Getting people back into the air will inevitably involve price reductions, but fuel prices are beginning to creep higher, even though most of the global economy remains in lockdown. Oil prices hit a one year high this week, not calendar 2021, but they are higher now than pre-pandemic and 5.3% higher than this time last month. It remains to be seen if oil prices will remain volatile or if indeed this is an upward trend, the next sets of data for crude oil will give us the answer, but we can be sure that most investors would be (rightly) that the only way is up for oil over the coming 12 months – the question is how fast prices will recover and what the ceiling will be. At the moment the disparity between analysts, the EIA and others is so great that no one has any real idea, and that in itself is a major headache for airlines everywhere who are trying to plan a post pandemic rebound.
For the most part around the globe the LCC and ULCC airlines avoid each other where possible, with very few directly competing routes, especially in the USA and Europe. But for the legacy and flag carrier airlines who are competing with LCCs on trips under five hours there is a problem, their service standards have been reduced to the point where they do not really offer anything more than the LCCs, the add-ons for baggage etc, have for the most part carried over from the LCCs to the flag carriers and majors, they can no longer compete on service alone. Now we must add into that mix vastly increased debt and a weakened structure/or in the case of those in Europe receiving state-aid - the loss of key slots that will allow the LCCs to compete more effectively and directly on prime core hub routes. However; Flag carriers and legacy airlines have proved time and again that they control the Atlantic and that they, for the most part control key international long haul routes – because they are, without doubt, low cost long haul specialists. They also have the government subsidized regional routes under their belts. But the long-haul model only works if you are able to feed transit passengers through your hubs. It means that the future for the big flag carriers is now as it was in the 1990s, and as British Airways (being the first mover with GO) saw the landscape – You have to have an LCC arm in order to compete on the shorter routes and keep feeding your long haul operations, which in turn keeps the low cost airlines out of the long haul market. But now those airlines too are saddled with debt for the most part and they are not the competitors that they once were. Many flag carriers must try harder to break-out their short haul feeder operations into new entities without debt piles now before the re-start of operations, in order to keep the pre-pandemic equilibrium, or else the business model may buckle under the debt and the onslaught of the LCCs operating within a recessionary environment. This may involve flag carriers doing deals with LCCs for them to act a feeder. More airlines need to look at sub-leasing key airport slots to LCCs as part of JVs, codeshares and feeder agreements in order to keep long haul traffic fed while contracting the loss-making short haul feeder footprint, which will lead to far superior margins for many airlines. After all, the service difference (the big stopping point in the past) between say BA / American and Lufthansa (for example) and easyjet and Wizz is negligible these days, and it might be said that Jet2 and JetBlue service levels are better than all of them. The 2020 JetBlue / American alliance is a blueprint for many airlines to follow, and there is in all this a great opportunity for all airlines, be they flag carrier and/or LCC to gain tremendously from lower overheads for the long term, and less competition in the medium-term recovery period. The subleasing of slots, especially at congested sites such as LHR should be allowed, and it should be actioned more and more. It is food for thought for the weekend.