LCCs Heat Up the Transatlantic Game

Low fares, low fares, everywhere—nor any drop for the corporate travel buyer.

The face of transatlantic air travel is changing as low-cost entrants pour into the market. Norwegian Air Shuttle is expanding service to the U.S. this summer, following a years-long battle for approval from the U.S. Department of Transportation and resistance from the three U.S. legacy carriers. Iceland's Wow Air also is building a network between Europe and the U.S. via Reykjavik. Both carriers regularly offer base fares below $200.

Legacy carriers are getting in on the action, too. British Airways parent company International Airlines Group this summer is launching a low-cost carrier, Level, to fly transatlantic from Barcelona. Air France-KLM plans to launch its own long-haul, LCC, Boost, this year with flights to Asia, and transatlantic expansion also is a possibility. Lufthansa's low-cost Eurowings brand also is considering expanding its current limited transatlantic service offerings.

In Canada, LCC WestJet began service to London's Gatwick Airport last year and is eyeing further transatlantic expansion. Air Canada is boosting its transatlantic service, and its LCC Rouge is a part of that.

In the longer term, U.S. LCCs eventually could be a factor. Last year, JetBlue amended a purchase agreement with Airbus: The 15 A321neo aircraft to be delivered over the next several years now come with the option to configure them to long-range aircraft, opening the door to European routes. Southwest also has not ruled out transatlantic expansion.

Lower Fares on the Horizon?

All this low-cost competition could result in lower fares for corporate travelers, as well, right? Think again, said Scott Gillespie, managing partner of airline data analytics firm tClara. "No doubt these new entrants will put significant pressure on their full-service rivals for the leisure crowd," he said. "The question for the corporate crowd is how much corporate market share these LCCs will take. My early guess is not much at all."

For starters, most do not connect major business hubs. Norwegian's new routes, for example, connect not to the major airports in New York or Boston but to T.F. Green Airport near Providence, R.I.; Bradley International Airport near Hartford, Conn.; and Stewart International Airport, about 70 miles north of New York City.

Even on routes where these carriers make sense for corporate travelers, the ancillary costs will add up quickly. In general, LCCs charge extra for beverages, meals, seat selection, checked luggage and in some cases even carry-on luggage, all of which remain inclusive in most full-service carrier transatlantic flights.

These carriers also remain dwarfed by the massive networks created by legacy carriers and their alliances, which have helped keep transatlantic fares strong, according to a recent Egencia white paper on airline competition and consolidation. "On transatlantic routes, the level of competitiveness is rather opaque and strongly impacted by the three alliances and joint ventures," according to the white paper. "These have acted as a stand-in for consolidation in this market, as airlines agree to share slots and revenue."

Capacity Concerns

Airlines also can adjust capacity much more easily than other travel categories can, and should transatlantic routes become a drag on their profitability, they will adjust accordingly.

The International Air Transport Association noted that transatlantic demand has "trended sideways" for about a year, but legacy carriers are facing challenges on those routes beyond the LCCs.

After the fourth quarter, American Airlines president Robert Isom called transatlantic coverage the carrier's "worst-performing international entity," as unit revenue decreased 7.7 percent year over year during that quarter. Competition with LCCs was a factor, but so was demand for travel to the U.S. thanks to the strengthening dollar against the British pound. American is vulnerable to the U.S./U.K. currency game because half its transatlantic capacity flies to/from the U.K.

The continued fallout from Brexit, of course, remains to be seen, not just on the macroeconomic level but in terms of aviation specifically. Departure from the European Union will require the U.K. to replicate open skies agreements with other countries, including the U.S. and Canada. La Compagnie, the all-business-class carrier, ended its New York-London service last year, citing Brexit as the major reason.

Delta cut its transatlantic capacity by 4 percent year over year during the first quarter. Its long-term plan for the routes includes "more seasonal flying that better aligns our capacity with demand," Delta president Glen Hauenstein said.

United does not have a U.K. partner as American and Delta do, but it actually reported year-over-year unit revenue growth on transatlantic routes in the first quarter, due in part to strong demand in Germany, United president Scott Kirby said.

"Of course, we carry a lot of revenues to the U.K. and to Paris, so we're impacted by that but less impacted," Kirby said. "Also, at least in this portion of the year, we're disproportionately selling U.S. point of sale. As we move to the back half of the summer, the normal demand pattern shifts to European point of sale." The fact that Easter fell in April instead of March also benefited results, he said.

Reshaping Models

Beyond fares, though, the low-cost entrants still stand to reshape the model of transatlantic flying, just as LCCs have on domestic U.S. routes. On one hand, legacy carriers will emphasize service and amenities to entice the travelers who make purchases based on more than price. "If you look at what Norwegian flies, they don't have flatbeds," Hauenstein said. "The ultra-low-cost carriers haven't made that investment in those types of products. We need to adjust to that new paradigm as a high-quality product for leisure customers who are willing to pay more than just standard coach fares."

On the other hand, additional unbundling seems inevitable should LCCs continue to build transatlantic presence. Delta's Basic Economy fares—no-frills fares that do not include seat selection or changes and that board last—already have expanded internationally, Hauenstein said.

This could trickle into standard economy classes, too. On some shorter transatlantic flights, British Airways already has cut back from two meals to one. More recently, the carrier indicated that switching to paid meal service is not out of the question.

If they expand to more business-friendly routes, LCCs could get more aggressive in courting corporate business, as well, especially considering that for years, corporate travel policies have trended more restrictive, requiring travelers to use economy class on transatlantic flights, Egencia consulting manager Max Weyde said. "Norwegian is smart enough to adjust their business model to make travel with them also attractive to corporations," he said. "If they're willing to provide fares attractive to corporate clients where amenities have been included, they might get additional share."