Will Skybus Ever Leave the Station?

Yes it will, and sooner than many have anticipated. It appears that Skybus will essentially copy the Ryanair model in the United States from its base in Columbus, Ohio. Skybus, which will fly 150-seat A319 aircraft, predicts that their startup operations will commence May 1, although this depends on when they get final approval from the DOT and the FAA. The Columbus Dispatch wrote about Skybus' wait for government approval in a recent article. Initial flights will likely be from Columbus to leisure destinations in Florida, California, Nevada, and Arizona (since most of the customers who want bargain-basement tickets are flying for leisure), and tickets will be priced in the $10-$40 range each way. As the company has hinted at before, Skybus will copy the Ryanair model in many ways. Like Ryanair, the exterior and interior of Skybus aircraft will be covered with advertising, no free food or drink will be provided, flight attendants will sell a range of products on board, much like a retail store, and customers will need to pay to check luggage. Right now, the airlines most similar to Skybus in the United States are Allegiant Air, which makes around $15 per customer in ancillary revenues, and Spirit Airlines, which prides itself on its $.05 cost per available seat mile (excluding fuel), which is far lower than available seat mile for most legacy carriers, which can hover around .08-.10 cents per available seat mile (including fuel). Ancillary revenues are a critical component of Allegiant's revenue stream that helps subsidize Allegiant's low fares. These revenues come from the commissions generated by vacation package sales, revenues from on board food and drink sales, and commissions generated by the sale of other services, such as travel insurance. Skybus, like Ryanair and easyJet, will also try to use alternate airports whenever possible. It's likely that they will initially serve airports such as Orlando Sanford instead of the primary Orlando airport-McCoy, St. Petersburg instead of Tampa, and Fort Lauderdale or another nearby alternate airport instead of Miami. But while this airline seems to be adopting many proven cost-cutting features of the Ryanair model, they are also adopting some dangerous, unproven features which could hurt the airline's reputation. The most notable unproven feature is that the employee payscales will be comparable to a regional airline (in other words, very low). One individual writes about his experiences interviewing for a Skybus flight attendant position here (and some of the information in this post is taken from his accounts). Even Ryanair and easyJet pay salaries in most cases competitive to their legacy peers, and the airline their business model is copied from, Southwest, is one of the highest-paying carriers in the United States (which has enabled the company to retain quality employees, but it could be a liability for the carrier down the road). However, unlike Southwest, Ryanair and easyJet outsource most of their ground and maintenance staff, and their contractors may pay low wages, but the employees who actually work for Ryanair and easyJet (mostly flight attendants and pilots) get paid decently.

The other main concern about Skybus is that they will start services from a relatively small market, and given their rapid and extensive plans for growth, they will be unable to use all 65 of their planes on order from Columbus. Ryanair has been successful in part because its bases are at such large cities that suffer from high fares and poor service by legacy carriers. Not all travelers in a given market will fly Ryanair, but Ryanair has the ability to find their niche in such large markets. Columbus is America's 54th largest market in terms of passengers embarking and disembarking at the airport according to the DOT. (These figures can be somewhat misleading, however, because they include connecting traffic, and some cities like Atlanta, with large hubs but substantially lower origin and destination traffic can skew the figures, but nevertheless, Columbus is still too small a market to be starting an airline in.)Skybus' low fares may be able to stimulate the market and increase passenger numbers, but not as much as many believe. If Skybus were flying from Chicago, they may be able to find more of a niche for themselves, even though they would endure more competition. However, with a market where the largest carrier is Southwest, which already offers relatively inexpensive fares, Skybus may be up against a tough competitor with a strong base of loyal customers in the area. At least on Southwest, you will be able to pay a bit more than Skybus and receive a free beverage and snacks and a free checked baggage allowance, without the pain of being hounded by flight attendants selling cheap goods. Columbus is somewhat underserved by the carriers that currently serve the city, including Southwest, in part because the market in Columbus is so fractured. No carrier has more than 25% of the market in the city (Southwest has about 22.75%), and consequently, there is no hubbing airline to offer nonstop service to many destinations Columbus origin and destination traffic cannot support. And unless Skybus plans on a hub-and-spoke operation, and they haven't given any indication of this so far, then they will serve many destinations from Columbus unsustainably, because even with ultra-low fares stimulating traffic, Skybus cannot sustain service to too many smaller destinations that currently lack nonstop service from Columbus because ultra-low fares can only convince so many people to fly. However, if Skybus is able to deploy their aircraft at other bases, such as Cincinnati, Chicago, Minneapolis, or Dallas, all of which are hub markets that have relatively high fares, then Skybus may be able to survive.

Take one example, Cincinnati. Delta and its regional partners dominate Cincinnati, with over 90% of the passengers that come through the airport. If Skybus entered Cincinnati, they could substantially lower fares in a market with more opportunities for growth than Columbus. If Skybus provided low-cost, punctual flights, then they could potentially capture a share of Cincinnati's lucrative business market as well. There are, however, three big challenges that Skybus will face in Cincinnati, or in most hub markets they enter, for that matter that they don't face in Columbus. First, because Delta has such a large share of the market, they have tremendous pricing power, and if Skybus enters the market, Delta will fight tooth and nail to retain its market share. Skybus may be able to gain some market share, but Delta will pressure Skybus by adding flights and lowering fares in markets where the two airlines compete. This is the most important reason Skybus is staying out of hub cities. Skybus will be attractive to passengers on fare alone, and if a legacy carrier with more amenities matches their fares, passengers will most often fly with the legacy carrier. Moreover, as a startup, Skybus cannot sustain a prolonged fare war for as long as Delta. If Skybus is successful in Columbus, then they may have the awareness among many Ohio consumers, as well as the financial capital necessary to sustain a long fare war, to enter Cincinnati. But, the formation of another base won't be for at least a year after Skybus launches services in Columbus. Second, because Delta has such a large market share in the region, it has a lot of brand loyalty from travelers in the area, particularly business travelers. Skybus' business model doesn't seem conducive to the needs of many business travelers, and as a result, Skybus may struggle to get many business travelers on board. Third, the Cincinnati airport, like many hub airports, is unattractive to low-cost carriers because it gives those carriers higher costs. The Cincinnati airport has high fees for its users, and they may be too high for Skybus' ultra-low-cost business model. But on the upside, Skybus would face no low-cost competition whatsoever, since no low-cost airlines currently operate from Cincinnati. Not Southwest, not AirTran, not JetBlue. I think those carriers have missed a big opportunity; with Skybus adding 65 planes to its fleet, Cincinnati is a good location to use them, but only after Skybus has developed a market in Columbus. In hub cities like Cincinnati, Skybus would certainly face challenges, and possible difficulties implementing their ultra-low-cost business model, but they would find markets with greater growth potential, and with greater monopolies that are keeping fares high.

But if Skybus' management believes that its growth can come mostly or entirely from Columbus, then they could be another Independence Air. Remember, Independence Air thought they had lower costs and more of a market that could be stimulated by low fares in smaller cities than they actually did. Because Independence Air believed this, they offered fares that were too low, which drove their company into the ground. Without more information, I can only suspect that Skybus will head the same direction. However, Skybus could become immensely profitable like Ryanair, if they successfully stimulate a strong customer base with their ultra-low fares and are successfully able to develop their ancillary revenue streams. If they can do those things in Columbus and in other underserved, high-fare markets, then they can be successful, but if they can't, then they will burn their cash and go the way of Independence Air.