Legacy airlines are facing new competitors on transatlantic routes

By M.R.

EVEN for a global industry like aviation, Primera Air’s business model seems remarkably cosmopolitan. The Icelandic-owned budget airline is headquartered in Latvia, but mainly operates low-cost flights from Denmark and Sweden to sunny places in the Mediterranean. This summer, it will begin long-haul flights from Britain and France to America. The company bears more than a passing resemblance to Norwegian Air Shuttle, another nominally Scandinavian airline with global aspirations. More than two-thirds of Norwegian’s capacity by passenger-km now bypasses its home country, and the rapid growth of its long-haul operations are proving to be a serious challenge for legacy carriers such as British Airways. And its tentacles are spreading around the world. This autumn, the carrier will begin operating domestic Argentinian flights, 12,000km away from its home base.

Low-cost airlines are not new. Ryanair, founded in the 1980s, has grown to become Europe’s biggest and cheapest airline. But low-cost carriers like it have generally stuck to short-haul flights in their local region. That is now changing as a breed of budget outfits, including Norwegian and Primera, cast their gaze further afield.

Two ingredients have allowed airlines such as these to escape the limitations of their home markets. The first is the liberalisation of aviation regulations, notably in the form of the European Common Aviation Area (ECAA) and the EU-US Open Skies treaty. The ECAA allows, with some exceptions, any European airline to fly between any two points in the continent. The EU-US Open Skies treaty similarly allows airlines based in those blocs to fly between any American and European airport. Second, these no-frills carriers are deploying new aircraft that, for the first time, cut costs deep enough to make viable budget airfares on long routes with low demand. Primera’s transatlantic flights will start from as little as $99 one-way, thanks to the fuel-efficiency of the Airbus A321neo, a plane sized for short-haul journeys but capable of reaching mid-haul destinations.

Flights across the Atlantic were once the preserve of the high-cost legacy carriers. Five years ago, 98.5% of capacity between London and New York was provided by five legacy airlines: British Airways, Virgin Atlantic, United Airlines, American Airlines and Delta Air Lines. A network of joint-ventures—co-operation deals that allow separate carriers to behave as if they were one—effectively made the market an oligopoly of three. The only challenge came from Kuwait Airways, which had flights that stopped in Britain on route to America. This summer, however, the market share of the big three will drop below 90% thanks to the presence of Norwegian and Primera. That can only be good news for flyers. After years of fare rises, travelling across the Atlantic is becoming cheaper again, due in part to a 15% increase in the number of seats available since 2013.

Norwegian is leading the charge to stimulate price-sensitive demand in the market—appealing to students, backpackers and others who struggle to afford long-haul trips. But its rivals are catching up. Another fast-growing operator, WOW Air of Iceland, is using its base at Keflavik International Airport to connect passengers between low-cost flights to America and Europe. Stopping in Reykjavík costs time and patience, but with one-way fares starting from $69 plenty are willing. WOW grew its passenger count by 69% last year.

All the newcomers apply a rigid no-frills philosophy to keep costs down: legroom is miserly, on-board entertainment is minimal to non-existent, and optional perks like food and checked luggage attract hefty surcharges. Flying to under-served airports far from city centres also helps. But technology is the biggest factor. Hrafn Thorgeirsson, Primera’s chief executive, says his upcoming A321LRneos will have a 40-45% cost advantage over the Boeing 757, an older “middle of the market” plane that merged short-haul capacity with long-haul range, but ceased production in 2004. “They’re much, much lighter and the engines are obviously brand new,” he says. “There just haven’t been aircraft like this available until now.” Primera’s Boeing 737-900 MAXs, configured with extra fuel tanks, will offer comparable cost benefits. Norwegian and WOW have also ordered the 737 MAX and A321neo respectively, as well as taking next-generation wide-bodies for denser routes.

It could be that transatlantic routes are undergoing the same transition that revolutionised short-haul travel in Europe two decades ago. Expansion to the East will be more challenging, due to a mixture of bilateral restrictions and lengthier–meaning costlier–flights. But, here too, Norwegian is making inroads, along with Scoot, a low-cost division of Singapore’s flag carrier. WOW expects to enter the market in 2019. It is investigating “what Helsinki Airport and Finnair have done in connecting Asia with Europe,” says Skúli Mogensen, the airline’s chief executive, and hopes to do something similar at Keflavik.

Unsurprisingly, legacy carriers are fighting back against the upstarts. They are aggressively expanding their joint ventures to reduce internecine competition. And they are launching their own low-cost long-haul divisions to compete. Over the past year alone the owner of British Airways has launched Level, and Air France a venture aimed at price-sensitive millennials called Joon. Lufthansa added long-haul routes to the network of Eurowings, its low-cost subsidiary, two years ago.

Many analysts speculate that this is an attempt to put pressure on the likes of Norwegian, which have much shakier finances than the big boys. Some only give Norwegian a slim chance of survival in the long term in any case. Huge debts, relatively low cash reserves and thin margins make it vulnerable in any downturn. But, just as with the low-cost revolution of short-haul flying in the 1990s, new startups are circling overhead, waiting to take Norwegian’s place if it fails. The result will be a world that is a much smaller place for budget-conscious travellers.