Is the LCC long-haul model making a comeback in the COVID recovery phase?

Transcript

Adrian Schofield:For this session, we're going to take a look at the Long Haul Low Cost model, and more generally, at the use of widebodies by LCCs. And we'll also touch on how long-range narrowbodies are opening new opportunities for LCCs in this region. This can be a difficult topic to define, long-haul low-cost carriers, so I thought I'd just take a few minutes just to set the scene a little bit. So there are several Asia-Pacific LCCs that operate widebodies, including some names I'm sure you're all familiar with, like AirAsia X, Scoot, Zipair, VietJet, Jin Air, Jetstar, and Cebu Pacific. Some of these are actually owned by legacy airline groups, that are looking to pursue a multi-model approach, and some of them are more independent operators. The pandemic has not derailed the trend of LCCs using widebodies for medium and long-haul routes. There was one that did disappear, namely Nok Scoot, which was a joint venture between Nok and Scoot. But the others have generally returned. Which I think highlights the fact that this model is well entrenched in Asia-Pacific. In fact, some of these carriers have launched new true long-haul routes during the pandemic period, thinking of, just some examples, Zipair and Scoot. It is important to note that not all LCC wide-body operations are long-haul, and the wide-bodies are actually deployed more often on medium-haul routes. or even at slot-constrained airports where aircraft size is more important than range. So anyway, I think we've got a great panel to talk about some of these issues. So if I could ask our panellists to join me on the stage, and if everyone could give them a warm welcome.

Hans Mitterlechner:Thank you, Adrian. Thanks.

Adrian Schofield:Great. So, um, from the left we have Hans Mitterlechner, Director of ASM Australasia. We have Beenash Qureshi, who is Sales Strategy Manager for Lufthansa Technik, and Cuong Chu, who is a board member for VietJet. Welcome again, and thanks very much for joining us. I thought if we could start with you, Cuong. VietJet has obviously been very successful with short-haul narrowbody operations, but you're a relative newcomer to widebody operations.

Cuong Chu:Yes.

Adrian Schofield:With your A330s. So could you tell us a little bit about your widebody operation, why you decided to get into it, how many A330s you have now, and where you're using them?

Cuong Chu:Okay. First of all, thank you, CAPA, have a chance for me to join this conference. Yeah, so we have face-to-face to see you and to talk with you. I hate, I mean, it is all lie, I mean, meeting more. Well, VietJet, just let me one minute shortly update about VietJet.

Adrian Schofield:Absolutely.

Cuong Chu:VietJet, our first Vietnamese private airline in Vietnam. And you know very well, I mean, the pandemic, COVID, they have very negative impact. Not just only to our allies, but for our tourism and over the world. But thanks to our government, I mean, it is correct anti-COVID policy, so we open our economy and society from the beginning of this year. So that's why, uh, not just only macroeconomic recovery very fast, And VietJet, we are recovering, and thanks God, we are surviving. And last night, I just got— I mean, it is a financial report from our company. Third quarter, our airline turned profitable already. Currently, we have 100 aircraft, including up to now 3 wide-body A330, and we have 48 domestic, I mean, route, and 51 international. So come back before, you know, we never think, because in 11 years in operation, before we think that we are LCC, we focus on short-haul. We have 100 aircraft, but mainly A320 and A321, and just only cover regional, I mean, destination. And we rely on China market.

Beenash Qureshi:Yeah.

Cuong Chu:But you know very well, now at zero COVID policy of China, they block We have no, so far, no more, I mean, Chinese market. So we think that if we would love to recover our business, we need to find new market. And the first we think about, I mean, our former friend from Soviet Union bloc before, like Kazakhstan. 3 weeks ago, I was in Almaty. and open new route from Nha Trang of Vietnam to Kazakhstan.

Adrian Schofield:An A330 route?

Cuong Chu:Yeah, A330. And we focus on new market, but just only medium one, India. We have 4 cities now, not just from Hanoi, from Nha Trang, from Ho Chi Minh City to Delhi, Mumbai. And we hope we can get 13 cities of India and very crowded one. And we have planned in the end of this year, we are coming to Australia because we think that this is a good market, not just only we have big Vietnamese communities there. So this is a new business opportunity for us. So we have planned in the end of this year, we have 7 A330 widebody.

Adrian Schofield:By the end of the year?

Cuong Chu:Yeah, yeah. So coming just 1 or 2 months more, we have 3 already.

Adrian Schofield:Okay, great. Well, that's exciting to hear that you're thinking about Australia from a personal perspective. Where in Australia do you think you might go?

Cuong Chu:So, so far we talked with Sydney, Melbourne, and maybe Brisbane as well.

Adrian Schofield:Okay. Yeah, very good. And if I could bring in some of the other panellists also, do you think there's a strong customer demand for medium and long-haul LCC service in this region? And is there a difference between the demand for medium-haul and long-haul LCC?

Beenash Qureshi:I think right now the market dynamics is very fluid. So Not all airlines are at 100% capacity. So, and also travelers are very cognizant. They want to have breaks between work, short travels. And I think that really arised into the demand for medium and long-haul operations right now.

Hans Mitterlechner:Absolutely, yes. I mean, the big difference is that this is a huge geography, Asia-Pacific, including Australia, New Zealand. Distances are typically longer and further here. So we need those aircraft that fly further destinations. And very exciting, Vietjet coming to Australia, hopefully to Sydney, and also for your native New Zealand, I would guess, right? We need to fly long to get anywhere, to be honest. And this concept helps a lot. So demand is there for sure. And I think we have all surprised ourselves by how much demand is in existence in 2022 after these 2 terrible years we just endured in 2020 and 2021. The demand is fine, I guess. The problem is more on the supply side. Do we have enough seats that people can afford to actually kind of fulfill their dreams and wishes to travel again? And that is where I think low cost comes in, because, you know, the need for yield is much lower for the low-cost carrier. And the democratisation of air travel will still work with the low-cost model, I guess. So therefore, I think demand is there and the model should work.

Adrian Schofield:Great. Also, I forgot to mention that we are going to have a poll question reasonably shortly. So I think at some point, some instructions will come up as to how you can participate using the Slido app. But before that, I think I'm going to I've always sort of assumed that the Asia-Pacific region is really leading the way in terms of widebody use with LCCs and long-haul LCC. Is that sort of how you see it? Has this region been really the standard bearer for that model?

Hans Mitterlechner:If I may, I think, yes, we had quite catastrophic failures very early on with PEOPLExpress in the Atlantic, with a very, very well-published one about 3 years ago with Norwegian, right? So it is a difficult or more difficult proposition Here, as you pointed out, there's many kind of existing long-term standing low-cost long-haul carriers— Jetstar, Scoot, AirAsia, Antron. It does work. It seems to work quite well. Again, the market composition and geography is quite different to Europe here.

Cuong Chu:Right.

Beenash Qureshi:Beenash, do you— Asia-Pacific, definitely there is a strong demand for the long-haul market. But is it leading? I don't think so right now. We are— I mean, if you think about it, we are sitting in Singapore and we are close to the largest demographic for population where we are 6 to 8 hours between India, eastern parts of China, Vietnam, and all other Asian destinations for both business and leisure travel. I believe there is a strong demand, and slowly, I think this market can also be tapped eventually, but we are not there yet.

Adrian Schofield:What do you think, Cuong? Is this something that's a very Asia-Pacific success story?

Cuong Chu:I think for Asia-Pacific, but it depends on market. For us, because we think there's a, like, I mean, Australia, Mid and Asia, very good market for long-haul for us. So of course, we take our time, not just only jump in long-haul. So, but we think that it is potential and profitable. I mean, it is a long-haul flight for us.

Adrian Schofield:Okay, great. And I wonder if we could bring up the poll question now so we can get some audience participation into that. There we go. Okay, so those are the options. And we're going to— while you're thinking about that, we're going to talk about this particular question with the panellists. Do you think the long-haul LCC model has proven it can be viable for airlines, or is the jury still out on that? You know, given that In the past, some carriers have tried it and not been very successful. Maybe it's a different dynamic now, but what do you think? Is it a viable model?

Beenash Qureshi:Looking at the current market situation, Europe is in recession, US dollar is very strong. Most of the airline cost comes in US dollars, fuel, maintenance, and everything else also. And for Asia, where the currencies are suffering, it's very difficult right now. So on the low-cost routes and the short-haul routes, the airlines most of the time are not making much profits. And that's where long-haul comes into picture, where the airlines are trying to be more innovative and experiment new things. And, you know, again, what's there to lose if a route doesn't work? In two quarters, you can always exit out. So yeah.

Adrian Schofield:What do you think, Hans? Is is it a viable model?

Hans Mitterlechner:Look, two of the world's most successful airlines, Singapore Airlines and Qantas, have their own subsidiaries doing exactly that. So I think they know what they're doing. Yeah, that's a good point. And both of these airlines have been working well for a long time. This is potentially the best time for them when the legacy carriers, network carriers, try to hold back capacity growth to keep yields high. That's actually a very, very good environment for low-cost long-haul to come in and grow underneath that. And I think that is happening right now. We need more of that growth, especially in the airport side, because, you know, the legacy carriers, well, you know, they run their own business and rightfully so. They want to keep these yields high. I mean, I'm still shocked. 2 weeks ago, Alan Joyce said they're going to have $1.3 billion Australian dollars profit for the first half of the year. Unheard of, right? And that has to be maintained. So, but underneath that, there is certainly room for lower fares and capacity to come in.

Adrian Schofield:And to that list of successful global carriers operating long-haul LCC, you could throw in Japan Airlines into that.

Cuong Chu:Yes, exactly.

Adrian Schofield:With Zipair. Cuong, I guess it's a fairly obvious question for you because you obviously do think it's viable, but what do you think about the viability of the long-haul LCC model?

Cuong Chu:I think, I mean, viable for this, I mean, long haul. But we need to think about, what do you think about this long haul? Long haul, for instance, VietJet, we never think we can fly to US market, cannot fly too far away, 13 or 14 hours flight. So we need some niche route, focus on niche route. I think it is less than 10 hours. It is quite profitable and viable for us. For instance, if you go to Australia, 8 hours. You go to Kazakhstan, Almaty, 8 hours.

Adrian Schofield:Yeah.

Cuong Chu:Or you will go to Uzbekistan, 8 hours. Even go to Russia in the future, just around less than 10 hours. Then you can control and you can think it is Good, modern, I mean, long-haul. But over there, I mean, if you cannot reach to US or far away from Europe, so then, yeah, I think it is that we need niche routes.

Beenash Qureshi:Yeah.

Hans Mitterlechner:Right.

Beenash Qureshi:Okay.

Adrian Schofield:If we could bring the poll answers up, that'd be great. But just in the meantime, if I can ask the panellists, what do you think the challenges are in operating true long-haul low-cost routes, given that The longer you go, the more you're entering an arena where the full-service carriers have a lot of advantages. So what are the challenges for long-haul low-cost operation?

Beenash Qureshi:Well, I think first to start with, it's competing with the full-service carriers on niche routes. So if you're doing that, it's very difficult. And during the pandemic, we grounded everything that was 4 engines. And now we are bringing them back. So to compete on cost for an Emirates A380 flight from Singapore, it's going to be a challenge because the back-end prices on the economy will be lower than what an LCC might give. Yeah, on a long-haul route. So to be really successful, LCCs will have to concentrate on premium routes. where they can have more bargaining powers. Also, maybe using secondary airports. If you're flying to Paris, if you're flying to France, maybe go to Nice rather than Paris. And for Germany, definitely I wouldn't recommend Frankfurt because we are there. So maybe Düsseldorf. So yeah.

Adrian Schofield:Anybody else want to talk about it?

Hans Mitterlechner:It is a challenge. I mean, the legacy carriers can cross-subsidize in 2 ways, really. One is from the business class cabin, so say, you know, premium cabins towards the lower class cabin. There's huge cross-subsidisation happening. The other thing is connect traffic. Most of these carriers are based on the concept of hub and spoke, in some cases on both ends of the route. That's something that typically low-cost carriers can't replicate so easily. So that's one issue. The other thing is that usually long-haul low-cost would involve crossing borders. And international flying is typically more expensive than domestic one. I just checked it for in preparation for this conference. A Jetstar flight from Sydney to New Zealand will be burdened by $200 in government and airport charges for a round trip. The same duration flight, more or less between Sydney and Perth, will have a burden about $40. So this $160 kind of increase. has to become— has to come back again somehow, right? So this kind of cost-benefit that low-cost carriers typically have on the shorter routes is somewhat less kind of easy to achieve on the longer routes.

Adrian Schofield:Right. I think we lost our poll results up there, but I— yeah, here we go. So it looks like it's fairly conclusive that perhaps that middle ground answer, that yes, it has proved its viability, but it will continue to be on primarily niche routes, which I think, Beenash, was a point you were making, wasn't it? That perhaps looking at, you know, maybe cherry-picking some niche routes might be the way to go for long-haul LCCs. Is that how you all see it, sort of that there are going to be very specific routes where the model can work?

Beenash Qureshi:Well, if you talk about Scoot, so they definitely have an advantage where they are sharing the airport with Singapore Airlines. But will that work for every other LCC in the region? I don't think so. Scoot has all the advantages like connection to India, China, Australia, and then best fleets and airport sharing with Singapore Airlines. So for them, maybe it's viable because they partner with one of the country's biggest regional airlines, but maybe not for others. Others told the jury, is there— so if you don't operate in secondary airports, your costs are going to be higher because you might not get the premium slots. And I think it's all about traveling smart these days, where the passengers are very much educated, very much cognizant. They want to avoid red-eye flights. They want to reach there in the morning to finish a business meeting and then come back also with an evening flight. So will the LCC models be able to afford such slots and also be able to generate profits thereafter? So I think that's a very open question. which the LCCs need to address.

Adrian Schofield:Okay, right.

Cuong Chu:Just want to ask, because for— I mean, you already think that about, I mean, low-cost airline. So the most important thing, it is about cost management. I saw this in the past, many long— I mean, it is LCC, they could not make profit. From long-haul, I mean, fly long-haul business, it's the most important thing. One of important thing for, I mean, cost management, what kind of long-haul aircraft you use.

Beenash Qureshi:Hmm.

Cuong Chu:If now we hire, we rent some, I mean, expensive like a Boeing 767 or something like this, or even Airbus A350, Because all, I mean, airlines, they love to move to new one. So then very expensive and very high cost. If you use like we have, I mean, A330, not outdated, but just only old model of A330. So very reasonable. I mean, it is a renting cost. So let's contribute to our long-haul business.

Adrian Schofield:Okay, great. I'd like to move on to, as our time starts to run down, I'd like to move on to product. And I'm curious to hear whether you think customer expectations are different for long-haul LCC versus short-haul LCC, and how are the airlines addressing that?

Beenash Qureshi:I think for short-haul, it doesn't matter the seat configurations and how much spacing is in between them. So if it's just 3 hours, 4 hours, then it's okay. But anything more than 3.5 hours, if you're at the same configuration as the MAXs and the AirAsia X, like where there are more than 370 seats, it's going to be a little tight. And I think the passengers are going to sway away from that. So, yeah, the seat configuration is very important. And with the new XLR models and the 787s, I think if you're going to operate on the long-haul rules, the cabin configuration is going— is, I mean, has to be the differentiation factor, or else it's going to be hard to compete, even if the prices are low.

Adrian Schofield:Hans, are you seeing any differences in approach between the short-haul and long-haul operations within the same carriers?

Hans Mitterlechner:Well, yes, and I mean, I'm more brutal in my assessment. Any flight over 6 or 8 hours in economy is not fun, right? So be it, sorry, Qatar Airways or Jetstar, you know, you'd rather be on a beach or something. But it's driven by price, though, the whole thing, right? I mean, price elasticity of demand is the driver of many of these low-cost concepts. So I think the customer would be knowing what's going on. And if, you know, there is an 8-hour flight in a somewhat like a denser configuration, but you save yourself $500 and you have a family of 4, that is a kind of decision maker, isn't it? Customers know what they're in for and it's going to be not fun. But, you know, after 7 or 8 hours, the suffering is over and you are where you want to be.

Beenash Qureshi:Yeah, right.

Adrian Schofield:Cuong, how are you How does your product differ between your short-haul operation and your A330 long-haul operation or medium-long-haul operation?

Cuong Chu:Okay, so customers, they only expect, I mean, it is a good service, good seat, I mean, it is, but low pricing. For short-haul, we use A321, A320, so seat very narrow.

Hans Mitterlechner:Yeah.

Cuong Chu:We have the same, I mean, meal and everything very attractive. But when we use A330 widebody, our service go up to very high level. The first time for NCC, we have real business class. Yeah, but In comparison with full service, cost very low.

Hans Mitterlechner:Hmm.

Cuong Chu:And so that's why people seems to be, for Vietnamese customers, they are very excited for this. I mean, new product, new, I mean, services. So make more attractive for us. And in terms of food on airplane, I mean, for long haul, Quite different from short haul because we focus 4 hours in each market. For instance, when you go to Kazakhstan, we should tailor our food for Kazakh people, something like this, and seat more comfortable because when you fly for, I mean, 8 hours, you cannot sit on, I mean, like A320 or A321. In my opinion, yeah. So quite different services and product quality.

Beenash Qureshi:Great. Okay.

Adrian Schofield:Yeah. So I guess having widebodies in the fleet does give LCCs an opportunity for more ancillary products that they can put in there with the longer duration and the larger cabins.

Hans Mitterlechner:100%. I mean, that's the whole unbundling philosophy that has started with low cost. Services many, many years ago. That comes to a whole new level when you fly long distances. I talked with a friend at Jetstar and he says, well, you know, every single one who flies to Honolulu or Indonesia or Phuket has a bag. I mean, if you want to go on a holiday for a week, a bag is a prerequisite basically, but you pay extra for that. You have the family with you, the kids want to have food, you want to have a beer to kind of deal with the kids. I mean, it kind of goes together. And it works in the customer's favour. The customer still has the perception that he or she controls the price. At the end of the day, he or she will have paid lots more because, you know, you have time to spend and, you know, things to do. Add-on, you know, entertainment, internet access. There's all these things you can add on and that are important.

Beenash Qureshi:I think that's very right. I agree with Hans because you buy your seat for $550 and then There is no baggage included, no meal, and no seat selection. And you want that, right? So you pay $750 now. And then you want also the flexibility to change the dates. So you end up paying $1,100. And then you maybe you really want the comfort also and extra legroom, right? Everybody would like that. So you end up at $1,200 for seat, which you were initially willing to pay only $550. So yeah, congratulations, you just sold a premium economy seat.

Cuong Chu:So yeah, okay.

Adrian Schofield:Hey, just for our final topic, we've talked so far about widebody use by LCCs, but I'm curious to hear your thoughts on what some of the newer aircraft types mean for LCCs, how that changes the long-haul dynamic, thinking about The A321LRs and XLRs, how does that create new opportunities for LCCs?

Hans Mitterlechner:I think that the niche idea is right for the large aircraft, right? We talked about before, and the niche is typically driven by leisure. In my case, in Australia, it's outbound leisure to the markets such as Phuket, Indonesia, Honolulu, and so on. That is the typical market for the long-haul aircraft. Now, if you now make it somewhat smaller, talk about the LXR at 220, 240 seats, I think more point-to-point markets become interesting because now all of a sudden you don't need to connect flow. You don't need this one very important leisure one-way flow. You can fill an aircraft more easily on pure point-to-point demand. So I think it's going to be quite interesting how low-cost carriers will deploy that aircraft. And the order books of low-cost carriers are pretty full with those assets. Alexa, yeah.

Beenash Qureshi:For LCCs with the new aircraft, I think it looks very lucrative right now and they are promised that there will be a lot of cost savings. But I think they also have to remember to sign up with the right MRO provider because at the end of the day, for long term, that is really a game changer if you're not tied up with maintenance provider who will not help you save cost. For instance, at Lufthansa, we invested in a product called Aviator, and we spent millions of dollars on that. Why? I mean, why would an MRO provider do that, right? Because we believe that technology is really evolving, and to have a sustainable future, to save cost for our partners, We really need to head into a direction where we help them save money and not only survive, but sustain in the long term.

Hans Mitterlechner:So, yeah.

Beenash Qureshi:So, yeah. Okay.

Adrian Schofield:Cuong, you actually have XLRs on order. So could you tell us a bit about, you know, how many you have coming, what you sort of see the potential uses for those could be?

Cuong Chu:So VietJet, we have orders, 20 units of A321neo. Last long, I mean extra long range. Okay, but it will be delivered in 2024, so we have two years more waiting for this one. We contacted, we talked with Airbus to make sure that I mean this aircraft can fly over ten hours, but so far not not is confirmed. I'm not sure in terms of technology. So, but in my opinion, for A321, I mean, XLR, just in my opinion, suitable for medium, medium range more than long range. Because, of course, in terms of cost, much, much better than long haul, I mean, long range.

Adrian Schofield:Yeah.

Cuong Chu:aircraft, but widebody. But for medium, because in terms of seat, in terms of services for people when travel more than 10 hours, you cannot afford— I mean, in terms of comfortable for seat and everything for customers. So comfortability, I think it is this aircraft better for medium. Short-term and medium.

Beenash Qureshi:I mean, it's great to hear that you care about the passenger comfort.

Adrian Schofield:Yeah.

Cuong Chu:Yes, of course, because sometimes you bring comfortable to your customers and they come back to you.

Beenash Qureshi:Yeah. So I think even with the smaller planes, it may be possible if you have just an aircraft for long-haul operations with wider seats.

Cuong Chu:Well, this is maybe one option, but in my opinion right now, I think that's Yeah, definitely for medium range.

Adrian Schofield:Do you envisage the XLRs perhaps replacing the A330s, or might you operate both types?

Cuong Chu:Yeah, so in terms of pricing, yeah, I mean, it is so far, for instance, for even the same, the same, I mean, pricing, I mean, quite, we manage this one for long haul, for short haul, we have the same range of pricing.

Hans Mitterlechner:Right.

Cuong Chu:Yeah, so that's why, I mean, that's why if, for instance, sometimes we think about, I mean, it is LCC and full service, or now we always call ours like a hybrid. So the most important thing, it is pricing, competitive advantages of, I mean, LCC. But for instance, if you I'm not sure from now, from Vietnam to Australia, I don't know full service, I mean Vietnam Airlines or other airlines, they charge very high for business class. But for us, we try to focus just only for $500, $600, but I mean dollars for return ticket for business class.

Adrian Schofield:Right.

Cuong Chu:Yeah, so that's why I think We try to keep low-cost model, but service, and I mean quality of service and pricing, much better than, I mean, full-service airline.

Adrian Schofield:Just to wrap up, a final question, if you could perhaps each address this quite briefly. As LCCs push more into long-haul routes and look at different, you know, different products in the widebodies and a premium class and that sort of thing. Are the lines blurring more between LCCs and full-service carriers on those longer routes, do you think?

Beenash Qureshi:Well, I definitely believe so because, I mean, sorry, in a full-service carrier, apart from the meal service, I don't see much differentiation. And yeah, I think if you travel smart, which I think most of the passengers are doing, that they want to save cost upfront and maybe buy a snack at the airport or just carry it themselves. So, and also the airport facilities are the same. So you go to the same airport, same immigration. So there is very less differentiation. So I think with proper planning, LCCs are going to to sustain in the future much better than full-service carriers.

Hans Mitterlechner:Hans, the lines are blurring in the, in the, in the back 2 cabins. Yes, economy and maybe premium economy. The lines might be blurring, but legacy carriers will do everything to maintain business and first-class traffic and make as much money upfront as possible. So that will stay.

Cuong Chu:Yeah.

Hans Mitterlechner:And I think low cost shouldn't go there. I mean, it kind of undermines the purpose, doesn't it?

Adrian Schofield:Yeah, Cuong, obviously you still think there is still quite a bit of difference between long-haul low cost and full-service long-haul.

Cuong Chu:Yeah, so I think there's just one very important thing, just pricing. Yeah, low cost, it is cheap, I mean it is a reasonable pricing, and full-service, I think they have added so So quite not expensive, but just only quite less competitive with NCC, in my opinion, between low cost and full service.

Hans Mitterlechner:Right. Okay.

Adrian Schofield:Well, unfortunately, that's all the time we have. I would like to thank the panelists very much for giving us some really good insights into what is a, I think, a pretty complex and evolving market sector. So if you could all perhaps Show some appreciation for our fantastic panelists.

Beenash Qureshi:Thank you.

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