More About Intra-California Competition

Why are so many airlines entering the intra-California market?

There are a few reasons, but the first is that the intra-California market is growing. California is one of the nation's fastest growing states, and the population is expected to balloon in the next several decades. While this population increase may be unsustainable and incredibly damaging for the long-term health of Californian society, it means big bucks for airlines. As the population increases, the demand for intra-state air travel will increase, and it's much easier for an airline that is established with significant market share on a route to expand to meet increasing demand than for an airline with little or no market share to meet that demand. Also, with the improvements made to San Francisco International to make it more cost-competitive with other area facilities, and along with the new competition being brought by Virgin America, other low-cost airlines are taking more of an interest in intra-state air travel. Also, LCCs that have to find places for new planes would rather expand on the West Coast where fares are higher than on the East Coast, where competition is even fiercer and yields are lower. But the final reason intra-state air travel is becoming increasingly attractive for airlines is because their revenues have suffered recently. Airlines can make more money on short hops than on transcon flights, since the airline can charge higher rates per mile flown for a short flight than for a long one (due to fixed costs airlines incur regardless of the length of the flight, such as landing fees, baggage handling costs, and the cost of using gate and check-in agents.) But, airlines can fly more short-haul flights with a single aircraft than long-haul flights, and efficient aircraft utilization is an easy way to increase revenues. Even though airlines have fixed costs, when many of those costs have been trimmed, then airlines are fighting for revenue, and the revenue equation is better for shorter flights where airlines can fly more flights in a given amount of time with the same plane.

How will airlines compete in this market?

What airlines will be competing on in the intra-California market are three things. The first is price. Flying up and down the state, even on a low-fare carrier, can get expensive, and customers want to minimize the cost of their travel. That will mean that a fare war of epic proportions may occur if or when JetBlue and Virgin America expand services. I wouldn't be surprised to routinely see $29 fares to the other end of the state during this fare war. It's also likely to be a prolonged fare war since there aren't any weak competitors in this market. This means that a fare war will give Californians some great bargains for many months, but it will also hurt the financial health of the airlines.

The second is convenience. This is both in terms of flight schedule as well as airport location. Low-cost airlines need to ensure that they offer enough flights to accommodate business travelers, who typically want flights very early or very late so they can work a full day. As a result, airlines like Alaska and Southwest, which are already established in many intra-California markets and offer a convenient menu of flight times, will have an advantage over other LCCs like JetBlue or Virgin America, which may only offer one or two flights at a time a business traveler would find suitable instead of four or five. Airlines will also have to win the convenience war with the airports they serve. Now that San Francisco is becoming more popular with LCCs, low-cost carriers will be a more viable alternative for business travelers to the legacies American and United from the San Francisco area. It will be the job of LCCs to ensure that they offer flights to a sufficient number of destinations on either end of the state. This is true especially in Southern California. Right now, the Ontario Airport is most ripe for expansion of service, though it's likely that LCCs will increase service at all the commercial airports in the region (excluding Palmdale, which will need a little more time before it can be attractive to LCCs.) Travelers heading to or from the LA Basin want to avoid driving as much as possible given the horrific state of traffic in the region. As a result, many travelers, leisure and business alike, will be willing to pay a bit more for service to a more convenient airport. That doesn't always mean LAX; Burbank, Orange County, Long Beach, and Ontario all offer convenience to a segment of intra-state travelers, and LCCs will need to cater to all of them if they want to win the revenue and market share battles.

Finally, as passengers expect more from LCCs, onboard amenities won't be the battleground, but frequent flyer amenities will. Airlines will try to fill seats, and especially try to lure business travelers, by offering bonus miles (or credits) for frequent travelers. Southwest requires eight round-trips for a free ticket. I suspect that if competition gets heated, Southwest will give customers 1.5 or 2 times the normal credits, giving them a free flight after six or even four round trips. JetBlue will need to improve its frequent flyer program the most. Right now, customers have to fly 12.5 round-trips within California to be eligible for a free ticket. That must change if JetBlue wants to lure business travelers. TV is a nice thing to have, but it's much better to have more free flights. Similarly, Virgin America will need to ensure that its frequent flyer program is competitive with its in-state rivals. American and United will certainly retaliate against LCCs, offering similar promotions to retain their hold on business travelers, and if they seriously retaliate, a frequent flyer promotion could be very effective. Business travelers would rather stay loyal to their current carrier than move to another, and if American and United offer the right promotions, those business travelers won't be going anywhere. If the competition gets really heated, then frequent flyer miles will be another major battleground (in addition to fares and convenience) on which airlines fight for customers.

As competition increases on California intra-state routes, airlines will fight harder than ever for passengers, and in six months to a year is when the results will finally start to show. When they do, there will likely be clear winners and losers. Southwest and United are the two airlines best positioned to succeed, and JetBlue, Delta, and Virgin America, are taking the most risks. But given that this is California, anything can happen, and after the first stage of this battle is over, Southwest and United may be in much worse competitive shape than when it began.

See the post JetBlue Considers Bolstering Intra-California Service for more information on the topic.