Tuesday, July 22, 2014

Legacy airlines in upheaval: Keep or ditch the economy class?

AirAsia in Thailand
Conventional wisdom says that the LCC (Low Cost Carrier) model only works for short-haul flights and cannot compete with the legacy carriers for the long-haul business. But most legacy carriers know full well that it is only a matter of time until they are challenged by the LCC on the long-haul. Already AirAsia X and Norwegian are demonstrating that conventional wisdom is wrong and that the LCC model is not limited to the short-haul business. Lufthansa is toying with the idea of creating a long-haul LCC to South-East Asia and India in addition to its regional Eurowings and its low-cost Germanwings. With Norwegian now offering low-cost service to Bangkok from northern Europe, it is obvious that Lufthansa would stand to lose some of their economy business to Norwegian.

The trade-off between premium and economy

Legacy carriers have also created another problem for themselves by focusing and elevating the premium classes at the expense of the economy class: as the gap of service and allocated space increases between premium and economy, the economy class becomes an ever increasing impediment to the development of the premium model. As the largest number of passengers generates the lowest profit margin, it could make business sense to eliminate that part altogether making it possible to scale down terminal facilities and use smaller planes which in turn would further elevate the premium class value by segregating it completely from the economy class now removed from both airport terminals and airplanes. Which would lead to the LCC using increasingly larger planes as they become the de facto economy class provider.

Swapping their fleet!

A fascinating consequence would be that the current make-up of the fleets of LCC and legacy carriers would switch with LCC moving from the B737 and A320 to B777 and A380, all configured in high-density seating, and the legacy airlines shedding their largest planes for smaller planes configured for two or three flavors of premium classes. Boeing's next major project may be a replacement for the 757 to fit in between the new generation 737 and the 787. Is it a coincidence that the size and range of the 757 and its possible successor would be the ideal format the legacy airlines would need to operate without an economy class section?

But how to feed the hubs?

In the long term, there is little the legacy airlines can do to maintain a presence in the short-haul market. Lie-flat seats are useless and there is neither time or incentive to serve lavish meals on one or two-hour flights. Even the free baggage allowance is no incentive at all as their target market, the business and executive travellers, are also the ones least likely to travel with checked baggage. But they do need to feed their trunk routes from secondary markets and with independent LCC increasingly using other airports than the major hubs, the legacy carriers will need to have their own LCC to reliably feed their hubs. All that would fit well with Lufthansa is planning for with Eurowings and Germanwings.

What about the other airlines?

A remaining question within this perspective would be the outlook of the likes of Emirates or Virgin Atlantic? They too will feel the growing competition from long-haul LCC on the low end and the increasingly efficient legacy airlines on the high end. This is especially true for the Gulf carriers who are courting both the premium and the economy markets between Europe and Asia, but even Virgin Atlantic is not immune to market evolution and their association with Delta Airline could hinder their flexibility and former capacity to adapt to changes.

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