Internet Travel Monitor - Industry News

February 8, 2017

Delta, American, United Go Guns Blazing Into Battle of the Atlantic

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The skies above the Atlantic Ocean appear to be the next front in the insurgency against higher airfares.

Delta Air Lines, United Airlines and American Airlines for years lorded over much of the trans-Atlantic market and have signaled they will mount a fierce defense. But even before President Trump's immigration restrictions last month threatened to hurt demand, the big three U.S. network carriers were facing a challenge in international travel.

New fuel-efficient, narrow-body jets from the likes of Airbus have made it more feasible for other carriers to offer low-cost, long-haul flights. And Boeing, which is scrambling to regain market share lost to Airbus in recent years, is developing similar aircraft, providing more options for expansionary carriers.

All of this means competition will rise on the Atlantic, fares will sink, and the number of available flights will remain high — just as the industry rehabilitates from a cutthroat, two-year grab for airspace in the U.S.

"It's still a very profitable entity for U.S. airlines, and I think it'll continue to be," Stifel analyst Joseph DeNardi said of the trans-Atlantic market. "It'll probably just become less profitable."

The big three control about a third of the flights in the lucrative market, and DeNardi estimates Delta, American and United generate 10%-15% of their revenue from trans-Atlantic flights. But other airlines, especially European ones, could turn more toward the Atlantic as competition on the Continent from discounters and Gulf carriers chews up profits.

Irish budget carrier Ryanair has floated the possibility of eventually flying across the Atlantic. Air France-KLM last year said it planned to launch a discount airline that could fly to the U.S. The parent company of British Airways could soon also offer low-cost flights to the U.S. All these airlines would join Lufthansa, which already operates the low-cost carrier Eurowings.

They must contend with challengers like Norwegian Air Shuttle, which boasts $69 one-way fares from New York to London, and can fly you from New York to Oslo and back for $350 this month. Iceland's WOW Air offers a round-trip flight from Boston to Berlin for less than $400.

New Airbus, Boeing Aircraft To Feed Market

Now even a U.S. airline, JetBlue, is considering flights to Europe. It should decide later this year as it starts to take delivery of Airbus A321s.

While low-cost operations get more difficult the farther planes have to fly, jets like the A321 are more fuel-efficient and have fewer seats to fill, allowing for tighter operations overall and easier access to more parts of the world.

"JetBlue ... doesn't have to become a widebody operator to serve Europe," said Seth Kaplan, managing partner at Airline Weekly.

A long-range variant of the A321 will fly up to 4,000 nautical miles, which Airbus calls the longest range of any single-aisle jetliner. With that kind of reach, it could serve cities like Philadelphia and Milan, which require longer distances than the typical New York-to-London route that spans about 3,500 nautical miles.

"It is ideally suited to trans-Atlantic routes and enables airlines to tap into new long-haul markets that were not previously accessible with current single-aisle aircraft," Airbus says on its website.

Meanwhile, Boeing plans a new midsize plane that can travel up to 5,000 nautical miles, industry officials told CNN last month.

U.S. airlines aren't completely at odds with European carriers. They get a share of revenue from European counterparts via alliances like SkyTeam, Oneworld and Star Alliance as well as joint venture agreements.

But analysts say U.S. carriers prefer that the big European airlines do well in Europe so that their partnerships stay healthy — and so their European peers don't try their luck over the Atlantic.

In the new Battle of the Atlantic, the big three are taking a hard line.

"We are sensitive to anyone that's a competitive threat issue for us, and we will be aggressive about competing with all of them," said United President Scott Kirby last month, responding to an analyst's question about partner Air Canada's plans to add trans-Atlantic capacity. He declined to talk specifically about the Canadian carrier.

During its call with analysts in January, American's management acknowledged pressure from low-cost carriers in the market. The airline is shrinking trans-Atlantic capacity during Q1 but plans to increase it again in Q3, when summer travel makes flights more lucrative.

"We don't intend to cede our position across the Atlantic to anybody," said Chief Marketing Officer Andrew Nocella.

Segmentation Strategy

To compete with low-cost rivals, the big three U.S. airlines are banking on more cabin "segmentation" — or dividing up a plane's seats into more classes of service, from no-frills "basic economy" to higher-end offerings.

Delta offers a basic economy class and has said it wants to make it available across its network by 2018. United and American will offer basic economy in the U.S. this year. It's unclear whether they will offer the service on international flights, but the three tend to match one another's competitive moves.

American's Nocella suggested the airline's segmentation would indeed go international as it strategizes with joint venture partners like British Airways. He called it American's plan to compete.

"So we feel bullish about that. It's definitely going to be a really tough competitive environment, particularly I think over the next year, year and a half as we see these capacity inflows," Nocella said. "But our position is good. London Heathrow is the best hub in Europe, and we feel good about it."

If nothing else, segmentation and the availability of basic economy help the network carriers better adapt to the changing tastes of passengers. At the same time, the strategy potentially robs discount carriers of the very thing that makes them unique and turns passengers on to fares that include more amenities, analysts say.

"The one-size-fits-all product never made a lot of sense," Kaplan said. "It was a legacy of pre-deregulation, of pre-1978, when airlines couldn't control their pricing and could only compete on service, and they had to compete for who had the least bad meal."

With basic economy's affordability — at least on U.S. flights — come some predictable annoyances. Although they sit in the main cabin, like other economy travelers, passengers can't pick their own seats. They face other restrictions on refunds, upgrades and what bags they can bring aboard, and they aren't guaranteed a seat next to the passengers they're traveling with.

Once they're in the seat, though, the in-flight experience is similar to anything else in the main cabin. Snacks, drinks, Wi-Fi, entertainment: all largely still there.

For the airlines, basic economy's advantage lies in its flexibility, analysts say. It's a type of fare, not a type of physical seat separate from others in the cabin. Thus, carriers can adjust more easily to demand and competition, as opposed to creating their own low-cost airline.

Meanwhile, the airline-within-an-airline model that European carriers are employing runs the risk of cannibalizing the parent airline and making labor costs difficult to manage.

Going Low And High

Segmentation isn't just for cost-conscious travelers. It gives carriers more ways to attract passengers to pricier fares that offer better convenience and comfort, such as options like United's Polaris and Delta's Premium Select, which offer more room to recline or lie-flat seats. Even with standard economy fares, passengers can get a complimentary glass of wine on international flights.

Last month, Delta President Glen Hauenstein said on a conference call that the airline might have trouble retaining market share over the Atlantic as low-cost carriers proliferate. But he said the company will try to "preserve and accelerate" margins and compete through higher-end cabin offerings like Premium Select.

"If you think of retailing, you go to the car dealership because they had an ad that said you could get the Mustang you wanted," said Bob Mann, a former airline executive and current president of the R.W. Mann & Co. consultancy. "You get there, you decide, well, you don't really want the V-6, because you're kind of a V-8 guy."

Low-cost carriers have taken note. Even Norwegian has a premium cabin, and WOW just announced a more upscale "Big Seats" product.

But the bigger airlines offer more flights, which gives them room to accommodate passengers if a flight gets canceled or a passenger's schedule changes, Mann says. Low-cost rivals sometimes only offer one flight a day or less to a given destination.

Delta, American and United are also more well-known than the smaller low-cost carriers, so brand recognition is another advantage. Plus, on a long-haul flight, little amenities and comforts tend to matter more.

"The same thing that people will tolerate for two hours won't necessarily do it for eight," Kaplan said.

Copyright 2017 Investor's Business Daily, Inc. All rights reserved. From By Bill Peters.
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