Tuesday, December 20, 2016

British Airways Parent Joins Race for Low-Fare Trans-Atlantic Flights: Major carriers are launching budget offerings to fight back against no-frills startups

Galley of Pan Am Clipper America. 1948.

The Wall Street Journal
Updated Dec. 23, 2016 12:56 p.m. ET

LONDON—The race to offer supercheap flights across the Atlantic is heating up, as the parent company of British Airways became the latest full-service airline to launch its own low-price offering to fight back against the budget carriers that have invaded the lucrative market.

International Consolidated Airlines Group SA announced Friday that it is creating a Barcelona-based budget carrier aiming to fly between Europe and the U.S. West Coast.

Air Canada, Germany’s Deutsche Lufthansa AG and Air France-KLM SA have also recently launched no-frills subsidiaries to ferry passengers on long-haul flights at budget prices.

Budget carriers offering cheap tickets—sometimes half the fare of traditional carriers—have ushered in one of the biggest shake-ups of the U.S.-Europe aviation market in decades. The competition promises to eventually drive down ticket prices on those routes, and it has already increased the number of second-tier airports served by European links. Full-service airlines, slow to respond when budget carriers lured away flyers on short -haul routes within the U.S. and Europe, are trying to avoid the same mistake with their long-haul operations, a key driver of profit.

Norwegian Air Shuttle ASA, which helped pioneer the market, is offering fares next year as low as $69, one way, for New York-to-London flights. Norwegian said this month it was setting up a new U.S. base at Stewart International Airport, about 60 miles north of New York City. It is also planning a second new base, either in Portsmouth International Airport in New Hampshire, or T.F. Green Airport near Providence, R.I.

Canada’s WestJet Airlines Ltd. and Iceland’s WOW air are also offering low-fare trans-Atlantic tickets.

Budget carriers generally offer lower ticket prices by charging extra for perks. Norwegian, for example, charges $31.50 for two hot meals, including a beer or glass of wine, during its seven-hour London-to-New York flight.

IAG Chief Executive Willie Walsh has been closely watching Norwegian’s progress. “They have actually demonstrated that consumers will accept some things that people questioned whether they would work on long-haul,” Mr. Walsh told analysts last month.

IAG said its new low-fare business will begin flying overseas from Barcelona starting in June. Barcelona is already home to IAG’s European low-cost carrier, Vueling, allowing some passengers to connect to the new long-haul operation.

Possible routes for the IAG long-haul discounter include Los Angeles, San Francisco, Buenos Aires, Havana, Tokyo and Santiago, Chile. The service will commence with two Airbus Group SE A330 long-haul planes.

Ireland’s Aer Lingus, meanwhile, is considering buying a long-range version of an Airbus jet to connect secondary U.S. cities from the carrier’s Dublin hub.

Decades ago, network carriers were slow to respond to the emerging ranks of short-haul budget airlines such as Southwest Airlines Co. in the U.S. and Ryanair Holdings PLC in Europe. They ended up losing business and retrenching.

The push to offer lower ticket prices on long-haul routes comes as airlines have already had to sharply slash fares amid an oversupply of seats and softening demand for international travel because of terrorist attacks and weak global economic growth. The International Air Transport Association this month said airline profits would decline in 2017 for the first time in years.

Prices on trans-Atlantic routes have softened, but it is hard to attribute that to the budget carriers, yet. There are still relatively few budget flights on offer, and legacy carriers have long struggled with a bigger headache: “There is general overcapacity in the market,” said John Strickland, an airline consultant.

Earlier this month, Delta Air Lines Inc. President Glen Hauenstein said the arrival of discount carriers on trans-Atlantic routes was “probably the least impactful” of a number of headwinds in that market, in the short term. “Maybe in the long run, it could be the most impactful.”

So far, none of the big U.S. carriers that dominate the trans-Atlantic market, American Airlines Group Inc., Delta and United Continental Holdings Inc., have joined the fray, although Delta last year began offering its “Basic Economy” fares on some international flights. While trans-Atlantic routes are important to them, as well, their domestic market is generally much more so.

IAG had already started to move more discreetly toward lower-fare tickets between Europe and the U.S.

British Airways last month said it would add seats on some of its Boeing 777 long-haul planes that operate from London Gatwick, an airport that typically serves leisure destinations. The additional seats give British Airways the flexibility to drop prices on U.S. routes from Gatwick and better compete with the budget carriers.

“That will give us a unit cost advantage over Norwegian out of Gatwick, which is absolutely key to competing there,” British Airways Chief Financial Officer Steve Gunning said last month.

—Susan Carey contributed to this article.

Original article can be found here:  http://www.wsj.com

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