Skybus Shutters...

Skybus has become the third LCC this week to fail. The carrier's Board of Directors announced late Friday that due to high fuel costs and a slowing economic environment, the carrier will cease operations effective April 5. The company expects to file for Chapter 11 bankruptcy protection on Monday. While this author isn't surprised at the ultimate fate of Skybus, given that the carrier was predicated on a faulty business model which simply couldn't bring the necessary yields in this type of environment, he is surprised that its collapse happened so soon. Skybus had $160 million in startup capital and burned through much of it rather quickly. However, the carrier still had a fair amount of cash on hand and likely could have continued operating for many months, but its investors probably realized that the company simply couldn't succeed given these market conditions and decided to pull the plug before the losses mounted.

The fact that Skybus decided to stop flying now is a bad sign. The carrier was going to fail, but for it to go under so soon makes me concerned especially about Virgin America, and how willing its investors are to endure the same kinds of initial losses that Skybus, or any new airline for that matter, faced. In this high fuel cost environment, the initial losses any new airline faces will be much greater than under more typical circumstances, and it simply may not be worth it to investors to try and ride out the storm. Virgin America has a much better business plan than Skybus, and is taking the right steps for success, but it's unclear whether the company's yields are sufficient to cover its increasing costs.

What will this mean for customers? Aside from the end of $10 one-way flights, it will mean fewer options to most consumers. The most significant effects may be felt in Skybus's focus city markets, Columbus and Greensboro. These markets will see a reduction in service, and in Greensboro, there is little hope of immediately filling the void. Raleigh and Charlotte have sufficient low-cost service, and the demand simply isn't there for another LCC to step in and replicate Skybus's level of service in Greensboro. It's possible that JetBlue or AirTran could eventually enter the airport, but the service those carriers would offer would be rather limited (service to JFK, Atlanta, and Florida). Columbus, on the other hand, is well-served by Delta and Southwest. While customers may not be able to find the very discounted fares Skybus offered, they will still find cheap fares, relative to other airports in the region, in particular Cincinnati.

But in some cases, fewer flight options may mean no flight options. Skybus's departure will be devastating to airports where the carrier was the only commercial airline serving the airport. Punta Gorda, St. Augustine, Gary, and others are unlikely to see any immediate replacement for Skybus's flights. This isn't a huge problem for most consumers, since low-cost carriers serve larger airports near the minor airports listed above, such as Jacksonville, Fort Myers, or Chicago Midway. But for the airports, some of which offered hundreds of thousands of dollars in incentives to Skybus in order to lure the carrier to their facilities, it will be a major blow.

Customers seeking information on how to obtain refunds or about flight cancellations should consult the Skybus Web site.

In a post tomorrow, I'll discuss some of the potential solutions to this oil mess. These airline failures can't keep happening, because while small carriers may get destroyed, over the long-term, even the legacies with large cash cushions could get in trouble. And the last thing Congress wants to do is offer another giant bailout to the airlines...