Aviation special report: blue sky thinking

As the summer comes to an end and airlines count their high-season profits, while most have made hay during 2017, some are contemplating big storm clouds on the horizon next year.

With oil prices hovering below US$50 a barrel for around a year now – half the price it was in 2014 – and with growing passenger numbers, airlines have been investing and expanding. IATA data shows that passenger numbers worldwide rose by 7.7 per cent in May, a figure which, despite a fall from April’s 10.9 per cent rise – a six-year high – it describes as ‘robust’.

Figures from Lufthansa Group bear this out. In the first half of 2017, its airline carried a record 60 million passengers; 17 per cent up year-on-year, with a record load factor of 79 per cent. Despite this healthy picture, Lufthansa is trying to fight off the threat of low-cost carriers via expansion of its Eurowings budget brand in a battle that will only get fiercer as we head into 2018.

Long-haul competition
During the remainder of 2017 and into next year, more alternative airlines are set to emerge as challengers to the legacy carriers. For some, that means the end of their halcyon days and a new scenario where they are operating under the darkest of competitive clouds. In the UK and Europe, for example, IAG, parent company of British Airways, Aer Lingus and Iberia, faces a major challenge in its tussle with Norwegian. The Nordic upstart has already proved to be a problem for IAG over the Atlantic and is branching out further to South America and Asia. Meanwhile, another threat to the status quo comes from China’s emerging airlines.

In the last 12 months or so, IAG has got very twitchy about Norwegian and is fighting it using Level, its own new budget brand, and, less obviously, with Aer Lingus. Level, which launched in June, based initially at Barcelona, is designed to head off Norwegian in continental Europe. It is perhaps too late for Level to debut in the UK – Norwegian’s stronghold – but IAG could be mulling over the idea, having ordered three new aircraft for delivery next summer.

IAG is also using the other weapon in its arsenal,  Aer Lingus,  whose transatlantic expansion has been rapid since it came under the holding company’s control in September 2015.

Last year, Aer Lingus added the US insurance centre Hartford to its network along with New York’s Newark. It also restored a Los Angeles route after an eight-year absence. With other increases in frequencies, notably to New York, it marked the airline’s biggest transatlantic expansion in 58 years and moved the carrier’s North Atlantic seat capacity above two million for the first time. This month, delivery of a 12th Airbus A330 will enable it to introduce a Dublin-Miami service.

More will come, with nine new-generation A350 widebodies on order for delivery from 2018, although some will be replacements. Aer Lingus, however, does see some storm clouds, warning even a 30 per cent increase in fuel costs could halve the €233 million operating profit it made in 2016.

All new Aer Lingus long-haul routes will head west, aided by a feeder network of 18 UK routes to Dublin and pre-clearance of US customs and immigration there. “We are en route for pretty much everyone travelling from the UK or Europe to North America; the pre-clearance is a bonus,” says an Aer Lingus spokesman. This tactic is working. Although it will not release exact figures, Aer Lingus says the number of UK passengers transiting through Dublin en route to the US has risen by one-third in 12 months, with Manchester and Birmingham the most popular starting points.

Monopoly busting
Norwegian is also mainly heading west and by next March will have broken British Airways’ monopolies on direct routes to Austin and Argentina’s capital, Buenos Aires. Austin is a significant move as BA has a European monopoly on the route, which is home to computer giant Dell and a host of other technology brands in the ‘Silicon Hills’ surrounding the city.

Another new Norwegian route – Denver – may have spurred United Airlines to restore flights to its hub there. From next March, United will reinstate services from Heathrow, albeit just for the summer. Norwegian has two other new routes – Seattle, starting in September, and Chicago, a major United hub, which begins in March 2018. BA and others serve both cities from Heathrow, but competition from Norwegian will have an impact on fares and provide an alternative for the 20 per cent of Gatwick’s passengers who are business travellers.

There are signs however, that Norwegian may be going too far, too fast. It posted a £92 million loss in the first half of 2017, compared with a £73 million profit a year earlier. The result came days after the departure of the airline’s finance director, who left suddenly after 15 years.

Speaking before the announcement of the airline’s latest financial results, Norwegian’s chief executive, Bjorn Kjos, hinted that 2018 would be a year of consolidation in the UK despite the new routes. “For 2018, we are concentrating on building up the places where we are already,” he said. “I don’t think you will see any new bases from us in 2018.”

The effects are being felt, however. With premium fare rates falling, BA is moving from nine- to ten-abreast economy seating on its Gatwick fleet in order to compete with Norwegian, which operates more fuel-efficient aircraft.

Norwegian’s new Boeing 787 fleet is the crux of the matter, as Kjos explained: “It’s not about removing the free food. Flying the Atlantic, the 787 uses 32 tonnes of fuel less than a comparable aircraft. That’s enough to power 500 cars for a year.”

Even this economic advantage will be trumped by the emergence next year of the first Airbus A321LRs, a narrow-bodied aircraft with a 4,600-mile range – allowing it to fly to many cities in Europe from east coast America – and a claimed 30 per cent fuel saving on the Boeing 757 it effectively replaces.

Aer Lingus will lease seven A321LRs from 2019, while New York’s Jetblue has the option to convert existing orders to the new type. If it does, delivery will be from 2019 and the airline has said it will fit them with its premium Mint cabin, which it has rolled out on US transcontinental routes. This currently has 16 lie-flat beds, including four enclosed ‘suites’, but this number can be increased. Jetblue has been eyeing up transatlantic routes, and has recently said it wants to focus on the premium market rather than compete with budget carriers in Europe. If it proceeds, the transatlantic business travel market is set for another shake-up.

Enter Primera
A surprise taster of this potential upheaval came in July, when Primera Air announced its UK debut at Stansted and Birmingham, offering economy flights to Newark and Boston from next spring. Primera, which is based in Denmark and owned by Icelandic investors, will use new A321neo (new engine option) aircraft, which add enough range to the existing version for it to reach the US. The airline will offer a ‘full service’ premium economy cabin of 16 seats, plus free wi-fi and charging points throughout.

The impact of Primera’s arrival will be felt most at Birmingham airport. While it is easy for buyers and business travellers to be dismissive of airlines such as Primera, on October 5, United Airlines ceases flying from Birmingham to Newark after 20 years. United is the only option, so come next May, Primera is likely to  be welcomed with open arms by business travellers and travel buyers because, unless they want to head to Manchester or London or fly via another airport to get to the US, they have no choice.

Longest low-cost route
When it comes to Asia-Pacific, Norwegian will further grab the headlines when it starts the world’s longest low-cost route, from Gatwick to Singapore on September 28. Again, it may not attract flurries of business travellers away from established carriers, but its premium class fares should provoke some lowering of rivals’ tariffs in the mid-range cabin. Chief executive Kjos has made no secret of his ambitions for Norwegian to tap into the Asia-Pacific market. However, it is currently China’s carriers that are making the running.

A significant change for travel buyers in the last 12 months has been the expanding choice of nonstop connections to China. Taiwan’s China Airlines is the latest to announce a UK service, resuming its Taipei flight after a five-year absence from December 1. It will offer four flights a week on a new Airbus A350 featuring the latest business cabin and offering the UK’s only nonstop flight to Taiwan. Once again, it is the economics of the new generation aircraft that is driving expansion.

China Airlines, which originally operated from Heathrow, will join the growing number of Chinese airlines at Gatwick, which is building its connections in the UK and Asia-Pacific. Gatwick’s portfolio includes Cathay Pacific’s return with an A350 Hong Kong service, launched last September, which moved from four flights a week to daily in June.

Since summer 2016, Tianjin Airlines has flown from Gatwick to the central industrial powerhouse of Chongqing, whose population exceeds 30 million, continuing on to its hub on China’s northern coast. In December, Tianjin Airlines will add Xi’an, in the east of the country, a centre for software and aerospace industries, to Gatwick’s China routes.

More will come, according to Stephen King, Gatwick’s head of airline relations. “We are actively in discussion with a range of international operators on growing our long-haul network to new destinations across Asia, including some of the largest cities in China and India,” he said.

King believes the need for these connections is paramount in the light of Brexit. “Given the current political climate, regular flights to these new destinations would provide UK businesses with fast access to some of the biggest non-European markets,” he adds.

Another potential candidate for a UK return could be Hong Kong Airlines, whose disastrous all-business class venture to Gatwick ended less than a year after its launch in 2012. It is tipped for another crack at the UK, having received the first of a fleet of 15 Airbus A350s in August.

After getting its fingers burned first time round, any resumption of the route would see it operate a traditional, two-cabin, full-service concept. Whether it returns to Gatwick is debatable, as Cathay Pacific has since moved back in and is operating successfully. If Hong Kong Airlines can find slots at Heathrow, a codeshare with Virgin Atlantic would benefit both airlines.

Meanwhile, Skyteam member China Southern has succeeded in getting an extra slot and launched a second daily Heathrow-Guangzhou service in June. Further north, Hainan Airlines established its Manchester-Beijing flight in June 2016, while Cathay Pacific goes daily to Hong Kong from December 1.

This is good news for buyers – more choice means lower prices as established carriers are forced to respond. Tianjin Airlines’ UK general manager Robert Chen’s blunt statement that “a pricing penetration strategy will be adopted by Tianjin Airlines to win the UK market”, is a neat summation. As the favourable fuel price and investment environment continues, combined with the procurement of new-generation aircraft, more competitors will emerge. This may be a headache for legacy airlines, but it is a great opportunity for canny buyers looking for bargaining power.

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