IAG Starting Budget Long-Haul Airline -- Update

By Robert Wall 

LONDON--The parent of British Airways is joining the race to add supercheap flights across the Atlantic, saying it is creating a Barcelona-based budget carrier aiming to fly between Europe and the U.S. West Coast, including Los Angeles and San Francisco.

The move by International Consolidated Airlines Group SA follows close on the heels of similar bets by other so-called full-service carriers. These legacy airlines are increasingly fighting back after a bevy of budget airlines--mostly European upstarts--have invaded the lucrative trans-Atlantic market, offering cheap tickets, sometimes half the fare of traditional carriers.

That move has represented one of the biggest shake-ups of the U.S.-Europe aviation market in decades. It 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.

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 such as seat assignment and onboard food that network carriers traditionally have included in ticket prices. 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. This time, they are trying to avoid the same mistake with their long-haul operations, which are a key driver of profit.

Air Canada, Germany's Deutsche Lufthansa AG and Air France-KLM SA have all recently launched no-frills subsidiaries that will ferry passengers on long-haul flights at budget prices. Ireland's Aer Lingus is considering buying a long-range version of an Airbus jet to connect secondary U.S. cities from the carrier's Dublin hub.

IAG Chief Executive Willie Walsh has been closely watching Norwegian's progress, in particular. "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.

The push to offer lower ticket 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.

So far, none of the big U.S. carriers that dominate the trans-Atlantic market, American Airlines Group Inc., Delta Air Lines Inc. and United Continental Holdings Inc., have joined the fray. 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.

Write to Robert Wall at [e-mail]

(END) Dow Jones Newswires

December 23, 2016 10:17 ET (15:17 GMT)

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