As the Farnborough Airshow takes place this week, we are posting an early analysis of a topic that is top of mind lately - the challenges low-cost airlines appear to be having sustaining the growth levels that built the sector. If you would like to skip to the PDF download of this analysis, you will find it here: https://app.visualapproach.io/research/restarting-low-cost-growth-with-the-small-narrowbody-a-southeast-asia-example

The low-cost airline industry has always faced a dilemma.  At what point will the flywheel of growth reach terminal velocity?

The opportunity for low-fare travel around the world was (and still is) massive.  The growth of economies that allowed the emergence of the middle class created a new scale of travelers entering the market.  Filling this new demand was a matter of scale - rapid growth connecting new cities - a race to catch up with the middle class that had already been emerging for years.

With growth comes real cost benefits:  Ever-increasing scale keeps costs low; rapid hiring keeps labor costs down with a constant influx of new hires - the “flywheel” begins.

But the low-cost airline flywheel cannot continue to accelerate forever.  Ultimately, it must abide by the simple rules of physics and mathematics:  demand is finite.  At some point, the number of seats offered will meet the number of people looking to travel, regardless of price.  The flywheel becomes a growth trap.

This analysis looks at the challenges facing the low-cost airline industry today.  We will look at the more advanced state of the industry in the Americas and apply it to the still-emerging markets of Southeast Asia.

How has the flywheel transitioned into a growth trap for some airlines, but not others?  How can airlines continue to find growth into this rapidly maturing market?  Finally, why is the small narrowbody so uniquely positioned to solve this growth dilemma - and yet so overlooked?

The goal of an airline is simple:  sell seats at prices higher than it costs to fly them.  As oversimplified as the concept may be, it remains the foundation of the airline industry.

While airlines continue to find creative ways to bring in more revenue for each seat flown, they must always contend with seat costs.

It is how the airlines manage seat costs that often creates a vicious cycle that ends in a growth trap.

To minimize the cost per seat, an airline has two basic options:

1. Reduce costs

2. Increase seats

The easiest way for airlines to minimize the cost per seat is not to reduce costs, but to increase seats.  The flywheel accelerates.

Only more seats require more passengers to fill them.  Finding more passengers can be achieved by lowering fares.  Lowering fares reduces revenue per seat, requiring lower seat costs…  The vicious cycle becomes apparent.

And yet, for the past two decades, the seat costs of the larger aircraft were consistently lower than the discounts required to fill the extra seats.  Airlines that started with 140-seat 737-700 and A319 aircraft saw seat costs drop substantially when shifting to the 180-seat 737-800 and A320.  

Later, the opportunity to shift to even larger versions of the same narrowbody family emerged with the 737-900ER and, primarily, the A321.  With this latest increase in capacity, airlines are delivering the lowest seat costs, but now must find up to 240 passengers to fill those seats - a 71% increase in capacity from the original industry growth model.

And still, a further challenge emerges:  for a growing airline, the number of markets available that can support a 240-seat aircraft is substantially lower than the number of markets that can support a 140-seat aircraft.  To sustain growth, fares must be dropped - seat costs must be lowered - aircraft size increases.  The growth trap looms.

The idea that the only reliable way to reduce seat costs is to increase the number of seats was true for decades; however, it is no longer safe to maintain that assumption.  The arrival of the latest generation of small narrowbodies changed the equation for airlines considering sustainable growth.

Both Embraer’s E2 and Airbus’s A220 have upset the traditional economics for growth airlines.  For the first time since the rapid emergence of the modern low-cost airline, overall costs can be lowered without increasing seat costs.

For decades, the obvious - and correct - move was to up-gauge to the larger aircraft.  For the increase in overall trip costs, seat costs dropped further.  Gradually, the industry shifted to the ultimate in seat cost/trip cost tradeoff - the 240-seat A321neo.

Considering this scenario from the opposite perspective, for airlines to shift away from the venerable A321neo would require an increase in seat costs that would far exceed the drop in overall trip costs.  In short, the cons eclipse the pros.  There has been no good economic reason to actively down-gauge aircraft - until the arrival of the E2 and A220.

The latest generation of small narrowbodies has reset the economics of considering the smaller aircraft.  Of course, seat costs are higher with aircraft nearly half the size, but overall costs have now dropped further.  The economics of aircraft selection has shifted away from the decades-long mantra that bigger is always better, back to a consideration of the market size.  

To be certain, the A321neo is an incredibly efficient aircraft.  With 240 seats, no narrowbody aircraft delivers lower seat costs than the A321neo, earning the aircraft a rightful place at the core of low-cost airlines.

And yet, as powerful as the A321neo is as a low-cost machine, it still requires ever-larger

markets to fill the massive capacity.  While seat costs have never been lower, finding new markets for continued growth has also never been more expensive.

The idea of reducing capacity to an A320neo to open new markets simply was not compelling.  At typical fares, a 240-seat A321neo could find profit with 148 passengers.  For the smaller A320neo, this break-even point is lower, but only marginally so at 137 passengers.  For airlines considering growth, the idea of downgauging traded higher seat costs for the opportunity to open new markets in a narrow 11-seat sliver.  Meanwhile, the sheer size of the A321neo offered incredible profit upside.

Now, consider the arrival of the new small narrowbodies.  A 146-seat E195-E2 requires only 106 passengers to find profit at the same fare.  At the same time, the lower costs of the small narrowbody continue to produce higher profits, even in markets that exceed the aircraft’s capacity.  The A321neo would require 193 on-board passengers before earning more profits than the small narrowbody.  Put another way, it is more profitable for airlines to turn away 48 passengers than to upgauge to the A321neo.

Of course, in reality, airlines would add a second flight or adjust pricing to see higher fares on the smaller aircraft rather than send 48 passengers to a competitor - further extending the advantage for the small narrowbody.

But the ultimate success for the small narrowbody is in finding, then growing markets away from itself.  It is in this way that the A220 and E195-E2 are not competitors to the A321neo, but elegant complements.  It is also in this way that the challenges of the low-cost airline, which has limited itself to the large narrowbody, become apparent.

This dilemma of optimizing seat costs with the A321neo while still maintaining growth options becomes immediately obvious in one of the still-fastest-growing regions:  Southeast Asia.  While the advent of the low-cost airline business model was largely a Western development, through pioneers such as Southwest Airlines and Ryanair, it is South and Southeast Asia where the model is finding the greatest opportunity for growth today.  The combination of large population centers, emerging middle classes, and geographic barriers has precipitated the evolution of the region into a strong low-cost growth candidate.

And yet, Southeast Asia is experiencing a rapid slowdown in new market growth.  When considering new markets opened over the past 15 years, the opportunity in the region is apparent. That growth is slowing, not by passengers, but by new market opportunities.

At some level, this is inevitable.  There still remains a finite number of airports between which people want to travel.  At the same time, however, the continued upgauging of low-cost aircraft is accelerating the arrival of this ceiling.  Continued growth remains beyond, just not with 240-seat narrowbodies.  

Further accelerating the growth trap for airlines focused solely on large narrowbodies is a similar challenge:  the markets viable for the ultra-economical A321neo are substantial - large enough to attract competition.  As established earlier, the larger the aircraft, the lower the seat costs, and yet the larger the markets needed to support them.

This acceleration into competing markets has also worked to accelerate the growth trap.  Not only are new markets capable of filling more than 148 seats increasingly difficult to find, but the remaining markets are more likely to already have been discovered by competitors.  As has been discovered by airlines such as Spirit Airlines in the U.S., simply having the lowest seat costs is no longer enough to compete in head-to-head markets.  If the majority of an airline's routes are on large narrowbodies that require head-to-head competition, the exposure to sharp downturns can be existential.  This is how the growth trap eventually snaps shut.

Even in the last remaining bastion of rapid low-cost growth, the opportunities are dwindling.  South and Southeast Asia remain the highest growth regions, and yet new market growth has decelerated at the same time the growth in seat-gauge has accelerated.

The challenge of continuing to find market growth with the large narrowbody is not new.  For developed markets, such as North America, the dilemma arrived last decade when new market growth began to stall.  The trend is extraordinarily similar to Southeast Asia - as aircraft gauge increased, new market opportunities fell.  Yet, North America was early to deploy a solution - the small narrowbody.

The arrival of the A220 at Breeze Airways and the E195-E2 at Porter Airlines restarted a trend of new market growth in two of the most mature markets in the world.  If there were concerns about new market opportunities simply running out due to a highly developed market, it would be apparent in the U.S. and Canada.  And yet, the small narrowbody has reignited market momentum, shifting the trend back to one of accelerating growth, rather than diminishing opportunities.

But this example of using the small narrowbody as the new generation of low-cost growth engines is not limited to North America.  Indeed, Southeast Asia is home to an already successful example of how market growth can be continued, even amid extreme market constraints.

Scoot has been successful in delivering much of the same market growth out of its large Singapore hub. Even with the A320neo, rather than the larger A321neo popular with low-cost airlines, Scoot has found growth behind the pandemic.  That new market growth has fallen away since 2023, particularly for the larger A320.  Even constrained by the airline’s lone hub at SIN, Scoot has continued to find new market growth since its arrival in 2024 by utilizing the E190-E2 small narrowbody.   

Scoot’s market growth also illustrates a second comparison for the utility of today’s small narrowbodies.  Arriving a decade earlier, the 787 offered Scoot economical growth in long-haul markets, which were otherwise unprofitable with larger aircraft.  The concept of using the appropriate aircraft to find consistent growth markets is not new to Scoot - whether that has been through the use of the 787 or the E190-E2.

If North America is a mature market example of how low-cost airlines can continue to find growth with the small narrowbody, Scoot is the example in Southeast Asia.  And this example is not new, as Scoot has proven through its use of the 787 to find new intercontinental markets over the past decade.

From a global perspective, the small narrowbody has disproportionately been the driver behind new market growth.  The E2, in particular, has found utility as the new market pathfinder, with almost half of all routes operated today having been pioneered by the E2 or its E1 predecessor.  

The idea of the small narrowbody to extend the growth of the low-cost sector is not new.  

And yet, however beneficial the small narrowbody has been to the continued growth of low-cost airlines, its use in the rapidly growing Southeast Asian market has largely been limited to Scoot.

From the perspective of the E2, alone, airlines such as Azul, Porter, and Binter Canarias have continued to use the small narrowbody alongside Scoot to find new and profitable growth markets.  AirAsia’s recent order of A220s is the only other example of low-cost airlines in Southeast Asia using the small narrowbody in the low-cost growth pathfinder role.  As the challenges for low-cost growth mount, the opportunity for the small narrowbody only grows.  

The low-cost airline industry in Southeast Asia stands at a familiar crossroads. For decades, the playbook was brilliant in its simplicity: buy bigger planes, drive down seat costs, and flood the market with capacity to capture an emerging middle class. But as the market matures and prime routes become heavily contested, the physical limits of this single-track strategy have become impossible to ignore. The very flywheel that powered the industry’s historic boom is now threatening to lock airlines into a high-risk growth trap.

True efficiency is no longer just about achieving the lowest cost per seat; it is about matching the right capacity to the actual dynamics of the market. The next-generation small narrowbody provides exactly this economic pivot. By dramatically lowering the break-even threshold and slashing overall trip costs, aircraft like the E-Jets and A220 allow operators to bypass brutal, margin-killing head-to-head battles and profitably pioneer entirely new city-pairs.

Ultimately, the small narrowbody is not an enemy of the large narrowbody model, but its necessary partner. Airlines that diversify their fleets to utilize these nimble pathfinders will be the ones to successfully unlock the next wave of Southeast Asian travel demand - escaping the low-cost growth trap.

For a PDF download of this analysis, you can find it here: https://app.visualapproach.io/research/restarting-low-cost-growth-with-the-small-narrowbody-a-southeast-asia-example

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