Murray Bailey
Oct 31, 2016 · 13 min read

What full-service-airlines need to do to survive


What full-service-airlines need to do to survive

By Murray Bailey

This White Paper is addressed to what we call Airline Groups (AGs). To match our proto-definition/requirement for an ‘AG’ an airline or group needs to:

-Be an FSA*. Independent NFAs* and possibly LCAs* need not change their business model.

-FSAs or groups built around an FSA should be a certain size — around 50mn seats sold annually as one initial measure.

-Comprise at least three airlines, preferably of different types — FSA LCA NFA. Hybrids don’t count.

The alternative is to abandon the FSA model and operate as LCA and NFA, or NFA alone. But we cannot see airlines such as Lufthansa doing that, and there would be many complications anyway. But we believe that in broad terms the FSA and LCA business models are under threat, and possibly may not survive (in an open market).

There seems to be only one airline that has made that transition, almost — Aer Lingus, now part of ICAG. Presumably, up against Ryanair in its home market, it realised there was not much else it could do. It could not beat Ryanair (so far, no airline has), so it had to follow the businessplan.

The list of FSAs that have launched or bought NFAs that have eventually failed is long. It includes Alitalia, British (two; today, the group of which it is a part has two [different] NFAs), Delta, Iberia, Lufthansa, SAS, United.

The Asia Pacific region has a better record. Launched and still flying are NFA subsidiaries of All Nippon, Japan, Qantas, Singapore, Thai.

We believe the problems of those FSAs that have opted out will soon become apparent. Take the Cathay Pacific group . It has a LCA, Dragonair, but does not operate it as an LCA — notably by not allowing Dragon to operate alongside Cathay on some routes. And resisting the need to establish an NFA. We believe that in the next 1–2 years Cathay will need to change its strategy.

Obviously we cannot know what it will do — either establish its NFA, or expand Dragonair as an LCA to operate an any routes where the market needs it, even if also operated by Cathay. In such cases, Cathay would have many choices. On a specific route, it could maintain its capacity and let Dragonair take the growth traffic. Or reduce its capacity to that it decides is the market requirement on that route for an FSA.

Our list of FSAs or FSA AGs excludes not only some below our 50mn minimum seat sales, but some bigger ones — most notably the world’s three biggest NFAs, in order, Southwest, Ryanair, Easyjet. And all China-based airlines, and others in the US such as Delta.

We exclude China because the airlines but more importantly the administration of airlines in China (controlled by a slightly-reformed communist-era bureaucracy, CAAC) does not clearly define what airlines can and cannot do. And sometimes, surprisingly, still does not have full control over them.

In the 1980s CAAC defined which airlines could be created (such as Air China out of its own CAAC Beijing flight-operating division), but even at the beginning of those reforms, the group of airlines that began operating were never what CAAC ruled they should be.

We exclude the US because all airlines are primarily US domestic, and rules are different (and light) that our AG businessplan is not relevant there.

Our list then:

Air Asia, AAAG.

Comprising partly-owned airlines under the AA name in India, Indonesia, Malaysia, Philippines, Thailand, with one planned for Japan, plus a medium-haul airline AAX.

AAAG is not included in our AG strategy in that — apart from the AA launch airline in Malaysia — all are subsidiaries of that launch airline, and all are NFAs.

What to do:

Nothing. AAAG is following a different businessplan with minority ownership shares — which has different criteria.

Air France-KLM, AKAG.

Comprising AF, KLM, Hop, Transavia.

Almost right. AKAG has AF and KLM as FSAs, Hop as (almost) LCA, and Transavia as NFA. Perfect as far as names are concerned, and in this way, to use the ‘Air France’ name below ‘Hop’ in Hop’s logo is good.

Its proper name is actually HOP!, but we change this because it is editorially awkward.

The problem is that Hop is not operating alongside AF as a LCA — AF on some routes, Hop on some, both on some. Today, Hop is a lower-cost replacement for AF in the (France) cities where AF can no longer afford to operate. That said, Hop’s fares are too low — almost at NFA level — although it offers, and promotes, a service matching AF’s. That is financially foolish.

KLM is something of a problem in all this strategic rethink — in that it is doing well. Nevertheless, there are some routes where Hop should be operating instead of KLM — although Hop is AF’s subsidiary, not AF-KLM’s. (Don’t ask.)

Hop’s business results are unknown. We believe they are combined with AF’s to hide any weakness — although AF is also weak now and Hop may actually be performing better than its parent. Be-that-as-it-may, we are surprised that investors do not require AF to at least break out Hop’s traffic figures.

AKAG’s Transavia NFA is doing well. Is AKAG doing with Transavia which AF unions said it could not — grow Transavia into a Vueling-type airline? And pulling AF out of trouble (KL is ok)? Transavia is still small — under half the size of Vueling — but its +19% H1 is unheard of at AF, whose calculators we thought stopped at +5%. Transavia’s share of the AF-KL group total is already 13%.

What to do:

AKAG needs to expand Hop to operate on other routes (short- medium- or long-haul) where profitable operation is hard, traffic is light, market is low-spend, or a new market. And not just those little local routes that it has today.

For instance, AF started and stopped a route to Kuala Lumpur within 12 months. Hop should have taken over from AF.

Also, AKAG keeps Hop out of the main hubs in France — Marseille, Nice, Paris CDG, Toulouse. But why is not Hop operating, say, Nice-Paris in competition with Easyjet rather than AF — which must be losing a lot of money on that route? And why not inter-continental flights from Marseille and Nice? Amazingly, MRS — France’s 2nd-largest city — has no US route, and from NCE only a US airline operates. And nothing from either city to Asia — giving the market to Emirates over Dubai.

Etihad, EAG.

In 2016, Abu Dhabi’s Etihad renamed itself Etihad Airlines Group. EAG comprises eight airlines in which it owns a share — Air Berlin, Air Serbia, Air Seychelles, Alitalia, Darwin (Switzerland), Etihad itself, Jet Airways (India), Virgin Australia.

Although total annual seat sales of these eight are around 120mn, EAG is not close to our definition of an AG in that all are FSAs. Some change may come from Darwin, which operates as Etihad Regional (we think its name should be ‘Union Airlines’), and thus in some way is an LCA — although it does not ‘serve’ an FSA.

What to do:

Nothing. EAG, as AAAG, is following a different businessplan with minority ownership shares — which has different criteria.

ICAG, International Consolidated Airlines Group.

Comprising mainly Aer Lingus, British, Iberia, Vueling.

Only 10% smaller than Europe’s biggest group, LSAG, in 2015, now on track to overtake LSAG this year — albeit partly because LSAG as much as ICAG is strong.

And ICAG has a better mix. It has two FSAs (British, Iberia), one NFA (Vueling), plus what may be considered a hybrid (Aer Lingus). AL is almost an NFA on Europe routes, but an FSA on its transAtlantic flights. Probably something must be done with this business model (hybrids do not seem to work in today’s aviation environment) although AL is currently performing well.

At present, Iberia is performing better than British, as Spain pulls out of its economic slowdown and the UK falls following its Brexit decision to leave the European Union.

ICAG does not publish all the measures we track. But we believe AL is growing at around twice the pace it was pre-ICAG, about +10%. But AL is still small; less than half the size of the group’s Vueling. And Vueling is growing faster — probably +18%.

That said, seat factors of both need to be improved — both are around 80%. Does this mean that ICAG does not have the management skill to run NFAs? Vueling is copying Easyjet and Ryanair and flying outside its home (Spain) base — Rome-Malta, for instance. Yet Vueling’s loads are 5–10pts lower than those two.

In addition, British has owned two NFAs (Go, DBA) and sold them both, and Iberia shut down its NFA (Click). Only after ICAG was formed by the merger of British and Iberia was management interested in NFAs — buying Vueling then Aer Lingus. The other factor is that if AL is, or does become an NFA — why have two NFAs when, for instance, Vueling could easily operate all AL’s intraEurope flights?

The big shadow over ICAG is Brexit — the UK’s decision to leave the European Union, probably in 2019.

If, as currently expected, the UK fails to reach agreement with the EU on a trade agreement (which includes aviation) similar to actualities today, AL might be restricted on its UK flights, British will probably be stopped from flying France-US with its Open Skies subsidiary airline (sic; yes, that really is its name). After 2019, a UK airline would likely be limited once again to flying routes just to-and-from the UK, and not third countries.

What to do:

Various options. Convert AL into a LCA (although its name may not be good for that). Or convert Open Skies (which might have to stop flying anyway after UK leaves the EU in 2019) into ICAG’s LCA. At least then its OS name may not seem quite so silly.

Lufthansa, Swiss; LSAG.

Comprising three FSAs — Austrian, Lufthansa, Swiss — and one unworkable hybrid, Eurowings (EW).

LSAG management is doing its task very well — running three FSAs and one hybrid. The problem is that task is wrong! (Somewhat like one of our corporate slogans — ‘Without The Right Analysis, More Data Just Gives A Better Estimate Of The Wrong Thing.’)

We are not sure that LSAG recognises its problems. Through September 2016, seat sales growth was weak for two of its FSAs — Austrian +3%, Lufthansa -1%, Swiss +1%. And EW is not yet clearly pulling LSAG out of slow growth, although its Y-Sep seat sales were +8%.

EW has the potential to be a LCA, but LSAG has mixed the message by adding NFA flights, holiday destinations, charters, some LH FSA replacements. A hopeless mix.

But as a hybrid — part FSA, LCA, NFA, and charter airline — and recently-strengthened with new routes, missions, EW should be growing faster. We think at least +10%. However, its seat factor is a low 80%. We are not sure what it should be, given EW’s hybrid status; 85%?

We find it hard to categorise EW but we think its businessplan will need to be rewritten (although this hybrid-EW is already a rewrite!).

After all, Germany has an 80mn population as a start market (so near 100mn including Austria and Switzerland). Currently, LSAG has left that NFA market potential in its three home markets to Easyjet and Ryanair. UK-registered Easyjet will probably be shut out after the UK leaves the EU in 2019 (including from its big operational base in Geneva), but LSAG should move before that.

What to do:

LSAG needs simply to make EW a LCA to support FSA flights of Austrian, Lufthansa, Swiss, whether short- medium- or long-haul. And it needs to extract from EW what was merged into it — Germanwings, a failed NFA.

It is important to remember that GW did not fail because of its pilot-suicide/murder crash in 2015, but because LSAG did not want it to attract passengers from Lufthansa’s own flights. If management is strong enough — for the well-being of LSAG, not just Lufthansa — then a re-launched/named GW should work.

Given the sad link with the GW name (following that 2015 crash), it must find another name. It should be a neutral one (rather than a link with one market, Germany), and we can think of a few — but will wait for when someone offers us fees.

Qantas, QAG.

QAG comes close to fitting our AG guideline, including selling (precisely, in 2015) 50mn seats. Comprising its Qantas FSA, Jetstar NFA on domestic Australia routes, and a different airline type operating as an LCA on international routes from Australia, but also named Jetstar.

And other Jetstars operating as NFAs. Singapore-based J Asia, J Japan (with Japan Airlines as one of its equity partners), plus the outcome of a inexplicably-bad decision — J Pacific, a domestic airline in Vietnam, despite that name.

JAsia sells around 4.5mn seats annually, JAustralia domestic 14mn, JI 6mn. Others are not reported — we estimate 5mn for JJ, under 2mn for JP.

What to do:

To complete its conversion, QAG needs only to change the name of its Australia-based international operation — sometimes called Jetstar International, although that JI name does not exist. And operate it properly as an LCA according to our definitions. One immediate benefit would be its Europe flights (JI has none), which QAG has abandoned to a partnership with Emirates. That agreement that is so one-sided that we see zero benefits for QAG, and all for Emirates.

Singapore, SAG

A badly-structured mess, comprising FSAs Singapore Airlines and Silk Air, and NFAs Scoot and Tiger. All Singapore-based.

As what seems obvious from running that list of its airlines, there seems little advantage in having two sets of airlines doing the same thing.

SAG argues that they do not do the same thing. SA is medium- and long-haul with some shorthaul routes, Silk is shorthaul routes. Scoot is short- and medium-haul (although conceived as longhaul, and still promising that), and Tiger shorthaul.

Yet these explanatory definitions also illustrate the duplication — which in one case has two NFAs operating on the same Thailand-Singapore route, and Tiger giving up one route, Perth-Singapore, to let in Scoot.

On one route — Singapore-Kuala Lumpur — SA and Silk operate as we propose for an FSA/LCA operation.

What to do:

Silk to become a proper LCA to its SA FSA, which would mean operating medium- and long-haul, not just shorthaul. And for Scoot and Tiger to merge. They are already under a newly-created division, and we believe this will eventually lead to a merger — even if SAG might not call it that.


All small FSAs (call them SFSAs) based in the 28 markets of the European Union (UK expected to leave 2019; applicant countries are Albania, Macedonia, Montenegro, Serbia, Turkey). We take Air Malta as our example; other SFSAs include Air Portugal, LOT-Polish.

If these about-20 FSAs are independently-owned, they have no (profitable) future. One solution is to sell out (such as Aer Lingus into ICAG, Brussels into Lufthansa).

The problem is that few travellers are ready to pay their fares that are necessarily higher than the NFAs for slight service advantages (mini-frills). If the fares are not higher, then the SFSA is losing money when matching or near-matching NFA fares.

If the SFSA is privately owned, the owners will either shut-down or pay the cost of running a ‘trophy’ airline. If state-owned, EU rules do not allow — in most cases in theory — state financial support.

And SFSAs cannot match NFA cost levels because SFSAs’ cost base — as FSAs — is unavoidably higher. And fast-expanding NFAs are offering a wider choice of routes/destinations to the traveller. And thus turning yet more passengers to them, ergo away from the SFSAs.

For us the only other option is as follows:

SFSAs to provide traffic-feed flights for the bigger intercontinental FSAs into their main hubs. So for Air Malta (AM) that would be from Malta to Paris for Air France; to Rome for Alitalia; to London for British; to Madrid for Iberia; to Frankfurt and Munich for Lufthansa; to Copenhagen for SAS; to Zurich for Swiss; and so on.

Of course, most of these routes are already operated, as well as others — such as Malta-Lyon/Marseille in France. Those ‘others’ should continue.

But those main routes we listed are main departure points for most of the medium- and long-haul flights of those intercontinental FSAs.

These flights by Air Malta to Paris, for example, should:

-be frequent; at least 3 daily?

-scheduled to fit timings of flights to main medium/long-haul destinations from Malta; Malta-Paris-New York?

-be tailored to requirements of ‘receiving’ airline, such as Air France. At least on the busiest flight times. To give a crude example, a special/better meal service on the Malta-Paris flight, with croissants and a choice of French wines for example. So that ‘code-share’ becomes more than nominal. And because the idea is that AM flights would replace those of AF on the Malta-Paris route, something else; an AF stewardess for instance on each AM flight Malta-Paris?

-give loyalty-program points to the program of the ‘receiving’ airline, whether One, Sky, or Star.

AM would clearly become primarily a small feeder FSA — and that might be loss of face for the nation, even if such a sentiment should have no value in the business world. The upside is that although AM would be ‘serving’ those bigger FSAs, there would be many of those airlines, and so that would leave it some independence. And, as noted, those ‘other’ routes — Lyon etc — would continue, and more could be added.

To encourage AF and others to drop their flights to Malta, AM would have to be generous with the code-share financial deal. That said, those FSAs are struggling to keep/make many of their intraEurope flights profitable, and might be grateful to offload them to an airline that might be able to make a profit. (Although not if that other airline has created an LCA — the main theme of this study — to operate such FSA-unprofitable flights such as Paris-Malta.


-FSA = full-service-airline. Offering first/business/economy, travel agency bookings, meals/bookings/baggage/cancellations included, etc. As its name indicates — full service.

-LCA = low-cost-airline. (Not a no-frills-airline; see next.) An FSA but with lower operating costs — cheaper longer-hours flight-deck crew, younger/new longer-hours cabin crew, tighter cost control (twinned 3-star hotel rooms, for instance), fewer fare types, which may have first and business cabins, and which allows bookings through travel agencies etc. If relevant, usually similar to the parent airline, but a different name, and competition against parent airline allowed.

  • NFA = no-frills-airline. We believe that among the many essential elements that make a successful NFA are: market freedom in terms of routes and aircraft choice; single aircraft type; where relevant, competition against parent airline allowed; fares that are extremely low when booked at least three months in advance, say US$25; one fare at one time (no wholesale rates, travel agency commissions, etc); no refunds; no service frills; single economy-class cabin; paid seat selection; two toilets for 150-seat aircraft; 25-minute turnaround time; cabin crew do daytime cabin cleaning; name and flight change charged at least US$25 each; no trade shows; plenty of consumer advertising and promotion; and much more.


AG=Airline Group, AAAG=Air Asia, AKAG=Air France/KLM, CAAC=Civil Aviation Administration of China, EAG=Etihad, ICAG=International Consolidated Airlines Group, LSAG=Lufthansa/Swiss, QAG=Qantas, SAG=Singapore.


Murray Bailey is Editor/Research Director of Travel Business Analyst.


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