Low-cost flyers exit long-haul market, but leave their mark

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Norwegian Air disrupted the U.S.-Europe marketplace when it began flying across the Atlantic in 2014.
Norwegian Air disrupted the U.S.-Europe marketplace when it began flying across the Atlantic in 2014.

Norwegian Air's announcement last month that it will not resume long-haul flying when the pandemic is over signaled the end of ultralow-cost carriers (ULCC) in the transatlantic marketplace, at least for the foreseeable future, analysts say.

But though Norwegian is gone as a long-haul operator, the carrier's legacy is likely to continue to be felt in the form of the long-haul basic economy products offered by full-service carriers.

"This is not a good development for cheap-flight lovers, but I don't think it is going to be apocalyptic by any stretch," said Scott Keyes, owner of Scott's Cheap Flights, a service that alerts members when bargains pop up at their local airports. "I think the legacy airlines have adopted their business model. It is going to be difficult to unring that bell."

Norwegian began flying across the Atlantic in 2014. The carrier's exceptionally cheap fares disrupted a U.S.-Europe marketplace that, at the time, was almost entirely controlled by legacy airlines. 

Following a ULCC business model that featured ancillary charges for basic offerings such as advance seat assignments and food service, Norwegian quickly spawned additional low-cost, transatlantic entrants, most notably Iceland's Wow Air.

Legacy European air groups also responded by forming discount long-haul units. Lufthansa Group began crossing the Atlantic with Eurowings. International Airline Group (IAG), owner of British Airways, Iberia and Aer Lingus, created the Level discount transatlantic brand. Prior to its collapse in 2019, leisure tour operator Thomas Cook had also sharply upped service across the Atlantic on its Thomas Cook and Condor airlines, offering discount fares that weren't wholly unbundled like the ULCC model.

By the third quarter of 2018, ULCCs and hybrid low-cost carriers such as Condor flew 15% of the 13.2 million seats in the transatlantic marketplace, data provided by OAG shows. Norwegian was the biggest discount carrier, offering approximately 40% of those seats.

Norwegian ushered in what Keyes called "the golden age of cheap transatlantic flights," with roundtrip offerings of $500 or less being common.

But while the new entrants were popular, they were never profitable. Wow, Danish ULCC Primera, France's XL Airways and Thomas Cook all collapsed in 2019, even as the airline industry in general was excelling. Lufthansa's Eurowings was losing money. And Norwegian sharply curtailed growth that year after losing $170.3 million in 2018.

The carriers struggled, Keyes said, because unlike their short-haul cousins, they weren't able to make up for cheap fares by turning aircraft more frequently in the course of a day than legacy competitors. Fuel, on which ULCCs have no price advantage, is also a relatively larger portion of costs on a long-haul flight than on a short-haul flight.

OAG senior analyst John Grant said the low-cost, long-haul model was worth experimenting with when demand was high and fuel was cheap, but it's done for now.

"From a long-haul, low-cost carrier perspective, you're not going to see enough demand for your service unless you operate only once or twice a week, and then, of course, you can't compete in the marketplace," he said.

However, the impact of Norwegian and the other discount transatlantic carriers lives on.

U.S. carriers didn't form new discount units like IAG and Lufthansa in order to stave off the long-haul ULCCs. Instead they expanded basic economy offerings into their long-haul services, with pricing designed to compete with the discount upstarts. Such products restrict preflight seat assignments, don't include a checked bag like long-haul economy and, except during the current pandemic, are stricter than economy when it comes to itinerary changes. 

Many European carriers also now offer basic economy long-haul fares.

"It's not nearly as important for the airlines' business models today to make a ton of money off of economy fares," Keyes said. "They can reliably make money, even when selling $300 fares across the Atlantic." 

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