Legacy airlines are facing new competitors on transatlantic routes

By The Economist online…

Even for a global industry like aviation, Primera Air’s business model seems remarkably cosmopolitan. The Icelandic-owned budget airline is headquartered in Latvia, but mainly operates low-cost flights from Denmark and Sweden to sunny places in the Mediterranean. This summer, it will begin long-haul flights from Britain and France to America. The company bears more than a passing resemblance to Norwegian Air Shuttle, another nominally Scandinavian airline with global aspirations. More than two-thirds of Norwegian’s capacity by passenger-km now bypasses its home country, and the rapid growth of its long-haul operations are proving to be a serious challenge for legacy carriers such as British Airways. And its tentacles are spreading around the world. This autumn, the carrier will begin operating domestic Argentinian flights, 12,000km away from its home base.

Low-cost airlines are not new. Ryanair, founded in the 1980s, has grown to become Europe’s biggest and cheapest airline. But low-cost carriers like it have generally stuck to short-haul flights in their local region. That is now changing as a breed of budget outfits, including Norwegian and Primera, cast their gaze further afield.

Two ingredients have allowed airlines such as these to escape the limitations of their home markets. The first is the liberalisation of aviation regulations, notably in the form of the European Common Aviation Area (ECAA) and the EU-US Open Skies treaty. The ECAA allows, with some exceptions, any European airline to fly between any two points in the continent. The EU-US Open Skies treaty similarly allows airlines based in those blocs to fly between any American and European airport. Second, these no-frills carriers are deploying new aircraft that, for the first time, cut costs deep enough to make viable budget airfares on long routes with low demand. Primera’s transatlantic flights will start from as little as $99 one-way, thanks to the fuel-efficiency of the Airbus A321neo, a plane sized for short-haul journeys but capable of reaching mid-haul destinations.

Flights across the Atlantic were once the preserve of the high-cost legacy carriers. Five years ago, 98.5% of capacity between London and New York was provided by five legacy airlines: British Airways, Virgin Atlantic, United Airlines, American Airlines and Delta Air Lines. A network of joint-ventures—co-operation deals that allow separate carriers to behave as if they were one—effectively made the market an oligopoly of three. The only challenge came from Kuwait Airways, which had flights that stopped in Britain on route to America. This summer, however, the market share of the big three will drop below 90% thanks to the presence of Norwegian and Primera. That can only be good news for flyers. After years of fare rises, travelling across the Atlantic is becoming cheaper again, due in part to a 15% increase in the number of seats available since 2013.

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Category: Business and finance, Gulliver

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