More Questions Raised About Skybus's Viability

As Skybus prepares to launch service tomorrow, many questions linger about the long-term viability of the airline. While the company is well-capitalized and well-aware of the competitive landscape it faces, it seems to be headed for trouble. History is littered with airlines that have overestimated the viability of certain markets, and I think Skybus will soon be one of them as I doubt that Greensboro, Richmond, Kansas City, and Bellingham have the traffic necessary to support profitable service. Skybus is trying to avoid markets with a lot of competition with its expansion. Fair enough, but in an extremely competitive marketplace, there are very few viable markets where there is little competition, especially since Skybus is launching services from a city – Columbus, Ohio - served by Southwest Airlines. The markets left with little competition carry greater risks, and may not have enough traffic to support a daily flight on a 150-seat plane. Skybus may be able to sell all the $10 tickets it wants to on these routes, but the measure of a successful airline isn't by the number of loss-leading tickets sold, but by the number of profitable tickets sold. And I suspect that Skybus will fail to impress on this measure.

Unfortunately for Skybus, Columbus is simply too small a market to fly from, especially given the amount of service already supplied by Southwest and Delta. Perhaps Skybus will be able to lower fares enough so customers from other markets will find Columbus attractive, but given the distance between Columbus and other markets, that might be a bit of a stretch. Cincinnati is one of the closest major markets to Columbus, and it's 110 miles away. Granted, Cincinnati has some of the highest airfares in the nation, so some customers might find a switch to low-cost Columbus attractive, but how many business travelers or others with time-sensitive plans will be willing to make that trek? If Skybus were to open new bases of operation in Burbank and Portsmouth, which may occur in the not-too-distant future, then those might be more successful because those airports have more populous catchment areas. Until then, I have serious questions about the viability of the Skybus business plan.

Much of what the plan is based on is this notion that people will fly to anywhere if it's cheap enough. According to CEO Bill Diffenderffer, people will fly from "nowhere to nowhere" for the right price (taken from this Columbus Dispatch article about Skybus's launch). Ryanair has been able to market dozens of smaller cities as attractive destinations because the flights are so cheap. That may make sense in Europe, where many of these destinations are popular vacation spots, but most of Skybus's cities, especially its weaker markets, aren't. Moreover, Ryanair has a huge base of people in London to support its flights; Columbus has far fewer people to support flights with similar-size aircraft. Yes, low fares will help stimulate traffic: For example, many people plan on using Skybus's low fares to visit family members. But families visiting each other don't fill planes. Vacationers do, and on most of its flights, Skybus won't be transporting primarily vacationers. Another element of Skybus's dilemma is the number of tickets that it plans to sell as the last minute. Typically, tickets purchased at the last minute are bought by business travelers who need to fly quickly. Business travelers have historically been averse to Ryanair, and I suspect that they will be to Skybus as well, especially given Skybus's menu of far-flung alternate airports. If Skybus offers punctual, friendly service, then I suspect some business travelers will fly the airline and purchase pricey last minute tickets, even with the drawbacks surrounding alternate airports. But if Skybus offers the American service equivalent of Ryanair, all bets are off. Without a good base of business travelers, it's unclear whether Skybus will have the necessary load factors and yields to make money.

But another issue stems from Skybus's use of ancillary revenues to subsidize the cost of flights. Skybus doesn't plan to generate as much of its total revenues from ancillary sources as Ryanair does. Skybus has the challenge of being the only US airline to charge for all checked bags. While Spirit has tightened their policies in recent months, the carrier still allows customers to check one free bag. Not Skybus, which will charge $5 for the first two bags, and $50 for each one thereafter. It sounds like extortion to me, and I think customers who aren't used to the idea will be turned off. Moreover, Skybus may have difficulty enforcing its policy on food. The airline prohibits customers from bringing outside food or drink onto aircraft in a bid to force more customers to pay for pricey onboard refreshments. However, if that policy is enforced, the airline could be faced with a mob of incredulous customers; even Ryanair doesn't prohibit onboard food or drink just yet.

Skybus has started advertising on planes through a partnership with Nationwide Financial, but Skybus's aircraft advertising program will need further development in order to make it a more important and viable component of the airline's ancillary revenues. However, Skybus's biggest ancillary revenue problem is that the airline hasn't promoted its outside hotel and car rental vendors on its Web site as much as it should. Ryanair has demonstrated that hotel and car rental commissions can add a meaningful amount to the bottom line. But many Ryanair travelers fly to vacation getaways and need hotel rooms and car rentals for their vacations. Skybus doesn't have many vacation destinations on its route map, and consequently won't be able to collect the commissions Ryanair does.

If Skybus wants to succeed, the airline needs to focus on marketing itself. For a new airline, marketing is key, especially given the competitive nature of the business. Skybus is adding a lot of capacity to an already crowded market, and if it can't fill planes, it can't make money. I'm not so concerned about Skybus's fares, since the airline seems to have their fare structure well thought out for profitability, but that strategy will mean nothing unless those tickets are sold. Also, Skybus needs to rethink how it is targeting its ancillary revenue streams, and focus more on hotel and car rental commissions. But that may not come until Skybus's route map is restructured with more leisure destinations. Finally, Skybus needs to diversify its routes away from Columbus. Not in a year, because it may be too late by then. Skybus needs to open new bases in some of its secondary airports (such as Burbank, Portsmouth, Oakland, or Fort Lauderdale) very quickly. If Skybus can do those things, it might have a chance. But otherwise, it will be stormy skies ahead for the startup.