For many big carriers contemplating the rise of low-cost, low-frill airlines like WOW air and Norwegian (which offer inexpensive flights across the Atlantic that generally and vastly undercut the cost of offerings the big, global players make), there is a feeling of concern at the competition.
International Airlines Group (IAG) — which runs British Airways, Aer Lingus and Iberia — is going so far as to build a discount airline all its own called LEVEL to keep up with the emerging competition. It also invested in the competition — taking a 4.6 percent stake in Norwegian (with several unsuccessful attempts to just buy the company outright, so far).
Delta Air Lines CEO Ed Bastian, on the other hand, is less concerned. As of last Wednesday (May 30), Bastian waved off concerns that the up-and-coming transatlantic discounters might pose a “meaningful risk” to established airlines.
For two reasons. One, the pricing winds are changing — particularly in regard to jet fuel — and that might take a bit out of discounter models. Two, Bastian says they just aren’t competing for the same customers.
The Rising Cost Of Jet Fuel
Bastian said at the Bernstein 34th Annual Strategic Decisions Conference, “I don’t think that fuel prices, for example, are sustainable over time in the ultra low-cost markets. Fuel prices have jumped 50 percent in the last year.”
Smaller carriers, Bastian said, are much more likely to feel that cost on their business model than larger carriers. All airlines, more or less, pay the same price for jet fuel and, as costs go up, discount airlines feel the burn first when they must raise their prices to reflect that. While larger carriers see higher costs, they also have more price tiering — selling more high-margin business class tickets, for instance, and leaning more heavily into business travel as a whole.
Discounters like Norwegian and WOW are dealing with consumers traveling for leisure — not business travelers, by and large — and those customers tend to be much more sensitive to price fluctuations. If flying to Europe gets too spendy, then California, Florida and Vegas are all lovely domestic locations that are often offering up flight deals.
And oil prices, Bastian noted, are on the upswing.
“When fuel prices fell to $30 a barrel, it created a lot of dysfunctional behavior within the industry,” Bastian said. “We all made a lot of money, but it also created a lot of dysfunctional behavior. Fuel prices at $70, $80, even $90, I think, is much more of a sweet spot for the industry because it causes people to think before they put capacity out into the market in terms of how they’re going to be able to afford to price for it.”
Chasing Different Customers
More than price, however, Bastian noted that it is something of a misnomer to really treat Delta as though it is in a direct competition with the likes of Norwegian or WOW. Customers looking to fly discount, he noted, aren’t choosing between Delta and WOW — they are choosing between WOW and staying home.
“Customers that travel on those ultra low-cost carriers are people that, otherwise, would not be flying,” Bastian said. “They take their traffic from the couch into the airplane or whatnot.”
Delta has lower cost offerings — they have economy transatlantic fares that skip things like free checked bags and advanced seat assignments. Passengers, however, do get the bulk of the larger airline experience: free food, beer and wine, and access to Wi-Fi and entertainment. But, overall, the super-economy customer isn’t Delta’s target buyer — and never has been.
Is he betting right? Well it’s certainly the case that fuel prices are on the incline — up a full $10 a barrel in the last seven or so weeks. Discounters can only discount so much through rising fuel costs, which could be concerning.
Is Delta’s CEO judging its customer base right? That remains to be seen. It is the case for extreme discount shoppers — Bastian has a point about not trying to race to the bottom for their buy, because their buy will always be dictated by the bottom price.
But how much air-travel is that really? How many people are looking for the stripped-down flight experience? That figure remains to be counted.