The airline industry is constantly evolving, with new trends and challenges emerging all the time. One such trend is the rise of low-cost carriers (LCCs) in the long-haul market. While LCCs have traditionally focused on short-haul flights, they are increasingly venturing into longer routes, including those over 10 hours, also known as ultra-long-haul flights. This raises the question of whether LCCs will eventually overtake legacy airlines in this market segment.
Cost of Operating a Long-Haul Flight
The cost of operating a long-haul flight is a significant factor that influences an airline’s profitability. These costs can be categorized into direct and indirect expenses. To better understand these costs, let’s examine a breakdown of operating expenses per block hour for different aircraft types:
| Cost Factor | Description | Example |
|---|---|---|
| Fuel | Cost of jet fuel consumed during the flight | $2.46 per gallon |
| Labor | Salaries and benefits for pilots, flight attendants, and ground crew | Captain costs $160K per year, the F/O $90,000 |
| Airport Fees | Charges for landing, parking, and handling at the airport | Landing fees vary between $6,000 to $25,000 |
| Maintenance | Costs for regular upkeep and repairs of the aircraft | $1 million for a large business jet turbine overhaul |
| Insurance | Premiums for aircraft and liability insurance | $1,200 to $2,000 for a basic aircraft |
| Amortization | Cost of aircraft depreciation over its useful life | An A380 costing $350M amortized over 20 years is $2,740 per hour |
| Overflight Fees | Fees charged by countries for flying over their territory | 145 EUR per 100km for a 747-400ER over Europe |
| Administrative Costs | Expenses related to ticketing, marketing, and administration | Not available |
Fuel is typically the largest expense for airlines, and its price can fluctuate significantly. For example, in 2024, the average cost of Jet-A fuel in the U.S. was around $6.20 per gallon, but it could reach over $8.00 in some regions . Larger aircraft consume more fuel, with heavy jets burning 400-600 gallons per hour . To manage fuel costs, airlines often use a strategy called fuel price hedging, where they buy futures contracts to lock in fuel costs for a set period . This helps mitigate the risk of price fluctuations and provides greater budget certainty.
Aircraft amortization is another significant cost factor. This refers to the gradual expensing of an aircraft’s cost over its useful life. For example, an Airbus A380, which costs around $350 million, might be amortized over 20 years, resulting in an hourly cost of $2,740, whether flying or not. Â
Overflight fees are charged by countries for allowing airlines to fly over their territory. These fees are typically based on the distance flown and the aircraft’s Maximum Take-off Weight (MTOW) . For instance, a Boeing 747-400ER flying over Europe might incur an average overflight fee of 145 EUR per 100km .
It’s important to note that airport fees are also influenced by the size and weight of the aircraft. Larger aircraft generally incur higher landing fees and other charges due to their greater demands on airport infrastructure .
Profit Margins on Long-Haul Flights
Profit margins in the airline industry are generally thin, with the overall industry netting a margin of just 2.6% in the previous year . However, some airlines manage to achieve higher margins, particularly ultra-low-cost carriers (ULCCs) like Ryanair and Spirit Airlines, which reported profit margins of 16% and 15%, respectively . These impressive margins are achieved through a combination of maximizing revenue generation and minimizing costs .
For legacy airlines, profit margins can vary significantly. In 2019, margins for US low-cost and ultra-low-cost operators were two to three times higher than those of legacy airlines . Factors like heightened competition, fluctuating fuel costs, and economic conditions can put pressure on legacy airline margins . For example, Delta Air Lines adjusted its operating margin guidance for the third quarter of 2023 from a previous forecast of mid-teens to 13%, while American Airlines revised its operating margin for the same period from 8%-10% to 4%-5% . Â
RPK and ASK on Long-Haul Flights
Revenue Passenger Kilometers (RPK) and Available Seat Kilometers (ASK) are essential metrics for assessing airline performance and capacity utilization. RPK measures the volume of passengers carried by an airline, calculated by multiplying the number of revenue passengers by the distance traveled . ASK, on the other hand, measures the airline’s carrying capacity, calculated by multiplying the number of available seats by the distance flown .
The relationship between RPK and ASK yields the Passenger Load Factor (PLF), which represents the percentage of available seats filled with passengers . A high PLF generally indicates efficient capacity utilization and contributes to profitability.
While specific RPK and ASK data for legacy and low-cost airlines on long-haul flights was not available in the provided material, these metrics are crucial for airlines to monitor and analyze their performance, especially on long-haul routes where capacity utilization and passenger demand are key factors for profitability.
Business Models of Low-Cost and Full-Service Carriers
Low-cost carriers and full-service carriers operate under distinct business models, each with its own set of strategies and priorities. LCCs prioritize cost-efficiency and offer a no-frills service, while full-service carriers focus on providing a comprehensive travel experience with a wider range of amenities and services.
Revenue Management Strategies
LCCs and full-service carriers employ different revenue management strategies, encompassing pricing strategies and ancillary revenue streams.
LCCs typically use a dynamic pricing strategy, adjusting fares based on demand, competition, and other factors . They often offer low base fares and charge extra for ancillary services like checked baggage and seat selection . This allows them to attract price-sensitive travelers while generating additional revenue from those willing to pay for extras.
Full-service carriers, on the other hand, often use a more traditional pricing strategy with fixed fares that include a wider range of services in the ticket price . They may also offer different fare classes with varying levels of flexibility and included services.
Ancillary revenue is a significant source of income for both LCCs and full-service carriers. LCCs generate revenue through fees for services like checked baggage, seat selection, priority boarding, and in-flight meals and drinks . They often rely heavily on ancillary revenue to compensate for their low base fares.
Full-service carriers also generate ancillary revenue, but they typically rely on a wider range of sources, including cargo businesses, frequent flyer programs, and partnerships with other travel providers . Frequent flyer programs, for example, can generate revenue through the sale of air miles to banks and other partners .
Dynamic pricing models are increasingly used for ancillary services as well . This allows airlines to adjust prices for extras like baggage or seat selection in real-time based on demand and other factors, maximizing revenue potential.
Cost-Cutting Measures
LCCs employ various cost-cutting measures to maintain their low-cost structure. These include operating a single-family aircraft fleet, utilizing secondary airports, minimizing turnaround times, and offering a no-frills service . Secondary airports often have lower fees and less congestion, contributing to cost savings .
Full-service carriers also focus on cost reduction, but they typically have higher operating costs due to their more comprehensive service offerings . They may employ strategies like optimizing aircraft utilization, streamlining maintenance procedures, and negotiating with suppliers to manage costs effectively .
One important difference is that legacy carriers often rely on outsourcing to regional airlines as a cost-cutting measure. Studies suggest that this practice can lead to lower airfares, as regional airlines typically have lower operating costs .
Strategies for Low-Cost Airlines to Operate Long-Haul Flights
To operate viable long-haul flights, LCCs need to adopt strategies that address the challenges of increased costs and passenger expectations.
Aircraft Selection
Choosing the right aircraft is crucial for long-haul flights. LCCs typically opt for fuel-efficient aircraft like the Airbus A321neo LR or Boeing 787 Dreamliner to minimize fuel costs . These aircraft offer a balance of capacity, range, and fuel efficiency, making them suitable for long-haul operations. Â
Route Planning
Efficient route planning is essential for long-haul flights. LCCs need to consider factors like weather conditions, air traffic control regulations, fuel efficiency, and sustainability when planning their routes . They often choose routes that minimize distance and fuel consumption while ensuring safety and compliance with regulations. Environmental considerations are becoming increasingly important in route planning, with airlines seeking to minimize their carbon footprint and operate more sustainably .
Cost Management
Cost management is critical for LCCs operating long-haul flights. They need to control costs in areas like labor, maintenance, and airport fees . Strategies like negotiating lower airport fees, optimizing aircraft utilization, and streamlining maintenance procedures can help LCCs manage costs effectively.
Consumer Preferences for Long-Haul Travel
Understanding consumer preferences is crucial for airlines operating long-haul flights. Passengers on long-haul flights typically have different needs and expectations compared to those on short-haul flights. Economic and cultural factors can significantly influence passenger preferences for ultra-long-haul flights . For instance, business travelers often prioritize time efficiency and convenience, opting for direct routes and full-service carriers even if it means higher costs . On the other hand, leisure travelers with budget constraints may be more willing to endure layovers to take advantage of lower fares .
Willingness to Pay for Amenities and Services
Passengers on long-haul flights are often willing to pay for amenities and services that enhance their comfort and convenience. These can include extra legroom, seat selection, in-flight entertainment, and Wi-Fi access . Airlines need to carefully consider which amenities and services to offer and how to price them to maximize revenue and passenger satisfaction.
The COVID-19 pandemic has also had a significant impact on consumer preferences and travel behavior . Travelers are now more focused on health and safety, flexibility, and personalized experiences .
Some airlines employ a strategy known as “calculated misery” , where they intentionally make economy class less comfortable to encourage passengers to pay for upgrades. This can influence passenger perceptions and their willingness to pay for amenities.
Will Low-Cost Airlines Will Overtake Legacy Airlines?
Based on the information gathered, it is unlikely that low-cost airlines will completely overtake legacy airlines in the long-haul travel market in the near future. While LCCs have made inroads into the long-haul market, legacy airlines still hold several advantages.
Legacy airlines have established brand recognition, extensive route networks, and strong customer loyalty programs. They also have the financial resources to invest in premium services and amenities that cater to the needs of long-haul passengers. These factors create a significant competitive barrier for LCCs.
However, LCCs are becoming increasingly competitive, driven by several factors:
- Dynamic Pricing and Revenue Management: LCCs effectively utilize dynamic pricing and ancillary revenue strategies to maximize revenue and offer competitive fares.
- Operational Efficiency: They excel at operational efficiency, minimizing costs through strategies like single-fleet operations, quick turnarounds, and the use of secondary airports.
- Evolving Passenger Expectations: Changing passenger preferences, with a greater focus on value and personalized experiences, play to the strengths of LCCs.
Suppose LCCs can successfully address the challenges of operating long-haul flights while maintaining their low-cost structure and meeting evolving passenger expectations. In that case, they may be able to capture a larger share of this market segment in the future.
The long-haul travel market is a dynamic and competitive landscape. While legacy airlines currently dominate this segment, LCCs are emerging as a significant force. The success of LCCs in this market will depend on their ability to manage costs, offer attractive services, and meet the evolving needs of long-haul passengers.
The future of long-haul travel is likely to be shaped by a combination of factors, including technological advancements in aircraft technology and fuel efficiency, changing consumer preferences with a greater emphasis on sustainability and personalized experiences, and the competitive strategies of both legacy airlines and LCCs. As technology continues to advance, we may see the development of even more fuel-efficient aircraft and innovative passenger experiences that could further disrupt the long-haul market.
