It was a bold move, but Primera Air’s venture into low-cost long-haul will surely be recorded as the shortest-lived attempt to break into the market.

From waving off the first transatlantic flight in May, it took just six months for the Riga-based carrier to file for bankruptcy and prompted many in the industry to question whether Primera’s demise signalled the end of the budget long-haul boom. As 2018 draws to a close and the airline world looks nervously ahead to next year, the industry as a whole has less of a bullish outlook, with fuel costs rising by a third in the past 12 months and some saying the expansion phase of the past few years is coming to a close.

Was Primera the start of this trend? At first glance, no, as its demise was due to late delivery of aircraft that meant it ran up a charter, delay and cancellation bill of €20 million. Despite attempts to boost cash flow by announcing new bases in Brussels, Frankfurt, Madrid and Berlin from summer 2019, the debts grew too large for the regulators. Primera arguably had a run of bad luck, but others have found their corporate flight paths buffeted by headwinds.

Warning signs

WTM London attendees in November found themselves reading about Icelandair’s proposed takeover of WOW air, which lost £34 million in the year to June 2018. WOW had been showing classic warning signs: big losses but rapid expansion – a 69% increase in passenger numbers to 2.8 million last year. A hurried bond issue to fund further growth raised £53 million, but at a 9% interest rate, and the airline’s talk of a flotation in 2020 fooled few commentators.

Another sign was WOW air’s skittish expansion: it launched services to Detroit, Cincinnati, Cleveland, St Louis, JFK, Dallas/Fort Worth and Pittsburgh this spring, but swiftly axed Cincinnati and Cleveland in October and will do the same to St Louis in January.

Phoenix-based private equity firm Indigo Partners came to the rescue when Icelandair pulled out over worries about debt and future losses. Indigo’s involvement is a vote of confidence in the sector; it already has stakes in four budget carriers – Hungary’s Wizz Air, Denver’s Frontier Airlines, Chile’s JetSmart and Mexico’s Volaris – so WOW looks in safe hands. Moreover, Indigo has 430 aircraft on order that it will supply to these airlines.

WOW air is expected to lose money again this year, but Icelandair Group may yet regret its decision not to go ahead with the deal. The Centre for Aviation (Capa) estimates Icelandair’s 2017 operating margin fell to 3.5% from 9.2% in 2016 and 11.9%  in 2015, when it had been one of Europe’s most profitable airlines. A great deal of this is due to WOW air, and Icelandair may rue the day its shareholders stopped it from taking out its key competitor.

Norwegian Air Shuttle also wobbled in 2018. This summer saw it reject a hostile bid from IAG during a period when many questioned its ability to manage its rapid growth, having lost £165 million in 2017. The warning bells – a new share issue raising £121 million in March, negotiations to sell 140 aircraft, including an order for 60 Airbus A320neos, and the closure of its Edinburgh transatlantic base, after little more than a year, rang loud.

Slower growth ahead

This autumn, however, saw the release of third quarter figures confirming pre-tax earnings of £149 million versus £132 million last year despite a capacity increase of 33%. Norwegian has scared investors with its exponential growth – this year it added 11 Boeing 787s and increased Available Seat Kilometres by 40%. It also has to absorb the start-up costs of Norwegian Air Argentina, which began operating in October, but has pledged that “going forward, the  growth will abate”.

A look at some figures shows how budget airlines have made their mark on the Europe-North America routes, but also reveals how the picture has become muddied by their hype. Capa and OAG report that 179 new North Atlantic routes have been added since 2012 and 42 closed and that, since then, growth has come mainly from new airport pairs, with the number of pairings between Europe and North America growing from 114 to 135.

Among new airports connected to North America are Bucharest, Zagreb, Cork, Bergen and Belgrade. On the other side of the Atlantic, Winnipeg, Austin and many other secondary cities have become connected to Europe for the first time thanks to low-cost carriers (LCCs).

Despite this, Capa estimates that LCCs have only just over 8% of seats on the Europe-North Atlantic market. It adds that, while airlines that have entered the market since 2012 have been responsible for seat growth of 16%, this is less than the 29% growth from incumbent carriers. Behind all the hype about LCCs, it is the traditional brands that have added most capacity and opened new routes. Next year, for example, KLM will add Boston and Las Vegas; British Airways Charleston and Pittsburgh; and Air France launches Dallas/Fort Worth. Capa concludes that LCCs have made “a significant impact” in the past five years, but adds: “the legacy airlines are not shying away from the fight”.

Budget brands hoping to expand in Europe face the added threat that legacy carriers are really beginning to get on their case, with Lufthansa Group using Eurowings as its low-cost weapon.

Lufthansa spent €170 million expanding Eurowings this year, buying the assets of Air Berlin, including 33 aircraft, after its collapse in August 2017. The deal pushed Eurowings into a €65 million loss in the January-September period, a decline of €210 million year-on-year. Lufthansa Group chief executive Carsten Spohr clearly thinks it a price worth paying. Spohr said he had “seized a historic opportunity in the consolidation of Europe’s aviation sector”, adding “it was the right decision to do so in strategic terms, even if this has given Eurowings a very challenging 2018”.

IAG, having abandoned attempts to buy Norwegian, still has three cannons in its budget arsenal, the first being Level in Barcelona, designed specifically to head off Norwegian there. Then there is Aer Lingus, which will undergo a brand refresh in January. The Irish carrier is IAG’s main budget transatlantic weapon, combining pre-clearance at Dublin as a selling point with a low hand baggage-only fare point. Aer Lingus chief executive Stephen Kavanagh said the airline’s new image would “reflect the airline’s ambition to be the leading value carrier across the North Atlantic”.

The third, and perhaps less obvious, IAG weapon is British Airways’ Mixed Fleet crew operation, with substantially lower crew costs than the pure legacy airline and which operates nearly 40 long-haul routes. Add to this the extra row now installed in many BA Boeing 777s, taking them from nine abreast to 10 in economy, and BA has a much more combative offering.

Air France has Joon, but its expansion has been on a smaller scale and new Air France chief executive Benjamin Smith is reportedly unhappy with the concept. Joon’s PR spin describes it as the “airline for millennials”, but it is really just a lower-cost brand operating some former Air France long-haul routes, and the reality is the only market segmentation most budget-conscious travellers care about is price.

Against this more competitive environment in Europe is added the rising cost of fuel, which hits long-haul specialists hardest in times of elastic demand.

Looking ahead, Norwegian chief executive Bjorn Kjos has warned: “There is no doubt that tough competition, high oil prices and a strong dollar will affect the entire aviation industry.”

What this means is the budget long-haul sector, while not imploding, is likely to see fewer new entrants. OAG director John Grant believes: “In a business model where an obsession with cost is crucial, then reaching a point of critical mass in aircraft, network and passenger volume is going to be increasingly difficult.”

If LCC growth in Europe is slowing, the same cannot be said for Asia/Pacific, but even here the boom is not what it might appear as, so far, the majority of traffic is intra-regional, with China leading the way. Statistics show that China-Thailand, the largest international market from China, accounts for 10.8 million seats, with China-Japan second at 9.9 million and South Korea third with 9.4 million.

Booming Asia

China-Thailand is one of the world’s fastest-growing leisure travel markets, with Capa putting the number of air travellers to Thailand from China at around 12 million this year, compared to fewer than 800,000 in 2009. While flying times are generally less than five hours and within range of narrow body fleets, wide-body aircraft are used by carriers such as Bangkok’s NokScoot to cater for growing volumes.

The size of this market is underlined by Bangkok’s Don Mueang airport, which was planned to be redundant when Suvarnabhumi was inaugurated in 2006 but which reopened six months later. Last year, Don Mueang handled 38 million passengers, with 97% of these travelling on LCCs.

Don Mueang’s turnaround today will be another airport’s boom tomorrow as travellers venture further afield with LCCs catering to them. The long-haul low-cost sector might be finding it difficult in some markets, but in Asia, there is far more to come.