Viewpoint

The ultimate battle in the sky – reinventing
the long-haul travel experience
Arthur D. Little explores the future development of long-haul air travel

Since the mid 2000s the air-transport industry has been in an era of hyper-competition. Medium-haul has been irreversibly
disrupted, and the sector has become a mass-market industry. Now airlines are preparing for the next battle in the sky: thefight for the long-haul traveler. With lower regulatory barriers and the latest long-haul aircrafts delivering on their promises,
new business models are emerging, from “long-haul, low-cost” (LHLC) to the revisited “ultra-long range”. Therefore, no
one seems immune: neither legacy airlines around the world, nor the mighty Gulf carriers. All may have to rethink theirstrategies.

Winning the long-haul battle is key to compete in the
up-coming “hyper-consolidation” era
The low-cost model is finally emerging for long-haul flights, andeven still being in its infancy, it is raising the question of theeconomic sustainability and the future of legacy carriers.
Indeed, we observe that the disruption cycle in long-haultravel will be much shorter than in the medium-haul segment
where it took 20 years to reshape the industry. Airlines must
therefore act quickly and strongly in transforming and positioning
themselves to reinvent the long-haul travel experience and its
associated business and operating model.

Also, after the struggle for the medium-haul market, theoutcome of this “ultimate battle in the sky” will position airlines
when it comes to the next era in the industry post the “hypercompetition” era, i.e. the “hyper-consolidation” era.
Keep on succeeding in the long-haul segment will thus enable
some airlines to become global industry shapers, some could
rather be “hunted pearls” – that will be acquired and maybe
disappear, but surely maximize the return for their shareholders
thanks to niche leadership or a unique combination of strengths– and most of airlines could become “valueless/ commoditized”.

Disruption cycle in medium & long-haul air travel
Emergence

GrowthReconfiguration

Number ofcompetitors

Stability

Long-haul 2020 ?

Medium-haulsegment today

Long-haul today
Medium-haul >20 years
Long-haul 10 to15 years ?

Time

1996-2002

2002-20102010-20162010-2015

2015-2020

2020 - <2023 ?

Pioneers invent a disruptive
business & operating model

Many copy-cats enter the market
Incumbents activate defensive
strategies

Innovators consolidate (market exit,
mergers and acquisitions)
Incumbents players go offensive

2016+
2023+
Market shares stabilize
Disrupters and incumbent players
convergence towards an hybrid
model

Viewpoint

Long-haul low-cost: new life for an old concept
Examples of LHLC carriers date back to 1948, when Loftleidiroffered no-frills flights from Reykjavik to New York, and 1977,
when Laker Airways entered the London-to-New York route.
More recent attempts to develop the market have been madeby Zoom Airlines (Canada) and Oasis Hong Kong Airlines, both ofwhich ceased operations in the late 2000s.
Since the early 2010s, LHLC carriers have however entered
every major inter- and intra-continental market. Drivers for
expansion were the maturity of the short- and medium-haulmodels, as well as technological advances in terms of fuelefficiencies and operating costs brought by new generation of
aircrafts – the B787, the A350 and the revamped A330.

Long-haul, low-cost routes in 2016

Source: SRS analyzer, Arthur D. Little; ASC = available seat capacity in 2016

Today, the 19 LHLC airlines represent only 3% of the total longhaul market, operating 50 scheduled routes. But their offerings
tripled for the period 2010–2016, going from 3.7 to 12.7 million
in available seating capacity, with focus on gaining criticalmass in the existing-routes portfolio: in 2016, new routes thus
represented only 4% of a 28% total capacity increase. Most
destinations are within approximately eight hours’ flight duration,
the “sweet spot” for optimal asset utilization and lowest cost.

Size of the market M seats offered)80
60

Fixing the basics on the cost side: We have identified fiveareas in which low-cost carriers could exploit a significant costadvantage. Overall, the operating economics associated withlong-haul flights present a potential of ~20% cost advantage
compared to network carriers’ cost structure. This comes from:nn

Consuming up to 20% less fuel than airlines flying oldgeneration aircrafts, thus gaining an overall cost advantage ofaround 6% for LHLC carriersnn

Up to 25% savings would come from reduced cabincrew, more productive cockpit crew and lower employer
contributionnnGoing from an average of 12h up to 16–18h per aircraft,
thanks to a point-to-point network strategy

nnLimited catering and in-flight services (handling and airport
charges would be similar when serving same airports)

nn

Lower spending on sales and marketing, with typical lowcost carriers selling almost 80% of their tickets directly, andmore intensively leveraging cheaper digital marketing

LHLC cost per flight advantage vs. legacies
100

75.2

0.4% 67.4
7.9%

60.7

39.9

40
16.9

20

0.4%

13.3

Intra
APAC
& ME

-4

-5

79

-3

-3

1.5%

12.1

1.0% 4.8%0NA <=> EU <=>
EUR
APAC+
ME

-6

1.1%

NA <=> EU <=> EU <=> NA <=> Others
APAC + LATAM
AFR
LATAM
ME

Source: SRS analyzer, Arthur D. Little analysis

However with ongoing aircraft deliveries and limits on
penetration rates for existing routes, we expect expansion
on new routes: indeed (a) Europe  APAC and the Middle
East, and (b) APAC and the Middle East  North America areshowing similar passenger-traffic volumes and are currently
more unexploited by long-haul new entrants than the alreadypenetrated North America  Europe, the intra-APAC and the
Middle East markets.
2

Competing with the lowest cost base possible is, of course, apre-requisite, however maximizing revenues per seat is the real
key to enduring success.

Market share of LH PtP players

94.3

5.3%

Developing a viable business model for long-haul, low-cost
flights is challenging. Our analysis shows that long-haul, low-costairlines can maintain the same margins as their network peers,
even with a 20% decrease in revenues per flight. But LHLC
carriers are flying in thin air, as this -20% might not be powerfulenough to grab market shares compared to the -50% thatmedium-haul, low-cost carriers (LCCs) have achieved.

~20%

LHLC penetration rate in 2016 (major routes)
100

Boosting revenues is the secret key to the successof the long-haul, low-cost model

The ultimate battle in the sky – reinventing the long-haul travel experience

Network
carrier

Fuel

Staff

Ownership Handling & Sales &cost
Catering Marketing

LHLC
carrier

Source: Arthur D. Little analysis

Winning the battle on the revenue side: LHLC carriers
leverage on three major drivers: i) cabin-seat density, ii) unit
revenue per seat (fare price and ancillary revenues) and iii) cabin
mix between seat categories (economy, premium economy andbusiness).
Higher seating density can provide a 25% revenue advantage
compared to network carriers for any given flight. AirAsia X,
with 377 seats on an A330-300 (compared to Malaysian Airlines’
290-seat configuration), and Norwegian, with 291 seats on a1

Viewpoint787-8 (compared to British Airways’ 214-seat configuration), arestriking examples of the ability to increase cabin capacity.
However, in order to attract passengers and deliver on theirpromises, LHLC carriers are indeed doomed to offeringsignificantly lower fares than legacy carriers, typically -25% for acomparable seat category.
Another challenge for low-cost carriers is the disadvantage of
their cabin mix vs. that of legacies. Indeed, premium traffic may
account for only 10–20% of network airlines passengers, but
represent up to 40% of revenues on long-haul flights.

LHLC revenue per flight disadvantage vs. legacies-17.2%
100

6

25

37

83

Overall, the competitive landscape will be structured aroundfour strategic models that will fiercely confront each other byachieving different operating model and product strategies.
In terms of network structure, there are alternative models
emerging. The initial standpoint for network strategies of lowcost airlines is to focus on point-to-point (Air Canada Rouge,
XL Airways). However, some LHLC airlines rely on their own
feeding capabilities (Air Asia X, Norwegian, WOW, etc.); others
establish alliances to leverage specialization between short- andmedium-haul and long-haul partners, replicating the codesharing partnerships between full-service providers (e.g., Scoot,a member of Value Alliance). A virtual hub is another plausible
option, in whicha third partyof
proposes
self-connecting
Marketshare
LH PtPeither
airlinesperflights or connecting services, for example, at Gatwick, Milan ormain markets (2016)
Delhi airports.
Another pillar for successful LHLC and maximization of revenues
is product differentiation and quality of service.

Fare price& Ancillary

Cabin mix

LHLC carrier

Source: Arthur D. Little analysis

Overall, the revenue advantage that a network carrier could
expect from its ability to drive premium traffic and operate a“premium cabin mix” could be as high as 35–40% per flight.
Strong, innovation-driven sales of ancillary products are thus
required and heavily implemented to reduce the gap between
network carriers and low-cost competitors to as low as 5–10%.
A notable example is Air Asia X opting for more than $35 ofadditional revenues per passenger, derived from dynamic
baggage pricing, in-flight products and transit services.
Cargo is also a robust contributor to the business of long-haul,
low-cost airlines, with players like AirAsia X, Norwegian, Scoot or
Eurowings offering their belly capacities, sometimes relying on
the cargo organization of their mother-airline.

New long-haul models have not yet stabilized

Emerging long-haul models
Ultra Low-Cost

Basic

Lean & Intensive as a credo: asset
optimization, mono product, cheapest
pricesSimple in all dimensions: lean & core
operation, un-bundled bi-classproduct focus on core attributes

U
B

H
F
HybridFull service

Friendly as a differentiator: Valuebased bi-class product (comfort &experience on ground / flight), simple& efficient operating

Premium service first : High-end 3
class products, operational model
adjusted (connectivity, groundservices,…)

Main features of strategic models in long-haul
Product offering

Cabin seatdensity

Operational model

Network carrier

1 Cabin mix
2 Services
3 Connection
4

Loyaltyprogram

5 Aircraft type6

Assetsproductivity

7 Activity scope
8 Distribution

1 class

2 class

3 class

Minimal

Basic

Friendly

UpscalePure O&D

Self connecting

Simplyorganized

Optimized

Open

Alliance

None

Mono airline

UniqueConcentrated>14 h of utilization >12 h of utilization
Core

Ultra
Low-cost
Basic

Fragmented>10 h of utilization

HybridDiversified

100% Direct>85% Direct

50% direct

100% Digital>80% Digital~50% digital

FullserviceToday LHLC carriers are rethinking the whole customer
experience to provide a new, fresh and appealing productfor travelers. If most low-cost players do not yet rival legacy
Source: Arthur D. Little analysis
competitors in terms of seating comfort and in-flight catering,
they can deliver more content-rich in-flight entertainment,
including internet access and “bring-your-own-device”
strategies. They can also rival most basic legacy carriers.

Ultra-long-haul: a retaliation weapon against thelong-haul “low cost”/ “low fare” Gulf carriers
Next-gen aircrafts are now triggering another reinvention of longhaul travel by enabling more competitive ultra-long-range flights.
Singapore Airlines has already ordered seven A350-900ULR for
its future New York operations. Qantas also recently expressedinterest in reopening routes to Europe, thus bypassing its JVagreement with Emirates. ULR aircrafts are thus a doublesided sword: ULR flights can indeed attract travelers looking
for time-efficient solutions, and it would naturally bypass directcompetition, in particular from Middle Eastern airlines and fromhome-based LHLC airlines. After routes from ASEAN to the`The ultimate battle in the sky – reinventing the long-haul travel experience 3

1

Viewpoint

US east coast or the Kangaroo Route, routes to LATAM from
Northern Asia, Europe and the Middle East or between Asia andAfrica might follow.
Still, if aircraft economics are promising, on-board products andservices might need to be reinvented for up to 19h flights.

Lean and agile best practices are must-have to play;a reinvented passenger experience will make thedifference
After 2000–2010 saw a new form of medium-haul air transport
become the “new normal,” we will thus clearly see new formsof long-haul flights by 2020.
In order to be successful, new low-cost entrants should monitor
several key factors, such as:nn

nn

Contacts
Belgium

Latin America

vanaudenhove.f@adlittle.com

casahuga.guillem@adlittle.com

Central Europe
baron.ralf@adlittle.com

Middle East
berguiga.morsi@adlittle.com

China

Netherlands

pell.russell@adlittle.com

eikelenboom.martijn@adlittle.com

FranceNordicblondel.mathieu@adlittle.com

anderlind.klas@adlittle.com

India

Spain

srinivasan.srini@adlittle.com

portal.jesus@adlittle.com

Italy

TurkeyFine-tuning the commercial offering (e.g., price point vs.
service level vs. inclusive/ à la carte features) if not able
to capture high-value frequent business travelers, then tomonetizing a unique and reinvented passenger experiencemarsella.francesco@adlittle.com baban.coskun@adlittle.com

Maximizing sales efficiency and brand impact, not deprioritizing destination markets vs. home-market formarketing efforts

Korea

nn

Developing smart network planning to find the right balance
between serving the market demand and optimizing both
aircraft and crew utilizationnn

Quickly reaching a critical fleet size of >10 aircrafts toleverage economies of scalesnnImplementing smart alliance schemes, including leveraging
hubbing opportunities with internal or external partner
airlines

For legacy players, the challenge in order to thrive in phase twoof the era of hyper-competition is even bigger, as they need to:nnCreate investment capability to accelerate fleet renewal as a
key enabler for lower cost per seat and revamped cabinsnn

Leverage the full potential of their loyalty programs andbrands to retain business travelers and re-inspire theeconomy classnn

Rethink their offerings to keep segregated offers and boost
ancillary sales pre- and in-flightnnManage “co-opetition” with internal partner airlines and go
beyond current schemes to promote the next generation ofalliances

Overall, airlines that do not play with competitive cost bases
through lean & agile culture and practices will be excluded fromthe game. Brand equity and passenger experience, pre-, in- andpost-flight, in the air, and on the ground, will make the difference
between churn and loyalty.

Japan/Singapore
mori.yonoshin@adlittle.com

lee.kevin@adlittle.com

UKsmith.andrew@adlittle.com

USAbrennan.john@adlittle.com

Authors
Mathieu Blondel, Julien Vialade, Svilen Iskrov, Akitake Fujita

Arthur D. Little
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