This paper studies three failed pioneers of long-haul low-cost airlines, which marked the aviation history, in order to uncover the history of failure. Based on the history of failure, the paper detects and investigates four principal factors, which foremost impacted airlines’ fiascos.

1.
Long-­‐haul
Low-­‐cost
Airline
Operations
Airline
Operations
Coursework
Simon
Riha,
student
#
EAC0212171
Cohort
13,
Aviation
Management
Emirates
Aviation
College
November
14,
2012

2. EAC
AO
Long-­‐haul
Low-­‐cost
Airline
Operations
Simon
Riha
November
14,
2012
2
Table
of
Contents
INTRODUCTION
3
HISTORY
OF
FAILURE
4
SKYTRAIN
BY
LAKER
AIRWAYS
4
PEOPLE
EXPRESS
AIRLINES
(PEOPLEXPRESS)
5
OASIS
HONG
KONG
AIRLINES
7
LESSONS
LEARNT
FROM
HISTORY
OF
FAILURE
8
SUCCESS
FACTORS
FOR
THE
LONG-­‐HAUL
LOW-­‐COST
AIRLINE
BLUEPRINT
10
FACTOR
A:
EXTERNAL
ENVIRONMENT
AND
COMPETITION
10
FACTOR
B:
AIRLINE
GROWTH
AND
FINANCIAL
MANAGEMENT
12
FACTOR
C:
AIRCRAFT
CHOICE
IMPORTANCE
13
FACTOR
D:
DESTINATION
CHOICE
IMPORTANCE
15
CONCLUSION
17
REFERENCE
LIST
19

3. EAC
AO
Long-­‐haul
Low-­‐cost
Airline
Operations
Simon
Riha
November
14,
2012
3
Introduction
Several
airlines,
such
as
Air
Asia
X
and
Jetstar,
have
been
trying
to
implement
the
popular
short-­‐haul
low-­‐cost
model
to
stretched
routes.
Whether
this
model
can
work
usually
provokes
hot
debates.
"The
[long-­‐haul]
business
structure
has
an
unproven
track
record,
whereas
short-­‐haul
has
been
successful,"
says
Mark
Webb,
aviation
analyst
for
HSBC
in
Hong
Kong.
(Syed,
2011)
Webb
opinions
that
cost
savings
applicable
for
short-­‐
haul
routes
are
hardly
applicable
for
longer
distances.
For
example,
long-­‐haul
flights
do
not
benefit
from
high
frequencies.
Thus,
costs
cannot
be
easily
spread
out
over
many
flights.
Others
say
there
are
enough
travelers
willing
to
fly
with
no
frills
on
between
five
and
eight
hours
long.
"[From
Singapore]
to
Tokyo,
Beijing,
Shanghai
and
many
destination
in
India,
that
will
work,"
says
Leithen
Francis,
Asia
editor
for
Aviation
Week.
(Syed,
2011)
This
paper
first
studies
three
failed
pioneers
of
long-­‐haul
low-­‐cost
airlines,
which
marked
the
aviation
history,
in
order
to
uncover
the
history
of
failure.
Based
on
the
history
of
failure,
the
paper
detects
and
investigates
four
principal
factors,
which
foremost
impacted
airlines’
fiascos.
This
paper’s
goal
is
to
contribute
to
setting
a
blueprint
for
a
successful
long-­‐haul
low-­‐cost
model.
If
future
ventures
avoid
the
past
mistakes
and
develop
right
strategies
to
master
the
four
failure
factors,
their
success
probability
is
likely
to
be
significantly
higher.

4. EAC
AO
Long-­‐haul
Low-­‐cost
Airline
Operations
Simon
Riha
November
14,
2012
4
History
of
Failure
Machiaveli stated: “Whoever
wishes
to
foresee
the
future
must
consult
the
past;
for
human
events
ever
resemble
those
of
preceding
times.
This
arises
from
the
fact
that
they
are
produced
by
men
who
ever
have
been,
and
ever
shall
be,
animated
by
the
same
passions,
and
thus
they
necessarily
have
the
same
results.”
Applying
Machiaveli’s
wisdom
on
the
long-­‐haul
low-­‐cost
airlines
(LHLC),
it
makes
sense
to
analyze
their
history
in
order
to
identify
the
reasons
of
their
failures.
This
will
help
determine
the
success
factors
for
a
blueprint
of
next
similar
future
ventures.
This
chapter
describes
three
failed
LHLC
pioners
from
three
different
continents.
The
very
first
low-­‐fare
air
scheduled
service
pioneering
the
LHLC
airline
concept
was
so
called
“Skytrain”
launched
by
Laker
Airways
in
the
1970s.
Skytrain
by
Laker
Airways
Sir
Frederick
Alfred
Laker,
a
British
airline
entrepreneur,
formed
his
most
remarkable
airline
venture,
Laker
Airways,
in
1966.
Laker
Airways
was
considered
to
be
the
most
profitable
and
the
best–run
charter
airline
in
UK
of
its
days.
Laker
Airways
was
highly
innovative
and
cost
conscious.
It
developed
cost-­‐
saving
‘reduced
thrust
takeoff
technique’,
faster
climbs
and
weight
saving
measures
to
increase
aircraft
flight
range.
(Wikipedia,
2012)
However,
the
unique
and
fundamental
innovation
was
an
idea
of
Skytrain.
He
designed
Skytrain
as
a
low-­‐fare
scheduled
service
between
London
Gatwick
and
New
York
slashing
airfares
by
two
thirds
compared
to
the
fares
offered
by
established
legacy
carriers.
Laker’s
concept
was
an
operation
like
a
railway.
Tickets
were
sold
directly
at
the
airport
for
the
flight
departing
on
the
day
without
any
reservations
on
a
‘first
come,
first
served’
basis.
Passengers
bought
their
own
food,
and
low
fares
came
through,
cutting
out
the
frills.
Skytrain
was
to
concentrate
on
London
and
New
York,
using
only
brand-­‐new
cost-­‐efficient
DC-­‐10

5. EAC
AO
Long-­‐haul
Low-­‐cost
Airline
Operations
Simon
Riha
November
14,
2012
5
aircraft
with
345
seats,
operating
enormous
3270
hours
p.a.
per
aircraft
and
assumed
10-­‐year
depreciation
was
to
result
in
a
very
competitive
60%
break-­‐
even
load
factor.
(Ramsden,
1972)
It
took
7
years
(1971–77)
to
obtain
all
the
governmental
permissions.
Skytrain
first
departed
on
September
26,
1977
and
quickly
achieved
load
factors
over
80%
in
the
first
five
months
of
operations
with
the
gross
profit
of
£869,000
on
revenues
of
£4.9
million.
(Flight
International,
1978)
Based
on
its
initial
massive
success,
Skytrain
expanded
by
adding
frequencies,
new
routes
and
aircraft.
It
asked
for
permission
to
fly
to
Los
Angeles
at
the
end
of
1977
and
ordered
additional
seven
aircraft
for
$80
million.
(Flight
International,
1977)
By
summer
1981,
Skytrain
also
flew
to
Miami
and
Tampa
and
carried
over
two
million
passengers
since
the
service
commenced.
Furthermore,
Skytrain
was
thinking
of
flying
to
Australia,
Hong
Kong,
Chicago,
Detroit,
San
Francisco,
Seattle
and
Washington
DC
and
of
creating
a
pan-­‐European
network
of
666
Skytrain
routes,
for
which
it
initially
ordered
ten
more
aircraft.
(Wikipedia,
2012)
Such
significant
success
and
expansion
plans
did
not
leave
Skytrain’s
major
competitors,
such
as
British
Airways,
British
Caledonian,
PanAm,
TWA,
without
attention.
Legacy
carriers
held
secret
meetings
to
close
Skytrain
down.
They
undercut
their
fares
(PanAm
by
66%
at
one
point)
when
utilizing
a
difficult
economic
situation
in
1981-­‐82
with
rising
oil
prices,
recession
and
a
falling
pound.
Though
Skytrain
was
always
profitable,
it
was
undercapitalized,
with
only
a
few
valuable
assets,
and
with
a
significant
bank
overdraft.
Skytrain
ran
out
of
money
and
went
bankrupt
on
February
5,
1982
owing
over
£250
million.
(Annoh,
2006)
People
Express
Airlines
(PEOPLExpress)
PEOPLExpress
was
a
venture
to
operate
LHLC
scheduled
flights
out
of
USA
in
1981–87.
The
airline
successively
commenced
flights
from
Newark
to
Buffalo,
Columbus,
Norfolk,
Florida,
London
Gatwick,
Montreal
and
Brussels.

6. EAC
AO
Long-­‐haul
Low-­‐cost
Airline
Operations
Simon
Riha
November
14,
2012
6
PEOPLExpress
turned
out
to
be
an
instant
success
with
all
flights
sold
out
for
several
months
within
24
hours
of
being
offered.
Its
concept
was
simple
–
using
a
simplified
fare
structure
and
modest
pricing.
Fares
were
paid
in
cash
aboard
before
the
flight.
PEOPLExpress
pioneered
to
charge
checked-­‐in
baggage
by
imposing
a
fee
of
$3
a
piece.
The
airline
sold
simple
catering
for
affordable
prices,
too.
Being
extremely
successful,
PEOPLExpress
purchased
Frontier
Airlines,
Britt
Airways
and
Provincetown-­‐Boston
Airlines
in
the
mid
eighties.
Thus,
PEOPLExpress
quickly
became
the
fifth
largest
US
carrier
with
flights
to
most
major
US
cities.
However,
these
aggressive
purchases
imposed
an
enormous
debt
burden
on
the
airline.
Integration
of
the
purchased
airlines
into
PEOPLExpress’s
existing
structures
was
failing.
It
caused
labor
struggles.
The
change
to
a
low-­‐
fare,
no-­‐frills
mentality
was
alienating
both
acquired
airlines’
staff
and
their
passengers.
Last
but
not
least,
major
legacy
carriers
managed
to
quickly
improve
their
yield
and
fare
management
schemes
to
better
compete
with
PEOPLExpress
on
fares.
The
above
pressures
forced
the
carrier
to
change
its
philosophy.
To
boost
its
revenues,
PEOPLExpress
introduced
a
first-­‐class
cabin
and
a
frequent
traveller
program
as
well
as
it
abandoned
its
simplified
fare
scheme
in
favor
of
a
more
traditional
airline
industry
fare
structure
to
attract
higher
yield
business
travellers.
Despite
all
the
efforts,
PEOPLExpress
was
working
with
an
investment
bank
to
seek
buyers.
In
the
end,
PEOPLExpress
was
forced
to
sell
entirely
to
Texas
Air
Corporation,
which
merged
it
with
its
Continental
Airlines
under
a
joint
marketing
agreement
on
February
1,
1987.
(Wikipedia,
2012)

7. EAC
AO
Long-­‐haul
Low-­‐cost
Airline
Operations
Simon
Riha
November
14,
2012
7
Oasis
Hong
Kong
Airlines
Oasis
is
an
example
of
a
recent
LHLC
failure
in
Asia.
Oasis
launched
its
service
from
Hong
Kong
to
London
Gatwick
and
Vancouver
offering
both
economy
and
business
class
with
five
Boeings
747
in
2006.
There
were
four
fare
classes
starting
at
£75.
(Wikipedia,
2012)
Oasis
claimed
it
had
quickly
reached
a
load
factor
over
85%.
Its
strategy
was
based
on
selecting
appropriate
destinations
based
on
three
criteria:
1)
a
major
business
destination,
2)
a
major
cargo
destination
and
3)
a
major
low-­‐cost
carrier
hub.
Oasis
was
planning
to
launch
some
60
destinations
of
this
art,
such
as
Berlin,
Milano,
San
Francisco,
among
others.
(Kjelgaard,
2007)
Oasis
underlined
the
importance
of
choosing
right
aircraft.
Ken
Chad,
Oasis’s
commercial
director
opinioned
that
B747
was
quite
expensive
to
operate
unless
it
could
fill
it
up.
Oasis
was
convinced
it
would
commercially
succeed
if
it
were
selling
the
complete
aircraft
capacity
at
prices
40
to
65
percent
lower
than
its
competitors.
(Kjelgaard,
2007)
Another
attribute
of
Oasis’s
strategy
was
to
compete
against
carriers
offering
one
or
two-­‐stop
connecting
service.
Chad
argued
that
though
they
were
selling
tickets
at
lower
prices,
their
costs
were
higher
then
Oasis’s
nonstop
connections
as
a
result
of
burning
lots
of
fuel
when
taking
off
and
landing
at
their
connecting
airports.
Oasis
also
believed
that
long-­‐haul
routes
were
better
suited
to
the
low-­‐
cost
model
than
short-­‐haul
networks,
for
intensive
aircraft
utilization
exceeding
more
than
15
hours
a
day, that is, more than the short-haul airlines may possibly
reach. (Kjelgaard, 2007)
On April 9, 2008, Oasis announced ceasing of operations after having accumulated a
loss of US$128 million. Oasis’s liquidation proved its strategy unviable. In an attempt
to be competitive, the airline was offering lower than sustainable fares leading to
rapidly piling losses. Oasis also faced stiff competition by a number of well
established carriers operating on its Hong Kong-London route including Cathay
Pacific, British Airways, Emirates, Air New Zealand and Virgin Atlantic, and by the

8. EAC
AO
Long-­‐haul
Low-­‐cost
Airline
Operations
Simon
Riha
November
14,
2012
8
fact that its competitors flew into the more convenient and centrally located Heathrow
rather than to Gatwick. (Wikipedia, 2012)
Lessons
Learnt
from
History
of
Failure
Having
studied
the
failures
of
the
fallen
LHLC
airline
pioneers,
the
following
mistakes
were
detected
and
found
principal
and
resilient
for
its
repeating
impact
on
airlines’
fiascos.
• Underestimation
of
the
external
legal
and
market
environment
and
unreadiness
to
face
fierce
competition
from
network
carriers.
Laker
was
working
on
receiving
its
permit
for
Skytrain
for
seven
years.
British
government
rather
supported
Laker’s
competitors.
When
the
competitors
quickly
mastered
effective
competitive
methods,
Laker,
PEOPLExpress
and
Oasis
were
not
able
to
respond
back
effectively.
None
of
the
carriers
fully
understood
dangerous
influences
of
the
external
environment.
• Excessive
airline
expansion,
undercapitalization
and
weak
financial
management
Laker
ordered
too
many
new
aircrafts
at
once
using
external
funds
at
high
interest.
Laker
operated
with
little
own
capital
and
high
leverage.
Laker
miscalculated
its
finance,
mainly
its
currency
exchange
operations
at
the
period
of
economic
downturn.
PEOPLExpress
purchased
other
airlines
to
quickly
become
a
major
market
player.
Oasis
depleted
its
financial
resources
ending
up
in
deep
debt
after
17
months
of
operations.
• Operating
inappropriate
aircraft
type
Oasis
believed
it
could
operate
a
relatively
cost-­‐expensive
aircraft
type
while
earning
profits
at
lower
yields
than
its
competitors.
• Flying
from
and/or
to
destinations,
which
are
far
too
competitive
and/or
do
not
generate
enough
demand
to
fill
up
aircraft
capacity

9. EAC
AO
Long-­‐haul
Low-­‐cost
Airline
Operations
Simon
Riha
November
14,
2012
9
Laker
decided
for
a
highly
popular
route
London–New
York,
adding
the
trendy
Florida
and
Los
Angeles.
PEOPLExpress
went
for
the
favored
New
York–London
as
well,
among
others.
Oasis
thought
that
having
its
hub
in
the
highly
populated
Hong
Kong
and
flying
to
the
promising
London
and
Vancouver
would
make
success
sure.
First,
all
such
popular
destinations
were
already
well
served
by
established
legacy
carriers.
Second,
considering
adding
new
seats
on
the
market,
taking
a
Hong
Kong–London
route
as
an
example,
was
there
sufficient
existing
and
new
demand
to
fill
up
a
B747
with
some
340
seats
six
times
a
week,
resulting
approximately
in
200
thousand
seats
p.a.,
at
an
adequate
yield
considering
the
current
competition?
The
failures
of
three
airlines
reveal
that
the
airline
business
is
very
intricate.
Even
having
viable
air
operations
like
Laker
and
PEOPLExpress
used
to
have
was
not
any
guarantee
for
any
sure
commercial
success.
Next
chapter
will
examine
four
areas
of
failure
recognized
above
in
detail
in
order
to
identify
recipes
for
future
success.

10. EAC
AO
Long-­‐haul
Low-­‐cost
Airline
Operations
Simon
Riha
November
14,
2012
10
Success
Factors
for
the
Long-­‐Haul
Low-­‐Cost
Airline
Blueprint
Factor
A:
External
Environment
and
Competition
Laker
demonstrates
an
example
of
a
carrier,
which
did
not
master
strategies
to
cope
with
its
business
environment
and
competition,
though
it
was
operationally
a
successful
airline.
Scheduled
international
operations
were
highly
regulated
by
bilateral
air
traffic
agreements
in
the
1970s.
Only
a
few
existing
UK
agreements
contained
provisions
for
a
second
British
scheduled
airline
in
addition
to
the
incumbent
UK
flag
carrier,
whereas
they
did
not
contain
any
provisions
to
designate
a
third
carrier.
As
a
result,
any
license
to
Laker
prevented
British
Caledonian,
Britain’s
“second
force”
carrier
from
operating
a
competing
service.
Another
fact
Laker
underestimated
was
the
concept
of
British
aviation
policy
of
those
days.
British
government
supported
British
Caledonian
as
their
chosen
instrument
of
the
private
sector.
In
addition,
British
Caledonian
and
Laker
were
denied
access
to
Heathrow,
the
main
market
for
scheduled
airlines
in
the
UK,
having
to
operate
out
of
much
smaller
Gattwick.
(Wikipedia,
2012)
In
this
unfavorable
environment,
Laker
needed
seven
years
to
obtain
the
required
license,
after
a
few
law
suits
and
numerous
changes
in
British
government’s
opinions
and
decisions.
Other
large
carriers,
mainly
British
Caledonian,
exercised
fierce
competition
including
conspiratorial
behavior.
Laker
did
not
apparently
have
effective
strategies
and
means
to
face
it.
PEOPLExpress
and
Oasis
failed
in
competition
as
well.
After
PEOPLEexpress
exploited
its
initial
low
fare
advantage,
it
did
not
respond
by
the
right
strategy
to
beat
American
Airlines’
new
adjusted
yield
management
supported
by
advanced
mathematical
and
software
techniques.
Similarly,
Oasis
did
not
beat
carriers
such
as
Cathay
Pacific
and
Emirates,
after
they
managed
to
adjust
their
fares
benefitting
from
their
outstanding
yield
management.

11. EAC
AO
Long-­‐haul
Low-­‐cost
Airline
Operations
Simon
Riha
November
14,
2012
11
Sir
Richard
Branson
summed
up
the
lesson
learnt:
“Perhaps
his
[Laker’s]
best
advice
was
to
make
sure
that
I
took
British
Airways
to
court
before
they
bankrupted
us
—
not
after,
as
he
did.”
(Annoh,
2006)
Anticipating
and
proactive
approach
towards
the
external
environment
and
competition
may
be
worth
as
validated
by
Branson’s
successful
Virgin
Atlantic.
New
start-­‐ups
shall
be
encouraged
to
analyze
environment
and
competition
ex
ante
and
prepare
their
actions
and
reactions
in
various
scenarios
before
environment
and
competitors
strike.
There
are
several
helpful
methods
to
assist.
A
classical
tool
for
examining
the
external
environment
is
the
PESTEL,
which
is
an
analysis
of
macro-­‐environmental
attributes
having
effect
on
decisions
of
managers
and
organizations.
PESTEL
examines
political
factors
(for
example,
bilateral
air
traffic
agreements),
economic
factors
(GDP
growth),
social
factors
(changes
in
lifestyle
and
trends),
technological
factors
(Internet),
environmental
factors
(environmental
protection
laws)
and
legal
factors
(competitive
regulations).
(Gillespie,
2007)
To
analyze
micro-­‐environment,
market
and
competition,
Porter’s
five
forces
is
a
time-­‐proven
method.
It
examines
threat
of
new
competition,
threat
of
substitute
products,
bargaining
power
of
customers
and
intensity
of
competitive
rivalry.
(Porter,
1980)
Porter
(1985)
also
offers
a
so-­‐called
value
chain
for
analyzing
company’s
own
strengths
and
weaknesses,
for
the
company
is
a
synthesis
of
activities
performed
to
design,
produce,
market,
deliver
and
support
its
product.
SWOT
analysis
(internal
strengths
and
weaknesses,
external
opportunities
and
threats)
can
be
used
to
aggregate
findings
collected
by
the
methods
above.
(Kotler
&
Keller,
2012)
The
outputs
of
the
analyses
may
serve
two
key
purposes.
First,
they
can
be
a
basis
for
sound
risk
management,
for
example
in
the
form
of
Wrona’s
approach
including
a
simplified
risk
register.
(Wrona,
n.d.)
Significant
risks
are
listed
in
a
well
arranged
table.
Risks
are
not
only
assessed
and
prioritized,
but
preventive
actions
and
contingency
plans
are
developed
timely.

12. EAC
AO
Long-­‐haul
Low-­‐cost
Airline
Operations
Simon
Riha
November
14,
2012
12
Figure
1:
Risk
register
example
Having
such
a
risk
system
in
place,
LHLC
carriers
may
compete
more
effectively.
For
instance,
if
a
competitor
strikes
by
decreasing
fares,
the
LHLC
airline
already
knows
who
will
act
(risk
owner),
what
the
trigger
is
and
what
the
contingency
plan
is.
Besides,
risk
probabilities
are
already
decreased
by
having
taken
timely
preventive
actions.
Second,
LHLC
carriers
may
develop
competitive
positions
and
effective
competitive
strategies.
Kotler
&
Armstrong
(2001)
recognize
four
competitive
positions:
(1)
market
leader,
(2)
market
challenger,
(3)
market
follower
and
(4)
market
nicher.
Kotler
&
Armstrong
also
offer
applicable
competitive
strategies.
For
instance,
if
the
carrier
identifies
itself
as
a
market
follower,
it
can
elaborate
a
competitive
strategy
either
based
on
“follow
closely”
or
“follow
at
a
distance”.
Factor
B:
Airline
Growth
and
Financial
Management
PEOPLExpress
is
a
brilliant
example
of
the
consequences
of
disproportionate
expansion.
PEOPLExpress
abruptly
bought
two
other
airlines
to
quickly
become
the
fifth
largest
US
carrier
just
in
four
years
after
its
inception.
Prof.
Mayo
and
Prof.
Lance
(1992)
applied
the
sustainable
growth,
a
financial
management
tool
used
in
making
strategic
marketing
decisions,
on
the
growth
histories
of
American
Airlines,
KLM,
and
PEOPLExpress.
They
proved
that
PEOPLExpress’s
growth
was
incompatible
with
its
financial
stability,
since
its
expansion
was
not
accompanied
with
adequate
increases
in
profitability.

13. EAC
AO
Long-­‐haul
Low-­‐cost
Airline
Operations
Simon
Riha
November
14,
2012
13
According
to
Higgins
(1977),
company’s
growth
shall
be
sustainable,
avoiding
deficient
and
excessive
growths.
Sustainable
growth
enables
to
set
the
optimal
growth
pace
in
terms
of
the
annual
percentage
of
increase
in
sales
that
is
consistent
with
a
defined
financial
policy
considering
financial
indicators
such
as
target
debt
to
equity
ratios
and
others.
The
other
airlines
had
a
similar
tendency.
Laker
envisioned
expansion
to
Australia
and
Hong
Kong
and
dreamt
of
666
European
routes.
Oasis
planned
fourteen
aircraft
and
many
more
long-­‐haul
destinations
by
2011.
Both
airlines
had
little
own
capital
(for
instance,
Laker’s
paid-­‐up
share
capital
was
£504,000,
whereas
British
Caledonian’s
£12m
and
British
Airways’
£100m.).
(Wikipedia,
2012)
Skytrain
documents
the
importance
of
financial
management.
Its
weakness
in
forecasting
the
sterling-­‐dollar
exchange
rate
in
the
winter
1981/2
led
to
massive
outflows
of
funds
at
a
time
of
financial
recession.
When
Skytrain
ran
out
of
financial
resources,
it
went
bankrupt.
(Annoh,
2006)
In
conclusion,
economic
laws
are
valid
for
LHLC
airlines
like
for
any
other
companies.
There
must
be
a
balance
between
growth,
profits,
debts
and
assets
to
sustainably
develop
the
LHLC
business.
Sound
financial
management
and
funding
and
elaborated
currency
exchange
operations
are
a
cornerstone
of
LHLC
airlines’
success.
Factor
C:
Aircraft
Choice
Importance
Referring
to
Porter
(1980),
being
a
LHLC
carrier
implies
to
strictly
follow
the
cost
leadership
marketing
strategy,
that
is,
to
pursue
the
lowest
cost
among
competitors.
Considering
the
long-­‐haul
direct
operational
cost
(DOC),
a
half
of
the
DOC
is
directly
related
to
aircraft
operations
(fuel
consumption,
airframe,
engine
and
line
maintenance
and
landing
and
navigation
fees).
Specifically,
fuel
represents
approximately
35%
of
DOC
nowadays.
Hence,
it
is
extremely
important
which
aircraft
type
the
LHLC
carrier
operates.

14. EAC
AO
Long-­‐haul
Low-­‐cost
Airline
Operations
Simon
Riha
November
14,
2012
14
Figure
2:
Long-­‐haul
Direct
Operational
Cost
(Source:
Internal
Airbus
study)
This
factor
is
multiplied
by
the
fact
that
LHLC
airlines
usually
reach
in
average
only
20%
lower
operational
cost
than
legacy
carriers
compared
to
30-­‐60%
cost
reduction
reached
by
short-­‐haul
low-­‐cost
airlines.
(Doganis,
2010)
This
fact
is
further
intensified
by
the
ratio
of
the
long-­‐haul
ticket
price
upon
travelers’
total
long-­‐haul
trip
expenses.
According
to
a
study
conducted
by
UK
Civil
Aviation
Authority
(2005),
the
long-­‐haul
trip
usually
takes
many
more
days
than
a
short-­‐
haul
one.
At
the
same
time,
the
long-­‐haul
ticket
price
usually
plays
a
less
important
role
in
the
total
long-­‐haul
trip
expenses.
This
means,
long-­‐haul
travelers
tend
to
be
less
sensitive
to
ticket
prices
than
short-­‐haul
travelers.
As
a
result,
the
LHLC
airline
must
offer
a
substantial
ticket
discount
to
dilute
the
existing
demand
and
attract
the
new,
while
maintaining
desired
profitability.
Oasis
is
an
example
of
selecting
an
inappropriate
aircraft
type.
While
the
B747
had
the
lowest
potential
operating
cost
per
seat,
this
was
applicable
only
for
the
fully
loaded
aircraft;
costs
per
seat
increased
rapidly
as
occupancy
declined.
A
moderately
loaded
B747
with
a
70%
load
factor
used
more
than
95
percent
of
the
fuel
needed
by
a
fully
loaded
B747.
(Miljominsteriet,
n.d.)
Oasis
did
not
establish
any
viable
and
sustainable
competitive
advantage
over
its
legacy
competitors
and
thus
was
predestined
to
fail
in
this
respect.

15. EAC
AO
Long-­‐haul
Low-­‐cost
Airline
Operations
Simon
Riha
November
14,
2012
15
To
create
a
significant
strategic
cost
advantage
as
proposed
by
Porter,
LHLC
carriers
need
to
reach
more
than
any
moderate
20%
lower
cost.
A
solution
seems
to
be
coming.
Boeing
is
introducing
its
787,
which
operating
cost
is
20%
lower
than
any
other
similar
long-­‐haul
aircraft.
Rasch-­‐Olsen,
an
equity
analyst
at
brokerage
Carnegie,
said:
"If
you
take
the
Dreamliner,
where
the
operating
cost
is
20%
lower
and
you
also
save
30%
on
the
service,
…
,
then
[the
operating
cost
decrease]
could
get
to
50%."
(Stolen
&
Koranyi,
2012)
Factor
D:
Destination
Choice
Importance
History
of
failure
demonstrated
that
even
major
destinations,
such
as
Hong
Kong
and
London,
did
not
guarantee
any
success.
Morrell
(2008)
calculates
that
high
density
LHLC
services
will
have
to
offer
at
least
300
seats
per
flight
in
daily
or
five
weekly
frequencies.
This
means
that
they
need
a
market
share
of
over
175,000
annual
passengers.
Otherwise
they
would
be
restricted
to
leisure
markets
such
as
the
Caribbean
and
Thailand,
where
low
frequencies
better
fit
package
holidays.
However,
such
flights
are
already
usually
provided
by
long-­‐
haul
charter
airlines,
whose
competitive
operational
cost
and
advantage
of
selling
most
of
seat
capacity
to
tour
operators
in
advance
are
hard
to
compete.
Boeing
(2007)
made
an
analysis
of
promising
LHLC
destinations.
Boeing
calculated
that
a
daily
300
seat
LHLC
service
would
have
the
market
share
on
the
top
ten
long-­‐haul
markets
as
follows:
11%
on
LHR/JFK,
23%
on
NRT/HNL
and
between
30-­‐37%
on
the
other
eight
routes.
Boeing
points
out
that
these
figures
are
not
only
sufficient
to
stimulate
demand
but
also
many
of
these
routes
belong
to
the
most
profitable.
Another
aspect
is
the
importance
of
connecting
passengers
to
long-­‐haul
flights.
Though
low-­‐cost
carriers
usually
ignore
feeding
and
focus
on
pure
point-­‐to-­‐point
services,
the
evidence,
exampled
in
the
Figure
three
below,
proves
that
connecting
passengers
play
a
vital
role
in
long-­‐haul
business.

16. EAC
AO
Long-­‐haul
Low-­‐cost
Airline
Operations
Simon
Riha
November
14,
2012
16
Figure
3:
Connections
made
by
passengers
on
scheduled
long-­‐haul
services
at
Heathrow,
Gatwick
and
Manchester,
2005.
Source:
CAA
Passenger
Survey,
2005,
in
CAA
(2007)
Oasis
was
thinking
right
when
concentrating
on
both
business
destinations
being
major
low-­‐cost
carrier
hubs
at
the
same
time.
Still,
Oasis
apparently
underestimated
the
role
of
connecting
traffic.
Oasis
did
not
arrange
any
connections
with
other
carriers
and
relied
on
spontaneous
passengers’
own
‘self-­‐
connect’.
Eventually,
LHLC
carriers
should
reconsider
their
strict
point-­‐to-­‐point
thinking.
For
example,
they
could
develop
a
new
untraditional
method
for
feeding
and
interlining,
which
will
not
be
as
complicated
as
the
methods
used
by
legacy
carriers.
LHLC
flights
connected
to
affordable
trains
and
busses
may
be
a
viable
option.
Distribution
methods
to
enable
this
are
already
being
developed.
(Hahn
Air,
2012)

17. EAC
AO
Long-­‐haul
Low-­‐cost
Airline
Operations
Simon
Riha
November
14,
2012
17
Conclusion
This
paper
analyzed
the
history
of
failure
of
three
LHLC
carriers,
which
marked
the
aviation
history:
Skytrain,
PEOPLExpress
and
Oasis
Hong
Kong
Airlines.
Principal
lessons
learnt
from
their
failures
were
identified
as:
• Underestimation
of
the
external
environment
and
unreadiness
to
face
competition
• Excessive
expansion,
undercapitalization
and
weak
financial
management
• Operating
inappropriate
aircraft
type
• Flying
to
overly
competitive
destinations
omitting
feeding
Addressing
the
four
above
issues,
the
paper
contributes
to
setting
a
blueprint
for
successful
LHLC
operations:
• External
environment
and
competition:
LHLC
carriers
shall
approach
the
external
environment
and
competition
anticipatively
and
proactively.
They
can
benefit
from
analytical
methods,
such
as
PESTEL,
Porter’s
five
forces,
value-­‐chain
and
SWOT,
to
create
timely
risk
management
and
effective
competitive
strategies.
• Optimal
growth
and
financial
management:
LHLC
carriers
shall
pay
attention
to
sustainable
growth
as
proposed
by
Higgins.
A
balance
between
growth,
profits,
debts
and
assets
is
important
as
well
as
sound
financial
management,
sufficient
own
funding
and
elaborated
currency
exchange
operations.
• Aircraft
choice
importance:
To
create
a
significant
strategic
cost
advantage,
LHLC
carriers
need
to
reach
more
than
20%
lower
operating
cost.
Boeing
787
may
be
an
option,
saving
additional
20%.

18. EAC
AO
Long-­‐haul
Low-­‐cost
Airline
Operations
Simon
Riha
November
14,
2012
18
• Destination
choice
importance:
LHLC
carriers
shall
remember
that
suitable
LHLC
destinations
must
accommodate
at
least
175,000
passengers
p.a.
Boeing’s
study
suggests
several
city-­‐pairs
and
proves
their
viability
for
the
LHLC
model.
However,
the
LHLC
model
needs
to
include
connecting
traffic,
too.
In
conclusion,
this
paper
disclosed
that
three
remarkable
LHLC
carriers
had
failed
for
other
than
simple
airline
operational
deficiencies.
It
can
be
advised
that
future
LHLC
carriers
pay
close
attention
to
the
intricacies
of
the
entire
airline
business.

19. Reference
List
Annoh,
L.,
2006.
My
Tribute
to
Sir
Freddie
Laker.
Executive
Traveller
Magazine,
pp.7-­‐8.
Boeing,
2007.
Low
cost
long-­‐haul:
the
next
big
thing?
In
Presentation
to
BCA
Industry
Trends
Forum.,
2007.
Doganis,
R.,
2010.
Flying
Off
Course.
4th
ed.
Routledge.
Flight
International,
1977.
Laker
asks
for
Los
Angeles
Skytrain.
Flight
International,
p.1780.
Flight
International,
1978.
Skytrain
profit
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top
£1
million?
Flight
International,
p.553.
Gillespie,
2007.
Foundations
of
Economics
-­‐
Additional
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on
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[Accessed
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Air,
2012.
WESTbahn
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Air’s
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the
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[Accessed
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R.,
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How
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,
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[Accessed
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20. EAC
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Long-­‐haul
Low-­‐cost
Airline
Operations
Simon
Riha
November
14,
2012
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Kotler,
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G.,
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Competitive
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pp.682-­‐96.
Kotler,
P.
&
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K.L.,
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Marketing
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ed.
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&
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J.P.,
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growth
in
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strategic
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pp.5-­‐14.
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n.d.
Airline
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at:
http://www2.mst.dk/common/Udgivramme/Frame.asp?pg=http://www2.mst.
dk/udgiv/Publications/2003/87-­‐7972-­‐489-­‐2/html/kap09_eng.htm
[Accessed
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October
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Morrell,
P.,
2008.
Can
long-­‐haul
low-­‐cost
airlines
be
successful?
Reasearch
in
Transportation
Economics,
24(1),
pp.61-­‐67.
Porter,
M.,
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Competitive
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for
Analyzing
Industgries
and
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New
York:
Free
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Porter,
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