Long-haul low-cost – Yes it does work, but there’s no template for success

But does it work? There are sceptics aplenty.

The lack of consistent profits from this niche but growing sector makes definitive statements difficult, but experience has provided some indicators - both of what to do and what not to do.

Operationally, risks and complexity on a long-haul platform are magnified when compared with short-haul. There is a narrow window for any margin of error, unless a far-sighted and deep-pocketed owner (such as Singapore Airlines or Qantas) is prepared to invest for the long term. Cost discipline and ability to innovate must already be ingrained.

Commercially, point to point long-haul opportunities are limited and probably not enough to be profitable, so short-haul feed is increasingly a part of the model. This can be achieved through an existing short-haul LCC network on the same AOC (such as Azul, Cebu Pacific) or by association (AirAsia X with AirAsia, Norwegian with Norwegian Air Shuttle).

An exception is Scoot, started from scratch within Singapore Airlines. Only later, as the group strategy evolved did it partner with short-haul sister LCC Tigerair.

The need for feed was apparent early on, partially leading to Scoot launching a short-haul Singapore-Bangkok flight to connect with its Australian market.

Another element of the model can be the extent to which yield options are exploited. Over the past decade short-haul LCCs have hybridised, for example by accepting interline passengers from other carriers. This has allowed some carriers to have significant numbers of passengers placed on their networks, often from international to domestic.

Examples include JetBlue, Virgin Australia (although now no longer an LCC) and WestJet. These airlines have no long-haul network with the exception of Virgin Australia's relatively small operation, and WestJet's planned entry to the very leisure Hawaiian market. There is useful complementarity since these carriers are not competing in prime time long-haul networks.

This status quo can be threatened if the airline has international aspirations. Bangkok Airways receives over half of its passengers from foreign carriers and abandoned A350 long-haul plans; the airline is full service but the dilemma is similar for LCCs. JetBlue's oft-rumoured long-haul aspirations do not appear to be materialising. But it has launched new short-haul routes like Boston-Detroit thanks to large transfer numbers from partner Emirates.

Several versions of long-haul low-cost airlines have evolved. The AirAsia X and Scoot franchises are essentially network carriers on a low-cost chassis. Over half of AirAsia X's passengers connect, although this essentially means lower yields, forcing strong cost discipline (where competing airlines serve points direct, sum of sector pricing by the LCC cannot usually be price competitive, hence the need to discount).

Qantas' Jetstar is more focused on point to point demand to/from Australia, a substantial leisure origin market. But combined with a higher cost base, Jetstar's long-haul opportunities are limited and fleet growth has been scaled back. Azul and Norwegian's operations are similar in this way to Jetstar, with transfer passengers not as critical as at AirAsia X and Scoot.

Cebu Pacific started as almost entirely point to point with the exception of limited domestic Filipino connections. But the carrier is now considering partnerships with Air Arabia and flynas to expand its network options in the Middle East. Short-haul Asian connections are important for new Australian routes. Azul, serving the Brazil-U.S. market, may seek a tie-up with distant cousin JetBlue.

flynas' short-lived long-haul project tried to blend the leisure market with popular religious trips and had other missteps. Skymark sought to go long-haul with a low-cost base but all-premium offering despite not having a premium product - or any international experience - at its short-haul operation.

The attraction to long-haul - but failed execution - saw Skymark pay the ultimate price. Similarly, the long-haul full service operation of then-LCC Virgin Blue caused a serious hiccup for the airline. Would its fate have been the same if Virgin had gone long-haul on a low-cost platform, or were the problems ultimately about a short-haul LCC managing a long-haul business irrespective of service structure? (In passing, this raised another issue: as a full service long-haul airline, Virgin was able to negotiate a joint venture with Delta on the Pacific, which has helped both airlines become more competitive with Qantas/American Airlines. One future evolution for the long-haul low-cost model would appear to be formulating appropriate models for partnerships - the core of success for most full service airlines today.)

Oasis Hong Kong is understood to have exited due to a shareholder funding disagreement, but was clearly struggling as a point to point operator in a market dominated by a powerful and aggressive network airline.

Long-haul has strained the financials of Cebu and Norwegian while Scoot does not expect profits until it transitions to 787s and gains scale; even AirAsia X has recently suffered from over-capacity, although partly due to special circumstances (as a loss-happy Malaysia Airlines uneconomically dumped capacity to match AirAsia X).

Partnerships do not have to be only with other LCCs, where a full service parent presents opportunities: Scoot is growing closer to Singapore Airlines and SilkAir while Jin Air has started codesharing with Korean Air. Jetstar partners with full service carriers including Air France and Jet Airways.

For all the necessity of short-haul feed and partnerships, when it comes to management, the lesson is for the LCC to remain at arm's length. Most long-haul LCCs have separate management. This can be through a unique company entity and AOC with different shareholders (AirAsia X); or a unit within one AOC (Cebu). While short-haul LCCs can teach lessons to long-haul LCCs, long-haul has its own characteristics and needs to be free of outside constraints; it was long-haul AirAsia X that pushed the group to have connections as well as various ancillary revenue initiatives. Scoot's success with a more capable version of Navitaire pushed cousin Tigerair to upgrade.

Long-haul LCCs have largely done away with previous dogmatic ideologies, like avoiding connections. Connections bring complexity and therefore cost. But some principles still apply, such as high seat density and high utilisation rates. AirAsia X's A330-300s seat 377 and fly on the same routes as Malaysia Airlines' 283-seat A330-300s. Scoot took 288/323-seat Singapore Airlines 777-200s and made them 402-seaters. Norwegian's 787-8s seat 291 compared to British Airways' 214-seat 787-8s.

One standout is the recently-launched widebody operation at Jin Air, affiliated with Korean Air. Jin Air took ex-Korean Air 777-200s and reconfigured them; but it stuck with nine abreast seating for a total configuration of 355 - well below Scoot's 402. These are early days and experimentation is necessarily rife, and perhaps Jin Air expects to serve more niche than competitive routes.

Cebu Pacific seats 436 on the A330-300, just short of the 440 seat certified maximum. Cebu Pacific is the only long-haul low-cost operator without a premium seat. Most have gone for a premium economy-style seat, that is a big recliner seat but AirAsia X has angled lie-flat beds. AirAsia X might argue Scoot and Jetstar's recliner seats protect their full service parents, but the two in turn would argue the yields are not there for a bed. Another view: when AirAsia X selected beds, many intra-Asia overnight flights still had chairs, providing AirAsia X with another opportunity which might now be weaker. Azul will have the most premium option of a long-haul LCC, with plans to retrofit in a lie-flat business class seat with direct aisle access.

Efficiency continues with utilisation but this is not widespread. AirAsia X achieves 17 hours daily utilisation on its A330s. Cebu Pacific does only 11 hours, although is looking to boost this.

Hand me downs are cheap - but the poor man may pay twice. It has been an attractive option in some cases for a parent airline company to pass older aircraft to its new subsidiary. This can provide for a quick launch; from announcement to first flight Scoot took a year. Older aircraft come with lower ownership/lease costs and also allow the airline to test the waters. Scoot found its ex-Singapore Airlines 777-200s proved the feasibility but profits would only come with aircraft dedicated to the routes it serves.

Scoot's 787s are smaller and lighter; they also represent a generational leap. Scoot took its 787s from SIA's order book at relatively short notice, an advantage of being part of an airline group with flexibility. Scoot leapfrogged AirAsia X in terms of aircraft technology and efficiency.

The pendulum can swing the other way. Jetstar's A330 operation was supposed to be limited until 787s arrived. Jetstar would then pass its A330s to Qantas for domestic use with a common interior needing only light cosmetic changes. As the 787 delays became more prolonged, Jetstar was left to operate with an aircraft configured for short-haul full service domestic flying. This included embedded (heavy) inflight entertainment, although Jetstar's 787s also have this, as do Norwegian's.