12 March 2007

T2 Column in the Beat

GUEST: T2Impact on Low-Cost Long Haul
"This article is republished here with permission from The Beat."
The Beat ~ a travel business newsletter
New York City
3/12/07 8:59 AM

Timothy O'Neil-Dunne and Addison Schonland of T2Impact contribute this guest piece about the potential impact of "game changing" long-haul aircraft and the new entrant airlines that are buying them...

Travel, the great social equalizer, over recent decades has increased at significantly faster rates than gross national product. There is no doubt as well that low-cost carriers have changed the model for the airline market, further accelerating the growth of travel amongst all the world's populations. But this growth has been confined until now to regional or short haul sector pairs. In February 2005, First Choice--the U.K.'s fourth-largest vertically integrated tour operator business and sixth-largest U.K. airline with a fleet of 32 aircraft--announced to a surprised market its first purchase of Boeing 787s. In December, it converted two options to purchases and again this month converted four more to confirmed orders, becoming only the second airline to increase its order twice for the new twinjet before it even takes to the skies. "Having taken the decision to increase our commitment to long-haul destinations, we wanted to ensure we could do this in the most cost-effective and environmentally sound way, while offering our customers new destinations and even more comfortable travel," said Dermot Blastland, managing director of First Choice Mainstream Holidays.

Well, for those of you who think the long-haul LCC is a fantasy, think again. It's here. This is the first "non-legacy airline" to build its business growth engine around the 787, but it will not be the last. It is important to understand that First Choice is not really an LCC. It positions itself as a premium charter and tour company or vertically integrated tour operator (VTO), and it has little in common with any legacy airline. But it has a lot in common with an LCC because it is not a networked airline.

With the ability to connect virtually any secondary city in the world to the U.K., First Choice will be able to move into markets that up until now were exclusively the playthings of British Airways and Virgin Atlantic. Indeed this creates an interesting scenario and pressure on BA, BMI and Virgin as the U.K.'s legacy "flag carriers." At the top, their protected status at London's Heathrow is likely to be blown by the new transatlantic EU-US "just a little bit more open skies" agreement. At the other end is the voracious appetite LCC-type airlines. It's clearly an opportunity for the stock pickers to mark down the legacy airlines.

Many industry pundits have commented on the 787 being a "game changer." This 787 order needs to make many in the aviation world pay attention to what is surely the next frontier to be invaded by LCCs. First Choice's broad base of airports in U.K. means that it will be able to fly just about anywhere, with its 787s, that British holiday-makers want to go. No more stops in Goa on the way to Phuket. With a range of over 15,000 kilometers First Choice's 787 makes a London-to-Sydney nonstop possible.

For airlines that want to accept and realize that air travel is a commodity, the 787 class aircraft is the way to go. For now at least, until the A350XWB is available. If Airbus ever gets the A350XWB out the hanger door, then you could have a 787 and 777-sized airplane that will also connect secondary cities the world over. The good news for U.K. residents is that they will be able to avoid the bottlenecks of the four London airports as First Choice bases its planes at secondary U.K. airports. It should be noted that LCCs in a long haul market will be primarily dependent on leisure traffic. But this is bound to change. Just as the proportion of business travelers using LCCs is growing, so too will that phenomenon apply to the long-haul model.

But it is more than First Choice. Other LCCs (real ones) are getting into the act.

--Ryanair is being helped by the Moroccan government to start service. Four-plus hours on seats that don't recline!

--FlyAsianExpress plans to operate flights to destinations in Asia and Europe as AirAsia X, a new long-haul, low-cost carrier launched by AirAsia.

--Australia's Virgin Blue reported expansion plans including considering an order for eight 777-300ERs to be deployed on planned long-haul operations.

--LionAir is taking delivery of 60 Boeing 737-900Ers, a 6,000 kilometer aircraft.

--Oasis Hong Kong is growing its service from the current daily Hong Kong to London by adding U.S. service this year to Oakland and possibly Chicago and Vancouver.

New opportunities beckon for LCCs. They have created brand following beyond their traditional domestic markets. For example Aer Lingus and JetBlue are going to sell each other's seats on their Web sites. Clearly leveraging its traffic information, Maxjet publishes connections at New York JFK and London Stansted. Imagine this happening outside an airline alliance? When Oasis starts its Oakland service, you can bet JetBlue will be doing the same thing with them. That could even mean round-the-world tickets are coming soon--on LCCs that have no alliance and no legacy costs.

Our conclusion: LCCs are driving innovation and pushing the envelope for airlines, except now in a long haul version.

~ Addison Schonland and Timothy O'Neil-Dunne are consultants with T2Impact Ltd

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