Long haul LCCs are expanding rapidly at Australian airports. Should corporates, SMEs and TMCs be reassessing?

Long haul low-cost carriers today account for around 20% of all international seats at Melbourne and Sydney Airports, and growing. The percentage is in practice considerably higher than that, because they all operate solely in

Southeast Asia and North Asia, Australia’s fastest growing market.

In Asian markets the proportion exceeds a third of all seats. At those levels, the impact of LHLCCs on the shape of this key market becomes pivotal.

Firstly, the long haul LCCs have a durable impact on pricing levels; secondly, they provide an alternative, meaning they will put a lid on likely growth of full service operations in most high growth markets. It becomes a virtuous – or vicious depending on which side of the fence – cycle.

Add to that the order books that Asian LCCs have and it becomes clear that there will be a major momentum shift over the next decade. For example, Vietjet has nearly 400 aircraft on order, of which 40 are widebody A330-900s. Total LCC aircraft orders constitute almost half of all orders in the region (over 2,700), despite the much smaller number of this category of airline.

So, in all those circumstances it’s obviously important continually to re-examine the future ways in which corporates and SMEs (and TMCs working for their clients) can reduce costs in ways acceptable to their travellers.

In several cases, like Scoot and AirasiaX, there is clear provision for attracting business travel over these essentially medium to long haul routes. AirAsiaX was the first in the region to install a form of lie-flat seating in several rows at the front of the aircraft. Fast growing Vietjet too has a lie-flat version on its A330s operating on Australian routes. Scoot’s offering is more of a premium economy style.

Add extra-legroom to the provision of “premium-lite”, with priority treatment and bundled ancillaries, and the attraction grows.

And as more airlines like Vietjet are attracted to higher yielding traffic, the range of LCC product is only going to grow.

Yet these modest compromises of the low-cost model are only one step in making long haul LCCs acceptable for business travel.

Pricing may only be the starting point for decision making, but it does have a magnetic effect for companies looking to cut costs - and, importantly, to reduce their carbon footprint. Thanks to their higher seating density on a like-for-like basis, the LCCs’ unit emissions can be considerably lower the longer the distance travelled. Seat size affects both seat cost and unit emissions, as LCCs gain a cost edge by squeezing seat pitch and width.

For example, Cebu Pacific’s new A330-900s are configured with 459 all-economy seats, compared to Qantas’ slightly smaller A330-200s with its two class 250 seats on the same route. Sitting in 3-3-3 configuration may not be luxury, but it can be very cheap. (The Manila route is unusual in that Philippine Airlines, Qantas, Cebu Pacific and Jetstar all fly there.)

For a business, cost comparisons then mean totting up the total trip costs. Base fare indicators can be heavily misleading, when additional charges are made for bags, seat allocation, meals and flight change fees.

There, potential costs may also be inherent in so-called IRROPS (irregular operations), where flights are cancelled or there is less than daily service more suited to tourist traffic. Scoot and Jetstar, the only long haul subsidiaries of full-service airlines, do have some backup on occasion, where their parent may come to the rescue. Unlike full service carriers, LCCs rarely have partner airlines which may be available to pick up any slack.

For the company buyer, the next step is to determine the conditions where using an LHLCC is acceptable; factors such as trip length, purpose of travel, departure/arrival windows, bag needs, where charges aren’t included.

Risk management, where norms have been established over the years for travel on full service carriers, can be more of a challenge when considering using a cost-conscious LCC operation. This can mean establishing specific protocols with the LCC, covering self-re-accommodation limits, travel insurance, and perhaps virtual interline too.

This is one area where multi-destination travel will in fact become easier. In the case of some of the SE Asian LCCs especially, they are able to offer hub connectivity, notably into and from China, whereas Australian based airlines can’t – nor, for arcane regulatory reasons, can other full service (“flag”) carriers.

So, for example the AirAsia group uses AirAsiaX (Malaysia) and Thai AirAsiaX (Thailand) as the primary vehicles for long-haul LCC operations in the region, enabling one-stop and hub linking into Australia, Northeast Asia and the Middle East.

These are complemented by a short-haul network that feeds into the funnel. The short-haul nationally based affiliates in the Philippines, Indonesia, Cambodia and Thailand, build regional connectivity under the AirAsia umbrella, feeding the hub(s) that long-haul can exploit. So, in principle, this offers strong opportunities for multi-stop business visits.

The bottom line: This new and fast growing airline product will surely take a bigger piece of Australia’s international growth in future, especially on Asian leisure and VFR corridors. While long haul LCCs won’t dominate total expansion, they’ll almost inevitably grow to take on a larger role, particularly when (or if) they actively cater more effectively for the corporate and business travel sector.

For corporates, today they’re a useful tool, not a new default. In the meantime, so long as they can maintain a differential of reliability, schedule depth, alliance support and premium cabins, FSCs will remain at the core. But change is afoot.

Cultivating this fertile LHLCC ground should pay dividends in the medium term.

This will be one of the comprehensive array of topics discussed at FACTS, at Sydney’s ICC on 25/26 November