This article first appeared in The Edge Malaysia Weekly on May 22, 2017 - May 28, 2017

BUDGET long-haul airlines are not new, and few can claim success in this segment. One of the first was Laker Airways, which developed “SkyTrain” low-cost non-stop transatlantic operation between London and New York in 1977. The long-haul no-frills airline folded after five years.

Then there were the failures of US-based People Express in the 1980s and Hong Kong-based Oasis in the early 2000s, before the likes of Silverjet, MaxJet and Eos, which operated low-cost all-business class airlines. The latter three had their wings clipped between 2007 and 2008.

However, with the implementation of new business processes in recent years and, more importantly, the development of new technology and new aircraft, major airlines around the world are re-examining the economics of long-haul low-cost carrier (LCC) services.

One of the advocates is Scoot, the low-cost, medium- to long-haul arm of Singapore Airlines Ltd (SIA).

According to Scoot CEO Lee Lik Hsin, long-haul budget flights remain the next big thing for the global airline industry and there is plenty of room to grow in the long term.

“Low-cost travel has been around for a number of years now. (Budget) long-haul, however, is only at the start,” he tells The Edge in an interview on Scoot’s newest long-haul aircraft. The 787-8 Dreamliner has been named Mous-Scoot-Ka — a play on the popular Greek dish Moussaka, in reference to the new Singapore-Athens route, which takes off next month.

The plane is manufactured and assembled by Boeing, the world’s largest aerospace company, was handed over to Scoot at the Everett Delivery Centre in Washington, the US, on May 11.

“Many years ago, some airlines tried [low-cost long-haul] and it didn’t really work. But with the new technology and new aircraft like the Boeing 787-8 Dreamliner, airlines are starting to go back in,” Lee says.

He acknowledges that Scoot, which was launched in 2012, is still new to the business, but so are other budget long-haul airlines.

“The growing middle class in Asia, China, India and Indonesia will drive the new demand [for long-haul services], most of which are in the leisure segment, which is exactly where the budget airlines can offer a competitive product,” he says.

It is worth noting that Asia-Pacific is where the long-haul low-cost model was pioneered, with Australia’s Jetstar Airways and Malaysia’s AirAsia X Bhd being the trailblazers.

Still, a key question is whether the successful short-haul LCC business model can be replicated in the long-haul sector.

“Rather than [explain] why the long-haul LCC business model will work, I would say there is no reason why it shouldn’t. Scoot has demonstrated that we can offer attractive air fares to drive demand, yet keep our cost lower than the price,” Lee says.

In the financial year ended March 31, 2016, Scoot reported its first full year of operating profit since commencing operations. The airline reported an operating profit of S$28 million, compared to an operating loss of S$67 million a year earlier.

Passenger revenue increased by S$106 million from 29.1% growth in traffic, while unit cost fell 19%, due to lower fuel prices and a more fuel-efficient 787 fleet.

“Over the past couple of years, the business environment has been quite favourable to us. Fuel prices have been stable at a lower level. Internally, we have seen higher utilisation of aircraft, which helped us to achieve lower unit cost, resulting in profitability,” Lee says.

But moving forward, budget airlines are expected to face some short-term headwinds, as full-service airlines have become more aggressive in pricing, he adds.

“As a budget carrier, the primary proposition is that our air fares must be a lot more affordable. If our air fares are same as full-service carriers, obviously customers will choose the latter ... We have to make our unit cost lower, so that we can price ourselves a lot more affordably,” he says.

Scoot will take delivery of four new Boeing 787-8 Dreamliners this year, which will serve the Singapore-Athens route and another long-haul destination to be announced later this year. Each can accommodate 329 passengers, including 18 in the premium ScootBiz section.

Lee says the airline is entering into its next phase of fleet expansion, preparing for flights to destinations beyond Asia-Pacific, including the four times weekly, non-stop service between Singapore and Athens.

Scoot, which took delivery of its first 787 Dreamliner in February 2015, has 14 Dreamliners in its fleet and six more on order. Each 787-8 carrier has a list price of US$224.6 million (RM974.76 million).

The carrier has a growing network of 23 destinations, including Sydney, the Gold Coast, Perth, Bangkok, Hong Kong, Taipei, Tokyo, Seoul, and Osaka.

It operates the world’s first all-Boeing 787 Dreamliner fleet to medium- to long-haul destinations, while Tigerair offers short- to-medium-haul flights from Singapore on its Airbus A320 aircraft.

Lee is also the CEO of Budget Aviation Holdings Pte Ltd, a wholly-owned subsidiary of SIA, which operates Scoot and Tigerair.

The sister airlines have a combined network in Asia-Pacific of 59 destinations in 16 countries.

Following the integration of Scoot and Tigerair in May last year, the two airlines have been working towards operating their services under the Scoot brand and are expected to complete the exercise in the second half of this year.

Lee says Scoot does not plan to have “too many” long-haul routes and it expects to add one or two new destinations a year.

“After the integration, we will be supplemented by short- to medium-haul, which could give us another two or three new routes a year. So in total, [the enlarged Scoot] could have at least three to four new routes every year,” he says.

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