) FD = £1mill pa or £20K pw for 5 crews of 2.
(2) Cabin = £900K pa or £18K pw for 5 crews of 6.
Aircraft Cost = 10 year old A321 at a guess £30mill with new IFE.
Dry lease cost = £300K approx per month.
Weekly lease cost =£90K pw plus maintenance allowance.
Weekly maintenance allowance = £20K at a guess.
Total costs = £263K per week +/- 10%.
Or £13.5mill pa in total.
Then you have the fees — airport and ATC and insurance.
Then you have the company expenses.
4 aircraft needed for a credible fleet?
3, 4 or 5 flights a week to 7 or 8 destinations.
Need to generate £70mill of revenue in the first year to credible?
Potentially 500K extra passengers in and out of Glesga pa.
125K of new visitors to the city region?
£60/70mill extra spend?
600/700 extra jobs?
One issue: A321neo makes a big difference — Chicago and Atlanta now in range.
Second point: A322 at 112T MTOW makes the West Cost within range.
All for 55T OEW rather than 125T.