First Dallas then Dryden...Canada

Gary Kelly of Southwest has stated that the grandfather of LCCs will be announcing a codeshare with a yet-to-be-announced carrier to Canada. WestJet is the first carrier that comes to mind. The LCC business model is predicated on using low-fares to both entice new travelers and steal disloyal passengers from competitors. However, as those markets dry up (there are only so many origin and destination markets that can fill a 737 and still provide a financial return) those LCCs are forced to move into the territory of full-service carriers or find new markets. Southwest has had a presence at various primary airports, Denver and San Francisco, just to name a few, where the airline battled with more traditional carriers. However, it now appears as if international expansion is on the drawing board (click here). Southwest did have a codeshare in place with ATA to Hawaii, however that arrangement fell through with the carrier's demise. Now Canada is a market that Southwest is looking at. Asia and Europe are also mentioned, however a time frame is not given and at the rate that this industry develops it's hard to say how things will develop.

Southwest goes to Sweden!!!

Southwest goes to Sweden! Well, only as a participant at the annual Routes conference, a networking fair for airlines and airports from across the world. So, the airline is not going to be flying Hobby-Arlanda...not anytime soon though. The LCC did though make some eyebrow raising comments though:

Southwest international service with its own aircraft is "in the pipeline of things we're interested in...that's way out in the future for us [though]," said by Bob Jordan, Southwest's executive vice president for strategy, procurement and technology.

As a matter of fact, Southwest will offer international service in 2009...but with codeshare flights on partner ATA...and only to nearby destinations, such as Caribbean, Mexico, and Canada.

Long-haul low-cost is with us today, both on traditional network carriers and with dedicated carriers. As one LCC executive commented on low-cost long-haul, “Our biggest competitor is the back-end of a 747.” Traditional carriers are able to offer low-cost fares in their lowest classes. However, these may not be economically viable and are not always on offer. Oasis in Hong Kong and Air Asia X offer dedicated low-cost long-haul. It only makes sense for Southwest to cautiously enter this market via their partner ATA. The airline has codeshared in the past with the carrier from Iceland, but this was short-lived. The models are morphing and this is a natural transition.

Better late than never

As I am nearing the inevitable completion of my PhD I have been deeply buried in data and analyses which is my excuse for my distraction from posting here. I have though found the time to travel to London to attend the World Low Cost Airline Congress. This is the second time I have attended the event which always attracts a number of CEOs and airlines, so it makes for an interesting time to hear the developments that are taking place. The most interesting presentations I heard were from the Air Asia X CEO who handled the role in stride. It is certainly an exciting time to hear about long-haul low cost, and it will be interesting to watch the development of the industry. It reminds of those "old timers" who when asked about their initial reactions to LCCs said, "We never thought it would work. Passengers expected a certain level of service. We expected them to last a year or less." Well, those exact same sentiments are being repeated again in 2007. So, we'll see if there will be a repeat. JetBird, an up and coming low cost on demand charter company is very, very interesting. Rather than going the seat-for-sale option this carrier will be charting their Embraer Phenom on an per aircraft basis. They aim to cut the costs associated with traditional business jet charter and offer it to the "masses." Of course, the price won't be near Ryanair, but it will be near a business class seat. We were told that many corporations have approached JetBird about shuttle services, which reminds of Intel and PG&E in the Bay Area that had similar contracts. Looks promising.

In addition, we heard from Ryanair's representative who repeated the findings about my post regarding industry cycles and aircraft acquisitions. Airlines must learn not to purchase aircraft when everybody else is doing the same; the price is increased beyond what is acceptable.

The other development I wanted to address was JetBlue's announcement that it was going to increase focus on ancillary revenue. This was a hot topic at the conference and a number of LCCs are talking about adding 10-20% of ancillary revenue to their operations. The focus alone on this subject produces interesting developments as it opens up a world of opportunities. Cross branding, innovative concepts and ideas all help to push the industry in a direction it hasn't been before.

Air Asia X goes with Airbus

FlyAsianXpress, the long-haul brand of Air Asia, has confirmed an order for 10 A330-300s. It appears as if the world's leading LCCs are going to seriously attempt long-haul operations, with JetStar and Ryanair getting into the mix too. FlyAsianXpress had evaluated the 777 but delivery positions were not acceptable, which is related to Ryanair's O'Leary stating that his airline would wait a few more years before confirming an order as demand is currently high and driving prices up. In the meantime, FlyAsianXpress plans to have 25 A330s on the ramp within the next five years.

Ryanair comtemplating across the pond operations

I had to check the publication date on Flight International's recent article, "Ryanair boss Michael O'Leary plans launch of transatlantic no-frills airline with fleet of 50 Airbus 350s or Boeing 787s," click here, and make sure that it wasn't an April Fool's joke. It seems to be geniune enough considering it is dated April 11th.

Apparently, O'Leary and his team are looking at launching a trans-Atlantic subsidiary to the US following the recent Open Sky agreement. It would link with Ryanair's 23 bases in Europe with a handful of secondary airports in the US: Baltimore, MD; Providence, RI; and Islip, NY. The operation would be a separate entity from Ryanair and would not offering connecting services for passengers. O'Leary makes the point that they want to avoid complexity in the business model. Keeping activities simple and uncluttered allow for easier adjustments and trials. The operation will most likely utilize A350s or 787s and will be purchased near the end of the decade when they expect the demand to soften and prices to come down.

The article does not mention continuing on inside of the US. However, with Tony Ryan's investment in Allegiant and that airline's statement that it wants to be a Ryanair look-a-like, that may be something in the works. Of course, cross-Atlantic low-frills flying is not new to aviation. Laker's SkyTrain, People Express to London, or even Icelandic Air's former backpacker image. However, all these airlines are now defunct (except Iceland Air, however its image has certainly improved from its earlier days). There are various explanations for their failure, however Ryanair has something they didn't: passenger feed from all of the EU. People Express did have its US feed, however the CEO, Don Burr, did state that distribution strategies of People Express' competitors helped to undermine the airline. Ryanair is operating in the age of the Internet and doesn't have to fight with competitor-owned GDS'.

No one can say that the airline industry sits still for very long.

777s for Virgin Blue

Boeing has just scored the sale of six 777s for Virgin Blue's foray into the long-haul market. This contract is worth more than US$ 2 billion for Boeing and may just usher in the long-haul LCC business model...sort of. I have not seen any news on the configuration plans for the airline. Currently Virgin Blue is shopping for US routes and prefers to bypass the Hawaiian islands and head straight for the mainland. It will be interesting to watch this development, along with Virgin America's conditional go-ahead from the US DOT.

Don't focus entirely on the Atlantic

News of innovation within the airline business model has been dominated by the Europeans lately, however those on the other side of the globe have not been sitting on their laurels. Australian Virgin Blue has just announced an impressive 81% surge in half-year profits, $98 million USD. This has been aided by a less volatile fuel price and increased business traffic.

The airline has already followed in the footsteps of JetBlue and ordered more than a dozen Embraer aircraft to capture thinner traffic flows. However, now the airline is stepping into the long-haul league and negotiations are underway with Boeing for 7 777s. Long-haul flights should commence in the second half of 2008. It has already begun the process of applying for US traffic rights, but destinations in Hong Kong, Japan, and Canada are also in the works. In another twist, Virgin Blue has admitted that an ultra-low cost brand has been contemplated for very thin leisure routes. This brand would likely operate 737s with an additional row of seats, essentially lowering seat costs by 5-6%. The CEO goes on to state that a Ryanair-look-a-like would most likely not be interesting to Australian consumers, but if that is what they want Virgin Blue would not hesitate to offer such a brand. Consumers the world over have demonstrated their love of low-fares and a Ryanair model would work in any market. It is interesting to hear of an LCC interested in starting an ultra-low LCC. This has not been successful in Europe or the US with mainline carriers, but maybe Virgin Blue will be able to carry if off. The source of this information is found here.

The Australian market has been a news generator for some time now. The aviation-focused Texas Pacific Group and Macquarie Bank have made a bid for Qantas, while Singapore Airlines attempted to gain rights on the Sydney - Los Angeles route.

"Low-cost" long-haul has so far bypassed American carriers. Europe and Asia have seen the sprouting attempts at this model, however its success is far from guaranteed. And as one Nordic LCC stated, "Our biggest competitor in the low-cost long-haul is the back end of traditional carriers."

Aer Lingus expands its reach

Aer Lingus has been capturing headlines this week, although not the front-page kind. It appears now that the former FSC will stretch its reach and has plans to open its first base outside Ireland. This is a first for a European flag carrier, as far as I know. Both Ryanair and easyJet have country-neutral names and brands so it has been much easier for them to expand throughout the continent. Air Berlin, which leaves nothing to the imagination as to its origins, has been successful with its operations in the south of Europe. This German LCC also opened a base in England in direct response to those UK LCCs intruding on its home turf.

Aer Lingus is reporting that it has narrowed its search down to three bases outside of its home country, which will allow it to open up to 15 new routes. Rumors abound that this is not a one-off for the carrier and that we will likely see more foreign bases open up. With the airline's tie-up with JetBlue, expansion deeper into the European continent will benefit this cooperation. However, this strategic move for the Irish carrier will not come without its struggles as unions have voiced their opposition. It's not that unions are opposed to expansion per se but they have voiced their concerns about the work rules that Aer Lingus intends to apply. In addition, employees will most likely be employed under local rules rather than Irish.

Aviation in Europe is certainly not going to become boring in the next few years.

The LCC model crosses the ocean

Happy New Year! It appears as if the shower of interesting aviation news hasn't let up for the holidays.

Virgin America must once again reapply for its application to fly. The DOT has not allowed Virgin America to solo stating concerns over its ownership structure. The airline does not meet the requirement that 75% of its voting interest be owned or controlled by US citizens. Other US carriers are unanimous in their opposition to the carrier's upstart, however many industry experts believe that the airline will eventually be given the green light.

Sir Richard Branson's Virgin Group's aviation exploits are not dominated by the US market alone. Industry rumors believe that Virgin Atlantic may find time to cooperate with Air Asia of Malaysia, and possibly even easyJet. The LCC business model may finally get its turn to shine as a long-haul product. Air Asia is said to be interested in offering flights from Asia to the UK. If the model is able to survive the initial upstart-hiccups it may be a viable model. However, don't expect British Airways or Lufthansa to worry too much. A long-haul LCC model either needs sufficient local traffic on either end, or a supportive feed network. The model is not inherently designed to offer connecting traffic an opportunity to feed onto the long-haul routes, however the LCC leaders have proven themselves to be quite innovative and may just find a solution to the problem. The Virgin Group appears to be slowly building quite an aviation empire. With Virgin Express and Virgin Atlantic in Europe, and Virgin Nigeria, and Virgin Blue, and potentially Virgin America. It appears as if South Americans may soon have a Virgin among them.

The LCC business model is attractive to a market segment that is very large, however some executives can't help but yearn for higher revenue passengers. While watching their aircraft being boarded they look to the dinosaur, legacy carrier across the ramp and see the first class passengers walking down the jetway. Many LCC leaders want to see those passengers walking onto their aircraft, not only for vacation but for business travel as well. This is where they start to tweak the model, sometimes successfully and sometimes not. The same holds true for executives at full-service carriers. It appears as if each strategic group is looking across the fence and adopting those business model elements that they think work best.

The challenge is that a business model is like your neighbor's well-made cake. You can't copy some of your neighbor's ingredients and get the same cake as them. Sometimes it may be better than theirs, but sometimes it may turn out worse.