High and low
The introduction of new long-range aircraft has enabled low-cost airlines to offer long-haul travel at budget prices, with transatlantic one-way fares now as low as £70.
Faced with the prospect of losing significant market share on its core transatlantic routes, British Airways took the decision earlier this year to offer a discounted 'Economy Basic' fare for routes where it competes directly with Norwegian Air. Recognising the role played by price comparison websites in the flight booking process, the airline removed checked baggage and free seat selection from its cheapest tickets, in order to allow its prices to be viewed in a fairer, like-for-like manner next to those of its low-cost competition.
Many `legacy' carriers have also opted to establish low-cost subsidiaries of their own: IAG has reallocated several of its aircraft to Level, a transatlantic airline based in Barcelona, whilst Japan Airlines intends to launch a budget long-haul carrier by 2020.
The repositioning of traditional airlines in response to this intense competition is seen by many as a race to the bottom in the air travel industry, with fears that standards of comfort and service will steadily decrease as carriers look for new and innovative ways to shave pennies off ticket prices.
However, this development can offer real benefits to consumers, as passengers are ultimately able to pick and choose what would like to have included in their ticket by foregoing extras they have no great need for. The no-frills BA fare can be up to £60 cheaper on some routes, if you remove the option for checked baggage or preferences surrounding seat selection.
Thus far, the disruption caused by the entrance of low-cost players into the long-haul market has focused almost entirely around the budget end of the market, located at the rear of the aircraft. In our view, it will be difficult for low-cost carriers to truly conquer the long-haul market without an appealing proposition for business travellers, who are less price conscious and demand more luxurious cabins and more generous reward schemes than budget carriers are currently able to offer.
As business class seats return significantly higher revenues per square metre than those in economy, a fundamental arm of full-service airlines’ profit-generating power appears to be safe for the time being.
The future of long-haul air travel remains unclear, but Norwegian Air Shuttle's financial results suggest that it may be unsustainable to continue undercutting traditional air carriers by such a large margin. However, further improvements to aircraft fuel efficiency and, eventually, the advent of electric planes look set to ensure that prices will continue to fall across the board. This means the market will open up to a wider range of consumers, with increased passenger volume forecast to counteract rising oil prices and drive significant market growth.