What's going on?
The war for cheap transatlantic airfares is heating up with the launch of Level, a new sister airline to British Airways that will offer low-cost long haul flights between Europe and the US.
What does this mean?
The new airline is part of the International Airlines Group (IAG), which owns British Airways, Spain’s flagship carrier Iberia and other airlines. The launch of Level pits IAG against Norwegian Air, which has aggressively expanded its low-cost transatlantic offering in recent years, as well as smaller rival WOW. It’s about to get crowded up there!
Why should I care?
For the markets: Intense competition usually isn’t good for profits – at least in the near-term.
The proliferation of inexpensive short haul flights within Europe in recent years has led to an oversupply of flights and huge pressure on European airlines’ profits. Until recently, long haul flights have been relatively protected from low-cost competition, but that’s changing quickly. As more and more airlines launch services, it will likely only get harder for them to make profits.
For you personally: Ultra-low interest rates are helping keep down the cost of your air travel.
With interest rates from “safe” government bonds near historically low levels, investors are more willing to fund riskier endeavors, like the airline industry, in the chase for higher returns. In turn, that allows for new entrants, more competition and a pressure on the price of your fares. A similar dynamic is playing out in lots of other areas, like the plethora of content we get to view at a low cost (e.g. Netflix). If interest rates on government bonds were to move significantly higher (as some think they will), there might be a lot less money available for companies to spend without generating more profit.