Low-cost international flights are doomed: analyst

Ethan Wolff-Mann
Senior Writer

BERLIN - For the past few years, air travel from the U.S. to Europe was at unheard of levels of affordability. Airlines like Wow, Norwegian, Primera, Level, Iceland and others provided travelers with round-trip options that occasionally even dipped under $300. The competition also pushed down prices for legacy carriers, creating a race to the bottom that benefited travelers.

But a new research note from Bernstein analysts says costs will rise for smaller airlines and will eventually necessitate higher prices.

“We do not see LHLC [long-haul low-cost] as a threat to incumbents and do not expect the model to survive on its own on the trans-Atlantic market,” the note says.

A Primera plane at Stansted Airport, the Danish discount airline has ceased operations ahead of filling for bankruptcy and passengers have been warned not to turn up for flights. (Photo by Joe Giddens/PA Images via Getty Images)

Last year, these affordable airlines accounted for around 15% of Europe-North America capacity. But in the past year, Primera Air and Wow went bankrupt (highlighting the fact that travelers should buy tickets with a credit card) and other airlines like Norwegian have been facing high debt and steep losses and might not survive without bankruptcy or restructuring.

Low labor costs will eventually rise

Bernstein’s thesis holds that the cost advantages the cheaper carriers cultivate are small. For example, fuel costs the same for everyone and ultimately, Bernstein writes, labor expenses will as well. Currently, low labor costs are the main reason Norwegian Air can offer such low airfare to customers.

Bikes by a bike rental service of Icelandic airline WOW air are seen in Reykjavik, Iceland, August 5, 2017. REUTERS/Michaela Rehle

“As the staff of [long-haul low-cost airlines] matures over time, we would expect this cost advantage to diminish, as increasing unionization and pattern bargaining...will work to equalize pay across airlines,” the report says. Established carriers have stronger unions and so pay their employees higher wages than the lower-cost airlines.

The margins are good enough that these airlines can survive in the good times, but Bernstein doubts they can weather tougher moments in economic cycles. Since these low-cost carriers largely carry leisure passengers that are very price sensitive — they’re going for the deal, after all — they may be especially sensitive in a downturn. Bernstein says that a downturn may not benefit the low-cost carriers, as worries about the airlines’ survival might make people not risk their vacation.

Short-haul low-cost carriers have worked out well so far. These flights don’t require tons of connecting and interfacing with other airlines or airplane customization. The ratio of time in air versus turnaround time on the ground is low. And most important, passenger demand is usually more uniform for shorter flights and flights can be shifted easily to maximize utilization, Bernstein notes. But in the past, the business model has failed when applied to longer distances.

Bernstein says that history could repeat itself in today’s trans-Atlantic market. But the future could make long-haul low-cost possible, in other markets and with other planes. In Asia, for instance, where it’s easier to keep planes full, Bernstein sees it potentially working. And if new planes like Boeing’s “new midsize airplane” that’s expected deliver efficiency and range at a useful size, that could change the calculus that exists today.

-

Ethan Wolff-Mann is a writer at Yahoo Finance focusing on consumer issues, personal finance, retail, airlines, and more. He is reporting from Berlin on the Arthur F. Burns fellowship from the International Center for Journalists. Follow him on Twitter @ewolffmann.