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CAPA Live: A future for ULCC-FSC partnerships?

Analysis

Logic dictates that the stark differences in the full service and ultra low cost business models would prohibit those operators from ever forging partnerships. But in a post-pandemic world, the idea may not be as far-fetched as it seems.

Speaking at the recent CAPA Live July conference, Indigo Partners Managing Director William Franke stated that the opportunities for ultra low cost carriers (ULCCs) and full service airlines to integrate in some way “will be a major discussion item for leadership in the airline sector over the course of the next couple of years”.

It is an intriguing conclusion from Mr Franke.   

For now, it seems those two business models will emerge from the pandemic as the most robust, while operators falling in between are subject to far more uncertainty. 

Summary

  • Indigo Partners' William Franke believes industry discussion will pivot to tie-ups between ULCCs and FSCs. 
  • But the actual implementation of those partnerships will be a challenge. 
  • Airlines that fall in between those two business models could be at the greatest risk.

Indigo believes there are opportunities for ULCC and FSC partnerships 

Speaking at the recent CAPA Live July conference, Indigo Partners Managing Director William Franke stated that the opportunities for ultra low cost carriers (ULCCs) and full service airlines to integrate in some way “will be a major discussion item for leadership in the airline sector over the course of the next couple of years”. 

It is an intriguing conclusion from Mr Franke.

Indigo has founded numerous ULCCs worldwide and currently has investments in Volaris, Wizz Air and Frontier Airlines. The company also owns the South American ultra low cost operator JetSMART

Mr Franke acknowledged that such tie-ups would “require some modification of the point of view of both sides and some integration of where you fly, when you fly and what kind of services are provided on a flight”. 

There have been some partnerships between lower cost and full service airlines in the past.

Joining Mr Franke in the discussion was former British Airways Chairman and CEO Alex Cruz, who also founded the Spanish low cost operator Clickair and later Vueling, after the two airlines merged.

Vueling, which operates narrowbody flights from its hub in Barcelona, was able to establish codeshares with its fellow IAG airlines British Airways and Iberia, and later a codeshare pact with American Airlines

There are some hurdles to overcome for those tie-ups to materialise

Mr Cruz believes the business need “is there” for potential partnerships between lower cost airlines and full service operators, but from an implementation perspective, “there are some significant hurdles underpinned by a completely different culture of bringing the two business models together”, he said. 

Yet signs are emerging that partnerships between airlines with different business models could increasingly make sense.

Mr Franke explained that “the government of Abu Dhabi…considering the full service premier cabin it has in Etihad, is interested in finding an alternative to deliver more passengers at a lower cost, considering its customer profile across parts of Africa, Asia and to Central and Eastern Europe, and that is a step along that path”.

Wizz Air Abu Dhabi, which launched operations in January, is a partnership between Wizz and the Abu Dhabi Development Holding Company. 

“To be candid”, Mr Franke said, “full service carriers have a more difficult time competing on short haul segments on a cost basis than ULCCs”.

Mr Cruz agreed that the challenge traditional airlines face in their short haul feed has been “ongoing, forever,” but he explained that due to labour situations and aircraft commitments at those airlines, they “will fight tooth and nail to definitely not consider feed, certainly in their home hubs, from LCCs…” 

Still, Mr Franke believes that there is a place for ULCCs and full service operators in the marketplace, “but there is not a place for both models in all of the marketplace”. The question, he said, is: “How do rational people manage the difference?” 

He pointed out that historically the airline industry is famous for its mentality of doing things the same way over and over, and it is “not an easy path, I’m suggesting”.

But from “a consumer and economic perspective, recognising what the pandemic has brought to the fore around financial issues at airlines, there will be a need to have this conversation”, Mr Franke said. 

Airlines with less distinct business models will be at high risk 

As the industry waits to see if partnerships between ULCCs and full service operators unfold, both Mr Cruz and Mr Franke believe those airlines operating somewhere between those two models are the most at risk. 

Mr Cruz said that on one side there have been airlines that have received some form of state aid, and “it is very hard to see those large brands disappearing”.

But on the other hand, there are super lean ultra low cost carriers with high variable cost airlines that have “been able to drive through”, and are beginning to grow more and more, he explained. 

“What I’m worried about", said Mr Cruz, “are those in the middle that are very easy to define.” Those operators have a cost base that is anywhere from 20% to 100% bigger than low cost carriers, and don’t have natural support for their home countries. 

“There are a number of those airlines around the world”, Mr Cruz said. “And I think they are under severe threat at the moment”, he added, noting that most are short haul operators whose costs have gone in the wrong direction. Those airlines, he stated, are the “ones that are fully challenged, and there is much to be done.” 

Mr Franke said that those 'in-between' airlines have a difficult business model, and highlighted that many ULCCS, particularly outside the US, “have been able to persevere and survive as we go forward”. 

Operators with more defined business models will keep their edge

At the moment the only certainty in the post-pandemic operating environment is that the ultimate composition of the marketplace must change, and change radically.

Operators with business models that conform to one or the other of the two categories are better positioned to survive - perhaps not "succeed", but survive - whereas the in-betweeners are very much at risk. Mr Cruz believes there are many of them. And that the coming winter season will be their last.

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