Alaska Takes a Preemptive Strike on Allegiant

Alaska Airlines announced this morning that it will start nonstop service between Bellingham, WA and Honolulu starting January 7, 2011. The flights are aimed at travelers in the northern Seattle suburbs, as well as those on the other side of the border who may be lured by lower fares from Bellingham as opposed to Vancouver. This move is likely in preparation for Allegiant Air, which is preparing to start services to Hawaii next year from a number of West Coast cities. Allegiant, which has a focus city in Bellingham, has grown its operations in the city considerably over the past several years, without much response from Alaska. This is surprising given that Alaska has been very aggressive at responding to new low-fare competition on the West Coast, including with Southwest in the early 1990s, and more recently with Virgin America. As a result of this passivity, Allegiant has most of the market in Bellingham. However, this move could put an end to Allegiant's advantage. Alaska now realizes the considerable demand for flights from Bellingham, and while the airline may be unable to stop Allegiant from launching new services, or take away much of its market share, Alaska can at least make things more challenging for Allegiant going forward. 

But this is an important development not because of the one flight a day that Alaska will be flying on the route. It's important because Allegiant is evolving from the stage of being a mere annoyance to "mainstream" carriers (legacies and LCCs) to being a real competitive threat. This is not to suggest that this is the first time Allegiant has run up against direct competition. Several years ago, Northwest tried to run Allegiant off a number of routes from Midwestern cities to Las Vegas by offering competing non-stop flights, which ended miserably as Northwest lost lots of money and dropped the routes soon after they started. JetBlue and AirTran also fought Allegiant, and won, when all three airlines served Orlando from Newburgh/Stewart Airport north of NYC. Granted, the situation is not like a few years ago when LCCs were adding planes like crazy and had to dump them in lots of different markets, some of which overlapped with Allegiant's. Allegiant has shied away from competition before, but increasingly, they will be unable to do so, and Bellingham may be a case in point. The airport has been a shoe-in for Allegiant's Hawaii service, but Alaska announced first. If Allegiant responds, it could signal a new competitive aggressiveness by the carrier which needs to fight for market share.

And these days, Allegiant is better-positioned to fight, with better brand loyalty from travelers, as well as a reputation for delivering travel value. The truth of the matter is that customers in this recession are looking for excellent value more than ever. And Allegiant has very low costs, operates to airports close to where many people want to travel, and can offer very low prices for vacation bundles. Frequent flyer programs and lots of flights are important for business travelers. But for leisure travelers, being able to travel cheaply is most important. Being able to do so non-stop, and on a mainline jet (far more comfortable for the family than a tiny regional jet), is a bonus. I suspect Allegiant's Hawaii flights will be a success because of this, provided they can keep their costs low and rely on vacation packages, not simply fares for their revenues (which they have done for their other markets). Aloha Airlines, which served Hawaii from many secondary cities around the West Coast, folded a couple years back. Their yields got hit hard while their operating costs were relatively high (operating high seat-mile cost planes), and they didn't have much ancillary revenue through vacation packages and other sources (relative to Allegiant).

It will be interesting to see what destinations will get Hawaii flights when Allegiant makes the announcement. But be warned that their announcement may invite more competition from Alaska and/or United, and that could set up a heated battle on the West Coast. However, unlike several years ago, Allegiant can win these battles if travelers continue to trade down and if it focuses on markets where legacies and LCCs will have a tough time competing against infrequent, bare-bones, and inexpensive service.

Three Carriers Report Results--And A Note About Checked Luggage Policies

Alaska Air, US Airways, and JetBlue all reported first quarter earnings today. Alaska and US Airways reported quarterly losses, whereas JetBlue reported a profit, albeit a small one. The results were hampered by fuel hedge losses recorded in the quarter, though most carriers have detached themselves from most of their fuel hedge obligations, so in future quarters these losses will diminish (assuming the price of oil stays low). The results were a bit better than expected, and a promising sign for the upcoming summer months.

I wouldn't post about these earnings, because I don't have too much insight into them, except for one thing I found interesting in the results of both Alaska and US Airways. Both carriers used the date of their earnings releases to announce revisions to their baggage policies, and both policies will ultimately result in greater revenue for each carrier. US Airways will offer the option of online payment for checked baggage fees. If a passenger chooses not to pay online, there will be an additional $5 fee at the airport. Alaska will add a $15 fee for a first checked bag, bringing it in line with legacy carriers, though distancing itself from Southwest, which currently permits passengers to check two free checked bags. However, the nature of these moves differed.

US Airways added an additional restriction in their policy without adding any value to it whatsoever. Customers that had checked bags before for $15 or $25 will now have to pay more if they don't pay online. Not only is there no value added, but ostensibly, there is no reason why US Airways needs to add this charge now. The summer travel season is coming, meaning higher revenues, and fuel prices are at low levels. The economic crisis has been hurting airlines for the past several months, and though it's not clear things will get much better anytime soon, the business travel environment doesn't seem to be getting significantly worse. A more reasonable policy that would have added some value might have been to add the charge, but then offer customers who pay online a discount on the bag fee or bonus frequent flyer miles for the first few months. That way, US Airways could have seen whether the charge would be added by other carriers and either retreat from it if they were at a competitive disadvantage, or get rid of the discount after other carriers had added it.

What this new policy indicates is US Airways' aggressiveness to nickel and dime its passengers. In a similar move to add a new fee without adding any benefit, US Airways added fees for onboard soft drinks several months ago. The carrier was forced to retreat from this policy after the charge wasn't adopted by other carriers and frequent flyers complained. Nevertheless, US Airways is basing its survival on being able to charge customers for added services, and will continue to try and take the lead in adding new fees and charges in order to raise ancillary revenues without giving customers anything in return.

Contrast this with Alaska's new policy that will charge customers $15 for a first checked bag. What is interesting is that, although Alaska may be putting itself at a competitive disadvantage against Southwest, the carrier is offering their customers something for that extra fee--namely, a $25 discount off future travel or bonus frequent flyer miles if a customer checks in a bag and it arrives at the carousel more than 25 minutes late. Yes, customers are paying for a first checked bag, but at least the carrier has made an attempt to save face, to offer a perception of value even though the value of discounted travel certificates and frequent flyer miles awarded under this policy will be far far less than the new bag revenues collected.

Adding ancillary fees does not mean that airlines cannot do it in a customer-friendly manner, where customers feel that they received something extra for a service that was previously free, even if that something extra is only a nominal cost to the airline. This is something Southwest might want to take note of. Southwest could still maintain a consumer-friendly image even while moving to make itself competitive with other carriers. They are the ones that are putting themselves at a disadvantage, by having to match the fares of their competitors without the lucrative ancillary revenue streams their competitors use. I wouldn't be surprised if in the not-so-distant future, Southwest adds some limited new fees, though not necessarily for checked bags. Perhaps when they report Q2 earnings, airlines seem to like to appease their investors that way...

How Low-Cost Carriers Should Approach the Impending Consolidation

While much of the attention surrounding the merger frenzy in the industry right now has centered on legacy carriers and their many possible combinations, low-cost carriers are also very much in the fray, and could be important instigators of consolidation. There are several reasons for this. The first is that many LCCs are seeing their costs rise after years of solid cost containment. Older aircraft, more senior employees, as well as rapidly rising fuel costs are challenging LCCs. At the same time, many of these carriers recognize that there is relatively little "fat" to trim. These carriers have minimized staffing, fuel, airport, and other costs, and unfortunately, unless they were to convert to a Skybus-style business model (which, even then, doesn't yield tremendous cost savings), can't pare their costs much more.

Second, many of these carriers are smaller than the legacy carriers they compete with (with the notable exception of Southwest). Smaller carriers often lack the economies of scale that larger carriers have, and the even larger legacy carriers that could be created after a merger frenzy will have economies of scale that LCCs will simply be unable to match.

Third, many of these LCCs recognize that their business model has limited growth opportunities. Point-to-point domestic routes simply don't cut it anymore. To attract travelers and keep expanding, airlines need to offer connectivity with smaller aircraft (such as with Frontier's Lynx operation, or Alaska's longstanding partner Horizon Air), or they need to offer additional international service (as JetBlue and Spirit are doing in the Caribbean). Legacy carriers will continue to expand the diversity of their networks, and low-cost carriers, with their obvious fleet and cost constraints, will struggle to match them.

At a time when international growth, not domestic growth, will lead to higher profits, many low-cost carriers need to seriously think about how to offer more service options to customers. Spirit and JetBlue are looking towards Central and South America, Frontier towards Canada and Mexico, and Southwest towards unnamed international destinations. But even with this expansion, it misses the big prizes of Europe and Asia, which LCCs, in their current form, will be unable to serve.

The question is, though, whether a low-cost carrier would merely get bought out by a legacy carrier, as is quite possible, given that certain legacy carriers could otherwise get left out of the consolidation frenzy (like American and US Airways), or whether two low-cost carriers would merge together. I would suggest that the latter option is less likely, but possible. Since many LCCs have distinctive cultures and brands that they want to maintain, as well as a low cost base, it would be challenging to find a pairing of low-cost carriers that fit together very nicely. While there are certain scenarios that would be possible in this regard, they are limited in scope.

One brief example: I think Aloha Airlines is good takeover bait for Southwest or even Alaska, since both Southwest and Alaska are interested in Hawaii expansion, all three carriers operate 737-700s, and both Southwest and Alaska offer considerable service to the continental US from the smaller West Coast airports that Aloha serves, such as Sacramento, Oakland, and Orange County. However, Aloha is a relatively small carrier, and the acquisition of it by Southwest or Alaska would do very little to reduce either company's costs and instead be more centered about expansion.

A buyout of a low-cost carrier by a legacy carrier, would, however, be a way to add capacity to the network of a legacy carrier, even though it could destroy the brand of the bought carrier. This scenario is imperfect as well, since legacy carriers are focused mainly on improving efficiencies and yields on international routes, not the domestic ones where LCCs chiefly fly. The acquisition of a low-cost carrier would be to a legacy carriers' minimal advantage, unless that low-cost carrier had a certain degree of market share or pricing power in a key market.

For instance, while neither of these scenarios are in any way likely, a buyout of Frontier by United would give United an even greater degree of pricing power in Denver. The same would be true with a Delta buyout of AirTran, again, an unlikely possibility. Moreover, both these scenarios raise certain regulatory issues, since the Department of Justice is active in trying to prevent significant market power by one airline in any given market. However, I would argue that certain markets are large enough such that this wouldn't be a significant issue. Moreover, the unification of both carriers could create benefits for the customers of both companies by expanding route networks and flight schedules.

But if legacy carriers are focused on international growth, why would they want to expand their domestic networks, which would be inevitable with the takeover of an LCC? The main reason is to increase market share, particularly in critical markets of strategic importance to the company, where there are large concentrations of higher-yield travelers. Is there a merger that would do these things? I know of at least one, between United and JetBlue, which is detailed in this post. This is not to suggest that other merger scenarios are unthinkable, for all low-cost carriers are quietly discussing various merger scenarios and how they want to play a role in the upcoming consolidation, but I would suggest that the most attractive merger scenario involving a low-cost carrier is between United and JetBlue.

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MaxJet Applies for Seattle-Shanghai Service

In a surprising move, MaxJet, the all-business class airline currently operating routes between London and JFK, Washington DC, and Las Vegas, announced that it has applied for the rights to serve Shanghai with nonstop service from Seattle/Tacoma and one-stop service from Los Angeles starting March 25, 2009. If approved, the service would be the only nonstop service between the Pacific Northwest and Mainland China. Given the increasing trade ties between the two regions, it was only a matter of time before an airline announced that it would apply for new service in the market. However, it's interesting that MaxJet would apply for this route, instead of a more secure route to another Asian business capital like Tokyo, given that this would be its first trans-Pacific route. Moreover, the fact that MaxJet would choose to operate the Seattle-Shanghai route nonstop instead of the Los Angeles-Shanghai route, which is larger, and has more premium traffic is puzzling at first. But one possible reason MaxJet wants to operate from Seattle instead of Los Angeles is because the 767-200 ER planes that the company operates may have insufficient range to safely make the journey nonstop between LA and China. However, operating the trip from Seattle would shave an hour or two off the projected flying time, which could make the difference between enabling MaxJet to safely operate the route nonstop or not.

MaxJet may have reasoned that even though the circumstances aren't ideal, since Seattle cannot necessarily support the levels of premium traffic that MaxJet needs to be profitable (even with a fair number of companies that do business with China in the region), it's best to try to get in on China routes as soon as possible, so when the company acquires aircraft that can handle longer journeys, MaxJet will already be an experienced airline with service to China which could help its chances in winning additional China routes. Currently, the DOT is interested in helping cities that lack nonstop service to China by US airlines gain China service. Seattle is one of the largest and most significant US markets that currently lacks nonstop service to China, so even though MaxJet will only offer business class service on the route, it could still be attractive from the DOT's perspective, as the agency tries to cater to the needs of the business community in Seattle which has been hankering for nonstop service to China for many years now.

Unfortunately for Seattle-area residents like myself, I think nonstop service to China will have to wait a bit longer. While the MaxJet proposal does open up a new market, there are a number of drawbacks that I think will kill the proposal. MaxJet isn't large enough to facilitate connections through Seattle that other legacy carriers can (although this could change if MaxJet develops specific partnerships with low-cost carriers at the airport, such as Alaska). Moreover, the company doesn't have a lot of operating experience, and is still considered by some to be a fly-by-night operation in part due to their inconsistencies in operating their Washington Dulles route, where flights were often canceled or rerouted and service was eventually suspended this past winter. MaxJet will need a few more years of solid operating experience with no major breakdowns to change this perception. Finally, the carrier won't offer the variety of service to China that people need. Not everyone wants to fly on business class, and legacy carriers can offer a variety of service standards to customers, unlike dedicated business class carriers like MaxJet. I think it's possible that MaxJet could get the route, but I think other legacy carriers stand a better chance this time around.

I'll be writing more on the recent flurry of China proposals in the coming days, so stay tuned!

Alaska to Hawaii, Is It the Right Market for the Company?

Alaska Airlines recently announced its Hawaii schedule, and it looks like the airline is headed into a competitive battle. Alaska will fly Seattle to Honolulu, a route dominated by Northwest and Hawaiian Airlines, and Seattle to Lihue, a route which currently has no nonstop service, but does have convenient connecting service from Hawaiian and United. Alaska will also fly Anchorage to Honolulu seasonally, a route once flown by Northwest. I think Alaska may do well on the Lihue and Anchorage to Honolulu routes. The Anchorage route, especially, could command very high premiums, as travelers desperate for some sun want to avoid lengthy connections to the Lower 48. However, I'm concerned about Seattle to Honolulu. The market is already very crowded, with Northwest operating the route on larger 757 planes as well as Hawaiian operating the route with 767 twin-aisle planes. It will be difficult for Alaska to compete with those two carriers, who are both very aggressive in their pricing, and can be because they have the capacity that helps reduce available seat mile costs. Alaska will operate the route with 737-800 aircraft, which are efficient, but which have higher seat mile costs than the larger planes used by Alaska's competitors.

Hawaii is a tough market to make money in, because yields are very low, especially from cities on the West Coast. Specifically, Honolulu and Kahului are the toughest markets because they are the largest, and have the most low-fare competition. Smaller niche markets like Kona or Lihue attract fewer passengers, but higher yields, because there is less low-cost competition, and passengers on the mainland are typically willing to pay more for a nonstop flight to one of these smaller markets than for a flight connecting in Honolulu. Two airlines dedicated to Hawaii service, Hawaiian and Aloha Airlines, were both in financial trouble recently, and these airlines have had to streamline their operations in order to achieve profitability in part because yields are so low. United and Northwest are also major players in the Hawaii market. Alaska will have to compete with several large, established players on routes between Seattle and Hawaii, and I'm unsure whether the airline will really be able to survive on these routes.

What Alaska is counting on is connecting traffic, especially for its Seattle services. Alaska's sister carrier, Horizon Air, offers a wide array of routes which can facilitate passengers who want to connect to Hawaii flights. This presents a challenge for Alaska. On one hand, Alaska will be able to charge higher prices for its services, since connecting flights, particularly from the small markets where Horizon flies, can generate higher fares. But on the other hand, it's a risky strategy for the airline because passengers may avoid connections altogether. Alaska will not only have to attract passengers from the Seattle area, but also in many of the smaller markets it flies to, and so the route will need to be marketed well in these areas. Moreover, the connections must be convenient for passengers. Many of Alaska's smaller markets are serviced by other carriers which also offer connections to Hawaii flights (such as United or Delta), and other large markets have nonstop service to Hawaii only a two to three hour drive away. Given the high price of flying and driving, would customers rather drive three hours to a larger airport (such as Seattle, Portland, or Vancouver) to get a cheaper nonstop flight, instead of driving to their local airport to take a more expensive connecting flight? If customers were to avoid connections, it wouldn't only be about price. Connections, especially with all the hassles of air travel today, present a risk for customers. Alaska only has one flight a day on its Hawaii routes, and if a customer misses his or her connection (or his or her baggage does), then that could cost that customer hundreds or thousands of dollars, plus a day of that person's time. That's something many passengers don't want to risk with their hard-earned vacations. Alaska has been planning Hawaii flights for several years, and so they're ready to do battle with their competitors, but the airline will certainly have a tough fight ahead.

Will Skybus's Launch Provoke Other Airlines to Add Fees?

Skybus's launch has been getting a lot of attention in the past few days by a range of national media (such as this column in USA Today). But much of the coverage has not centered on Skybus's new routes or the opportunities it presents for smaller, underutilized airports. Rather, many news outlets have focused on what Skybus is not providing, at least, not for free. Skybus plans to charge for virtually any extra passengers need, short of using the restroom. And since this is a revolutionary idea in the States, it is picking up a lot of media coverage. But it begs the question: Will other carriers consider adding more a la carte amenities in a bid to raise revenues? If fares continue to remain relatively low, LCCs will need to find more ways to make money, and ancillary revenue streams are the easiest, cheapest, least risky way to accomplish that goal. Low-cost carriers have seen their costs rise in recent years. Many of them have new fleets which are now getting older and which require more costly maintenance. Also, many LCCs have labor agreements that are becoming more expensive to maintain, since many employee groups are looking for higher wages and more profit-sharing. When airlines first start out, employees typically get paid quite little relative to their counterparts at other airlines. But as they gain experience and seniority in the company, many employees receive pay increases, and that costs LCCs more and more money each year.

And with fares increasing very little, airlines are trying to figure out how to raise more revenues. Food and beverage sales is one idea that hasn't been fully exploited by LCCs, something Skybus will try. It's probable that other LCCs will start cracking down on some of the free snacks they are handing to customers, and may charge customers for the treats. Also, some LCCs may start charging customers for beverages, a move that could be very profitable, since beverages typically can be sold at high profit margins and many passengers find themselves dehydrated inflight. Moreover, most US LCCs have excess baggage fees that are similar to legacy carriers. Only Spirit has taken steps to remedy that, but even that carrier still allows customers to check one bag for free (although this will soon change, and customers will need to pay for all checked bags for reservations made after June 19). LCCs, especially those aiming to have a tighter grip on their costs, including Southwest and AirTran, may crack down on their checked baggage policies. While most US LCCs offer hotel and car rental reservations on their Web sites, and collect commissions from sales, they don't advertise these outlets very well on their sites and airlines don't appear to be focused on offering customers a good value for all their travel needs. Airlines typically make it difficult to purchase a flight, hotel, and car rental in one search, since hotel and car rental reservations are often kept on separate pages on US LCC sites. And many of the hotel and car rental partners airlines contract with offer lower rates at their respective Web sites, and if airlines want customers to book hotels and car rentals through them, they need to ensure that customers are receiving the best deal. Also, Allegiant and Skybus are the only two LCCs to charge for the privilege of boarding early. Allegiant offers advance seat assignments for an additional fee, and Skybus offers early boarding with no seat assignments. The revenue from these services costs very little to obtain, and if it improves a customer's comfort level on a given flight, people will pay it. Other LCCs, including Southwest and AirTran may charge for early boarding in the future. It's an extremely profitable and easy-to-implement revenue stream, more so than any other ancillary revenue stream, and LCCs would be foolish not to utilize it with LCCs so desperate to raise revenues. LCCs may also add fees for the use of their in-flight entertainment systems. AirTran, for example, offers customers satellite radio at every seat, and customers can hook up to it for free (assuming they have their own headset). However, AirTran would be an ideal airline to charge customers for the use of that entertainment because it doesn't market itself primarily based on entertainment like JetBlue and Frontier do. Even if customers were only charged $2 or $3 on a flight, that could still raise hundreds in revenue that AirTran otherwise wouldn't receive.

Even though customers prefer airlines that provide free amenities, it simply doesn't make sense for LCCs to do that in a stagnant revenue environment where legacy carriers are much more cost-competitive than they were several years ago. LCCs need to find ways to raise additional revenue, and in the wake of Skybus charging for many of these previously free services, the airline has paved the way for many other LCCs to start doing the same. As customers get used to paying for checked luggage, seat assignments, or in-flight sodas on Skybus, then other airlines will have fewer difficulties getting customers to accept these new fees. LCCs that market themselves primarily on the basis of low fares, such as Southwest, AirTran, Spirit, and Alaska (which, to be quite honest, is hard to classify as either an LCC or a legacy carrier), are the most likely candidates to implement these new fees. LCCs that attract customers less on the basis of fares, and more on the basis of their amenities, including JetBlue and Frontier, will be less likely to adopt some of these ancillary revenue streams because they could hurt their brand and discourage airline loyalty. While more fees may be one more hassle customers will need to deal with when flying, greater adoption of more ancillary revenue streams, including fees as well as commissions, may enable many LCCs to continue making money in the face of higher costs and marginally increasing fares.

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.

JetBlue Considers Bolstering Intra-California Service

In light of recent announcements that competition may be heating up on intra-California routes, JetBlue CEO David Neeleman announced at the company's annual shareholder meeting today that JetBlue is considering adding additional flights on routes within California. While Frontier has announced its intention to withdraw from the San Francisco-Los Angeles market, Delta announced additional flights from its Los Angeles focus city today to Oakland, Sacramento, San Francisco, and San Jose. The new Delta flights will be operated with regional jets by a feeder carrier, ExpressJet. Moreover, Virgin America is also set to enter the intra-state market within a few months with new flights between San Francisco and Los Angeles as well as San Diego. Southwest, Alaska, American, and United are also major players in the intra-California market.

As the competition in California heats up, JetBlue is making a choice whether to size up its operations or whether to withdraw from the intra-state market. In a competitive environment like this, customers must know which airlines carry passengers within the state. Even though JetBlue is a well-known brand, many Californians don't know that JetBlue currently offers intra-state service. With increasing numbers of flights on more and more airlines, passengers are increasingly less likely to choose JetBlue unless the airline offers more flights and attempts to grab a larger slice of the market. JetBlue currently flies between Long Beach and Oakland as well as Sacramento. JetBlue is considering starting intra-California flights between other airports, and will need to do so in order to survive in the competitive market. JetBlue has an advantage over some of its competitors, since its Embraer 190s, which might be used if the airline expands in California, enable the carrier to offer greater frequencies on many routes, making JetBlue more attractive to time-sensitive travelers. But if JetBlue can't expand on routes within California, it needs to withdraw from the intra-state market entirely, because otherwise JetBlue will end up like Frontier, with a solid brand, but with little awareness among customers that it flies intra-state.

But this convenience must be carefully thought out. JetBlue is also entertaining the possibility of starting intra-state flights at Los Angeles International. While this would help JetBlue attract some business travelers, it would also put JetBlue into direct competition with Southwest, which is something JetBlue has tried to avoid during its expansion. Southwest already has a very large operation at LAX, and it might be difficult for JetBlue to gain a foothold at the airport. Competition, combined with the difficulties some airlines have had with the airport authority about significantly higher terminal rental costs, may keep JetBlue away from LAX, at least for now.

However, if JetBlue does expand intra-California service, the airline will inevitably face competition from Southwest, due to Southwest's massive presence in the state. JetBlue can compete with Southwest, since JetBlue offers more amenities and comparable fares, but given the convenience Southwest offers customers (flights on many intra-California routes are often every hour), and the fact that on a one hour flight, amenities aren't too important, customers may stick with the established carrier. It's not just JetBlue that will have trouble breaking into the intra-California market, Virgin America, even with its amenities and flashy brand, will have difficulty attracting customers.

As a result, JetBlue will have its hands full if it decides to expand into more intra-California routes. However, the rewards for success will be lasting, since the market has a lot of long-term potential. JetBlue needs to be careful if it expands in California, but the airline has the potential for success if it exploits its strengths (like its Embraer 190s), and minimizes its weaknesses (like its frequent flyer program, which needs to be improved to be made more attractive to business travelers). There is no reason why Southwest should dominate the low-fare market in California, and JetBlue may exploit the opportunity it has to change that.

See the post More About Intra-California Competition for more information about this topic.

Frontier Announces Termination of San Francisco to Los Angeles Service

Frontier announced that it will terminate its San Francisco to Los Angeles service in July. Frontier will also end its service between San Francisco and Las Vegas at that time. Frontier has faced an uphill battle in the San Francisco to Los Angeles market ever since it announced service almost exactly a year ago (Frontier announced it was backing out to its employees one year and one day after it announced service), because the airline has had to compete against established carriers in the market including American and United, each of which has a loyal contingent of business travelers backing them. Frontier had difficulty getting business travelers, the largest and most profitable group of travelers on the route, to switch their loyalty and fly Frontier, even though Frontier offered extensive mileage rewards and more amenities (such as television) than legacy carriers.

Frontier hoped that it could succeed in the market because it would be the only low-fare airline flying the route, and that business travelers looking for a cheaper ticket would utilize the new service. However, stiff competition, not only from legacy carriers, but also from low-fare carriers which operate the north-south intra-California route from a variety of alternate airports, prevented Frontier from being more successful on the route. Frontier had to face competition from Southwest, JetBlue, and Alaska, all of which operate intra-California flights from alternate airports such as Oakland, Burbank, and Long Beach. But competition wasn't the only factor that hurt Frontier's viability on this route. Part of the reason Frontier failed is that it did a very poor job marketing the route. If Frontier wanted to fill planes, it needed to inform passengers that it doesn't just offer service to Denver, but rather to the other end of the state as well. Since most travelers in California know very little about Frontier, given the sheer number of airlines that fly within and to/from the state, it's no wonder that Frontier's service failed. If Frontier was serious about succeeding on the route, it would have launched a marketing blitz to promote the service. Unfortunately for Frontier, their marketing was drowned out by that of other airlines.

However, the failure of the San Francisco to Los Angeles flights should not be taken as a sign that Frontier's point-to-point flights between Mexico and certain California cities are failing. Frontier has succeeded in finding a niche for these flights, and they seem to be successful. Frontier is considering expanding its point-to-point flights between cities in the US and Mexico, and quite frankly, that would be a better use of resources than trying to expand on a route that's already very crowded. Frontier has found its niche with Mexico flights, and it should exploit it as much as possible. Frontier can charge more for the convenience of nonstop flights, and there's less competition on Mexico routes than on most point-to-point routes within the United States. Hopefully, after this failure, Frontier will think harder about where it plans to deploy its planes. It's likely that the Embraer 170 planes on the SFO-LAX route will be redeployed either on regional routes or on longer routes from Denver, perhaps to Canada or Mexico. If Frontier is smart, it should try to find its niche and avoid routes that are already full of competition. That means finding cities that are unserved, or underserved from Denver, and expanding to them.

Frontier's best hopes for expansion right now are in Denver, as it tries to expand its regional operations and create hub with a diverse set of flights, making it more useful for customers. Frontier's Lynx subsidiary shows promise that Frontier will be able to successfully diversity itself because there are many regional markets near Denver which are underserved and which present opportunities for Frontier to quickly gain market share against United. Hopefully Frontier will exploit Denver more before focusing on other markets where the airline is far less well-known and faces a higher probability of failure.

Does this mean that Frontier should stop adding new point-to-point services? No, because Frontier will need to expand from Denver eventually. While the airline may not open a full-fledged hub in another city, Frontier will probably open new focus cities with point-to-point flights within the United States. Frontier tried this in Los Angeles a few years ago where the airline got hammered because it was one airline operating just a few daily flights against competitors that had dozens of flights and far better name recognition among consumers.

Frontier is trying to open a new focus city in Memphis, which I think may be successful. Frontier has found a new market with relatively little competition (Northwest is the only airline with a significant number of flights in Memphis) and an unmet demand for service to some leisure destinations. If Frontier is able to market itself better in Memphis than it did in California and gain a following in the market, then I predict its new flights will succeed. Frontier's Memphis experiment could be indicative of the next wave of Frontier's growth. Since the airline will need to find markets outside of Denver to launch new routes, Frontier would be wise to add markets like Memphis that have competition from relatively few airlines, but also where Frontier has the potential to grow the market and gain market share simultaneously. Other markets in the South, such as Birmingham or Raleigh-Durham might also be appropriate Frontier focus cities, depending on the success of Memphis.

Frontier is making the right choice to exit crowded markets where it can't distinguish itself. Instead, the airline should find niche markets, which it can do with point-to-point flights between cities in the US (outside of Denver) and Mexico, regional flights to underserved destinations from its Denver hub, as well as focus cities which have relatively little competition, but big promise. If Frontier can focus on these three areas, in addition to adding frequencies on current routes, the airline should have a better future with fewer failed routes and a more comprehensive network.

How Changing Airline Demands Will Transform Regional Jet Utility

Now that Midwest Airlines and ExpressJet have made new commitments with regional jets which differ from traditional hub-small market routes, other airlines may have to be more creative with how they deploy their regional jets (or those of the regional lift providers they contract with). Airlines have been cutting regional jets from their fleets, specifically 50-seat and below jets, in an effort to cut costs. 70-seat regional jets, however, are still popular with airlines because they have better economics than 50-seaters, and it's unlikely many will be redeployed in the next couple years. Many of the 50-seat and below regional jets which remain will be used to fly traditional hub-small market routes which are still profitable, even with high fuel prices. However, some of the jets may also be used to start new point-to-point routes, similar to what ExpressJet is doing. Regional jets are well-suited for a couple of applications which will become more important to revenue-conscious airlines in the coming years.

First, regional jets offer a good way to deliver small amounts of capacity to in order to facilitate connections at focus cities. For example, Delta is building their Los Angeles operations, and has been adding an increasing number of flights to Latin America. And while Delta has a sizable operation in Los Angeles, and nonstop flights from LAX to many cities, particularly on the East Coast, Delta has stayed away from competing with the three big boys on the West Coast routes, Alaska, United, and Southwest. But Delta announced new regional jet service to begin June 7 from Seattle and Portland to Los Angeles. The new service will be operated by the former Delta subsidiary ASA (now part of SkyWest Airlines). Both flights depart early in the morning and return in the evening, timed perfectly for connections. Why did Delta add these flights on a regional jet which is far more inefficient to operate than a 737 which Alaska, United, and Southwest all operate? Primarily in order to facilitate connections at LAX for Latin America flights. Delta recognizes that in order to be successful on any route, it needs to maximize the amount of potential traffic that can utilize it. And while LAX has a lot of origin and destination traffic which will help sell tickets, O+D traffic alone won't fill planes. But LAX is a poor connection location, particularly on Delta's route network, since most of Delta's services from LAX are to the East Coast. With Delta's large Atlanta hub, passengers on the East Coast can easily connect to most of the same Latin American destinations they serve from Los Angeles nonstop from Atlanta. These passengers don't need to travel to Los Angeles. And so as a result, Delta needed to find ways to get passengers onto their LAX-Latin America flights, and connections to the Pacific Northwest made perfect sense. Delta isn't trying to compete for market share with Alaska, United, and Southwest on the Seattle/Portland-LAX route, that would be lunacy with a 50-seat regional jet. Delta is simply using some regional jets which would otherwise sit empty on the ground to expand their route network and to gain market share on routes to Latin America. The regional jet flights themselves may not be profitable, but Delta should make money because most of those passengers who travel from Seattle or Portland will continue on to Latin America, enabling Delta to charge a higher fare and make a profit overall. Finding niche applications for regional jets can be tough, but Delta's idea to use the aircraft to add capacity between large markets in order to facilitate connections should work well, provided there is sufficient demand for travel to Latin America, especially during the upcoming hurricane season.

Secondly, regional jets can also be used for starting point-to-point service, in the spirit of ExpressJet, to build up service from various markets. The excellent characteristic about regional jets is that they can be used to quickly build up service in a market to gain market share, and can be used to operate nonstop flights to many different cities, although its costly to do so, especially when competing against an airline using mainline aircraft. For example, in a city such as Omaha, regional jets could be used effectively by a lift provider contracting with a major airline to add service to a variety of cities unserved by mainline carriers. Service from Omaha to cities such as Seattle, Portland, San Jose, Austin, Raleigh-Durham, Indianapolis, and Richmond could enable an airline such as Northwest to build market share in Omaha without using precious mainline aircraft. Granted, Northwest would probably sell tickets at a premium to other airlines offering connecting service, but it would offer loyal customers more options for point-to-point service. And since those who are most likely to need nonstop service are business travelers, who already pay a premium for tickets, it could be a win-win situation, provided routes are carefully selected, and flights are timed to the needs of business travelers. This kind of service wouldn't facilitate many connections, it would simply offer nonstop service where none currently exists. Actually, Northwest has tried something similar to this in Milwaukee and Indianapolis, with mixed results. Both of those cities lacked nonstop service to many major business markets, and Northwest filled some of the gaps with mainline aircraft (mainly 100-seat DC-9 planes), and other gaps with 50-seat regional jets. Northwest has continued some of the routes, but had to cancel some as well. Unfortunately, Northwest tried to do to much in both markets. Northwest has had to pull most of its point-to-point flights out of Milwaukee because Midwest Airlines offered competing service with a better product than Northwest at a competitive price. Consequently, Midwest was able to dominate many of the point-to-point markets Northwest entered. Northwest's Indianapolis operations have been more successful, and the airline has retained many of its point-to-point flights from that city. If Northwest or any other airline wants to use regional jets to build market share, they need to do it in a location which is relatively free of competition on nonstop routes, and which offers the traffic levels to sustain point-to-point flights to multiple destinations. There are markets out there which fit this description. Omaha is only one example; Colorado Springs, Lexington, and Buffalo are all examples of markets which could benefit from the introduction of regional jet point-to-point service.

These are only two examples of how airlines can try to redeploy 50-seat and below regional jets. If airlines can find the right niches for these planes, then they will find a new life, because while their economics may be poor, there are still markets and routes where a regional jet is required and where that level of capacity isn't a competitive disadvantage (as many airlines with bloated regional jet fleets are now finding), but rather a competitive advantage. Airlines may find that because regional jets enable them to closely tailor capacity to market demands and to grow focus cities and other markets slowly, they will become assets. But, airlines must ensure that the routes they do start will be able to sustain themselves with higher fares, so airlines won't have to have sell seats at fire sale prices like Independence Air, an expedient way to failure. Airlines that fail to find ways to effectively redeploy their regional jets will find them increasingly costly and burdensome.

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