(Insight) Is intense competition leading full-service carriers to crisis ?
London is considered an aviation hub for many airlines with many foreign airlines operating from London Heathrow, the busiest airport in London. Airlines are facing intense competition with routes to London and are having to close routes. In addition, airlines are deciding to fly from secondary airports such as London Gatwick or London Stansted.
As mentioned above, some airlines are creating a loss operating these Many airlines, as we will show below, are only operating these routes due to the amount of passengers who intend to connect onto other destinations operated by the same airline, making other routes much more profitable. However, other carriers have been forced to close their routes due to extremely low yields. For example, South African Airlines have once again failed on there expansion back to London from Johannesburg. Read on, to see why.
(From the first graph, we can clearly see that Singapore airlines have well developed there route to London from their hub and are using their resources to their full potential. However, from graph 2, we can see that its London market is an unsustainable investment since intense competition from Norweigian and British airways has led to London being at a lower spot in the list of Singapore airlines' best routes. -source:OAG aviation analysis)
One extremely good example to show an unprofitable route is the Johannesburg to London Heathrow route by South African Airways. They recently downsized the plane operating on this route from Airbus A340-300 to Airbus A330-300. Despite calling this an upgrade, the airline actually reduced their twice a day service to a single daily flight. Looking at capacity, it looks like 7% of capacity has been lost.
It is well expected to see SAA losing money on this route. Despite low demand, this route has 3 competitors including British Airways and Virgin Atlantic, which operates 5 flights per day in total. This extremly intense competition puts SAA into a disadvantage since SAA doesn't have a lot of seats to offer compared to its competitors. This means that it should earn very low yieldsThis extremly intense competition puts SAA into a disadvantage since they do not as much resources (E.g. connecting flights) compared to its competitors.. Since SAA is a significantly smaller airline compared to British Airways and Virgin Atlantic, it makes it very hard to compete against them. Sadly, this is not the first time that the airline has failed its routes to and from the UK. They scrapped their London Heathrow-Cape Town service after over two decades of operation in 2012, again due to extremely low demand.
A route cannot be defined as unprofitable based only on the number of passengers. It also depends on fares. For example, Ryanair, a well-known European low-cost airline, created new routes and made many unprofitable routes, profitable.
For instance, a flight from a tiny village in France to a small city in the UK (Limoges-Bristol) is not and has never been offered by any carrier. Ryanair however, has and continues to operate the route.Full-service carriers have shied away from operating such low-capacity routes as they can result in a loss. Though some low-capacity routes have been offered at high fares, many low-cost carriers deliberately operate these routes at low fares resulting in more people flying on those routes, making them profitable.
Unprofitable routes are opportunities for low-cost carriers as new fuel-efficient aircraft make the opening of new routes more attractive. International routes are therefore becoming very competitive putting full-service carriers in a difficult situation. However, an analysis of one of the busiest routes in the world, the London to New York service reveals an interesting anomaly. This route is facing intense competition with over 25 flights per day from 7 competitors. The services provided by this flight varies massively, ranging from LCC Norwegian to British Airways' business class only A318 offer. Norwegian Air Shuttle is by far the low-cost carrier which offers the most passenger capacity on this route. They fly two Boeing 787-9s between the two cities daily, providing a capacity of around 4816 seats weekly. A quick online search revealed that the low-cost carrier's London Gatwick to JFK flight can cost as little as 374€ (£331) for a round trip.
In contrast, British Airways offers the highest price among its competitors. Flights cost around 1759€ (£1557) for the same date, which is around 70 percent higher than its competitors. The airline is one of the major carriers on this route, operating around 11 flights per day by a mix of mostly Boeing 747-400 and 777s. In addition, BA’s all-business London City to JFK service via Ireland, operates using an A318 on weekdays and has late booking return fares of around £5,500. This means that you can fly on Norweigian around 16 times instead of flying British Airways.
The future for full-service carriers as it stands does not look rosy. The rise of low-cost carriers will continue to create many profitable routes for some. And eventually, low cost carriers will be expanding its presence on many high demand and intense competiton routes. In Europe, the low cost flights account for 38% of all Europe 2012 air traffic, a rise on the previous 36.5%. Spain has the highest share of LCC traffic in Europe at 57%, followed by the UK which has the second highest share of LCC traffic, with an incredible rate of 52% mostly contributed by Easyjet and Norwegian. For LCC traffic, we found that Europe has the second biggest growth in the world !
(Looking at flights to and from London, this graph shows that full service airlines are still dominating the market. However, since low-cost travel has increased substantially, low cost carriers (other) are becoming more and more visible. -source: CAPA)
Full-service carriers have shied away from operating low-capacity routes as they can result in a loss. Though some low-capacity routes have been offered at high fares. However, many low-cost carriers are deliberately operate these routes at low fares resulting in more people flying on those routes, making them profitable much more profitable. An example is Ryanair which we mentioned above.
Low cost travel is becoming increasingly popular but full service carriers are still growing with hope of still grasping a good share of the market, and creating a profit at the same time. It's becoming significantly harder for full service carriers but for many, it is still a profitable market.
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