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The battle for the skies has begun

After revolutionising the short- and mid-haul market, low-cost airlines are challenging traditional giants when it comes to long-distance flights.

Looking for a tropical escape this winter? How about Tahiti? A oneway flight from Paris to Papeete will set you back 600 Swiss francs, a Barcelona-San Francisco flight goes for 160 francs and London- Montreal costs just 175 francs. Travellers rejoice! Over the past few months, attractive offers abound for flights from Europe to all over the world. And while the promotional prices shown are often much lower than the fares that are actually available, it is possible to buy a round-trip Paris-New York flight for less than 500 Swiss francs, airport taxes included. “Low-cost airlines, which used to focus solely on trips under five hours, are now starting long-haul flights,” says Xavier Tytelman, an aeronautics expert and consultant for CGI Business Consulting. “It’s a fundamental trend that is shaking up the air travel industry.”

The number of low-cost long-haul routes leaving from Europe has spiked from 14 in 2013 to 87 in 2017, according to figures from Airports Council International (ACI), which includes 500 European airports. The increase is so significant that while low-cost long-distance airlines are still marginal, with less than 2% of global capacity, some experts are predicting a very bright future. “It will work,” said John Leahy, former commercial director of Airbus, as recent as 2017. “Low-cost airlines could take up to 50% or even more of the long-haul market.” Willie Walsh, CEO of IAG (the parent company behind Iberia and British Airways) is predicting 40%.
 

EXPERIMENTAL STAGE

In only four years, European pioneer Norwegian became the first non-US low - cost airline to make transatlantic flights. And while its rapid growth, financed by loans, is slow to result in stunning profits, its commercial success has signalled the start of the race towards lowcost long-haul flights. Companies such as France’s French Bee and XL Airways, Denmark’s Primera Air and Iceland’s Wow Air have all thrown their hats into the ring. In Canada, WestJet has asked authorities for flying rights to China and, in the United States, JetBlue and Southwest are open about their desire to begin transatlantic routes.

 

“LOW-COST AIRLINES COULD TAKE UP TO 50% OR EVEN MORE OF THE LONG-HAUL MARKET”

John Leahy, former commercial director of Airbus

 

“Three years ago, there was only Norwegian and AirAsia X,” says Tytelman. “Now new airlines are coming into the market every day.” Despite the boom, experts remain cautious as to the economic viability of this model. Is it really possible to significantly reduce costs compared to traditional players? “That’s the question everyone is asking,” says Jean-Louis Dropsy, an aeronautics expert at Cylad Consulting. “For the time being, the low-cost long-haul model is at an experimental stage. We don’t have enough distance yet to say if this model can be profitable or not.” This is because the magic recipe for “traditional” low-cost flights, which has been so successful for Ryanair and easyJet, is hard to reproduce for flights longer than six hours. “To lower prices, these airlines optimised efficiency,” says Jean-Baptiste Nau, an aeronautics expert for consulting firm Wavestone. “That means ultra-modern fleets – Norwegian, for example, uses brand new Boeing 787s, which use 15–20% less fuel than planes from the previous generation – and it also means using each plane as much as possible.” Essentially, where traditional airlines would fly two round-trips per day, for example, low-cost airlines add an additional flight to limit the amount of time the plane is on the ground to the greatest possible extent. 

At Ryanair, for example, turnaround time (i.e. the amount of time a plane spends parked between two flights) averages 25 minutes. The problem: “After a ten-hour flight, it’s hard to reduce the length of a stopover,” says Nau. “You have to clean the entire cabin – which you don’t have to do with short flights – get a brand new flight crew, fill up with kerosene, etc. And since there are only 24 hours in a day and most airports are closed at night, low-cost airlines can’t differentiate themselves from traditional airlines in this regard.”

The second distinct advantage that Ryanair and easyJet have is selling a host of options to raise income, such as food and drink, internet access and checked luggage. Some of these additional amenities, such as priority boarding lanes or paying for a specific seat, sometimes don’t even cost the airline anything. But the subsequent profits are definitely not negligible. In the 2018 financial year, these fees brought in over €2 billion for Ryanair, or 28 % of its turnover of €7.15 billion.

“A la carte services work very well on short-haul flights, because passengers think they can fly two hours without a snack, but then end up buying a sandwich anyway,” says Nau. “But when you’re on a ten-hour flight, passengers need to eat, drink and check in their luggage. That means that low-cost airlines are then forced to include these services in the base price, which ends up coming close to the prices of traditional airlines.” According to experts, in order for a low-cost firm to make it amongst industry players, prices need to be 20% to 30% less than traditional airlines.

Norwegian’s current financial difficulties, with its debt reaching €2 billion, and the recent bankruptcy of Primera Air, which suddenly went bust in October 2018, reinforce the idea that the low-cost long-haul model is a difficult one. But there was the same scepticism when Ryanair and easyJet got started... “At the time no one believed it!” says Nicolas Paulissen, delegate general of UAF, the French airport union.

Nau adds: “Despite the difficulties, some airlines seem to have achieved convincing operating and financial results. Norwegian’s debt is a result of its frenetic growth policy and its purchase of several aircraft, and not a result of its business model,” says the author of the report entitled “Can the low-cost model be adapted to long-haul carriers?”. “I think we’re headed towards an ‘a la carte’ offer, where passengers will only pay for what they consume. In-flight films, wifi, meals – everything will be optional. The success of the new players will depend on the reaction from traditional airlines, which are also increasingly leaning towards this type of model.”
 

INCREASED CONCENTRATION IS COMING

Thirty-five years ago, when Ryanair first took to European skies, the big airlines mocked the newcomer’s take-off, convinced it would crash and burn at the end of the runway. They did nothing and were outpaced by the low-cost competitor. Not this time! When Norwegian made its first transatlantic flight in 2014, Lufthansa reacted immediately, launching its subsidiary Eurowings in 2015. IAG Group, the result of a merger between Iberia and British Airways, also decided to take the leap and created Level in 2017. Singapore Airlines began Scoot and Australian airline Qantas founded Jetstar, which are both low-cost airlines. And subsidiaries seem to keep popping up all over the place: Japan Airlines announced in May that its low-cost long-distance carrier will serve Asia, Europe and North America starting in summer 2020, and Air France-KLM is currently considering the issue.

“With the increased level of competition, airlines will fold and a concentration of the industry seems inevitable,” says Jean-Louis Dropsy from Cylad Consulting. In fact, it has already begun: in November, Icelandic low-cost airline Wow Air was acquired by traditional carrier Icelandair, whose share price on the Reykjavik exchange shot up 42% after the news was announced.

Norwegian’s share price has experienced ups and downs on the Oslo exchange as rumours abound of the airline being bought out. “Right now in Europe, everyone is talking with everyone else. We’re right in the middle of a wave of consolidations,” Lufthansa CEO Carsten Spohr told German daily Süddeutsche Zeitung in June. “That means we’re in touch with Norwegian as well...”
 

AIR TRAFFIC DRIVEN BY ASIA

The numbers are impressive. According to the latest forecasts from the International Air Transport Association (IATA), published in October 2018, the number of air passengers is expected to double over the next 20 years, reaching 8.2 billion travellers per year in 2037. With an annual growth rate of 4.8%, the Asia-Pacific region will be the main driver of traffic growth. Starting in the mid-2020s, China will become the largest aviation market in the world, ahead of the United States, while India will round out the top three. In Europe, annual growth will stand at 2%, meaning 611 million more passengers in airports. The problem: “Aviation is experiencing an infrastructure crisis,” warns the IATA. “Regardless of which scenario is considered, airports and the air traffic control system won’t be able to keep up with demand.” This is a wellknown problem in Switzerland, where the two main airports, Zurich and Geneva, will reach saturation by 2030.
 

SWISS SKIES: THE SWISS PROJECT

Will a low-cost long-haul carrier soon be founded in Switzerland? In September, a former Ryanair pilot and three associates announced that they wanted to create a new airline. They hope to raise $100 million. Based at Basel-Mulhouse airport, this future low-cost airline hopes to offer cheap flights between Switzerland and North America starting in 2019. To do so, it plans to exclusively use Airbus A321neo LRs, a single-aisle model capable of crossing the Atlantic.

 
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