How Short-Sighted Management has Seriously Damaged the Industry (and some solutions on how to remedy this).

Editor's Note: I've been a bad blogger lately, and I apologize to my loyal readers. I haven't had a substantive post since May, and now we've reached August. How time flies! While I hope to post more often, the nice weather might prevent me from getting more work done on the computer, so posts may be less frequent than desired for the next few weeks. Also, I hope to post selected pictures of my Ecuador trip soon.

The airline industry has problems that no other industry does. For some reason, the airline industry has difficulty adequately matching capacity with demand, and as a result, business cycles and unexpected turns of events seem to hit the airlines much harder than other sectors. There are many reasons for why this may be true. But first and foremost, airlines offer a product that is both essential to the economy, and is one that is constantly in greater demand. Low-fare carriers have succeeded because they have been able to reduce the cost of air travel for those who otherwise couldn't afford it. Ryanair, which has succeeded in reducing fares more than any other carrier, has seen extraordinary growth, because people simply cannot get enough of air travel. After purchasing one car or cell phone, a consumer may have all he or she needs of those products for several years. It's much harder to increase milk sales by lowering prices than it is for airline tickets.

Consumers have limitless opportunities to fly, and airlines have succeeded in convincing them that it's a good use of money, partly because it's more convenient and comfortable than other forms of transport. Nevertheless, as costs rise, this myth will be shattered. Americans will still want to fly, but it will require more and more money. What airlines will hopefully realize is that they will be more profitable companies by offering fewer flights, targeting business travelers and those who are willing to pay for it. Capacity reductions are already starting to come into place that would help achieve this, but it could be too little, too late. Fuel prices have reached such stratospheric levels that most major US airlines will likely burn through their cash reserves in the next few years.

As legacies are at a substantial cost disadvantage with the hedging Southwest, instead of targeting their core customer base, their most frequent flyers, and improving their service, legacies have eliminated many of the perks that these travelers have come to expect, in the name of revenue generation. Known as "unbundling" it's a strategy that Ryanair has perfected (to the ire of much of Europe's flying public), by charging for many services that airlines offer, aside from the flight itself. Charging for checked bags, food, pillows and blankets, and anything else that isn't bolted to the cabin, seems to be the trend. In fact US Airways' new policy is to charge for all beverages onboard. This will even keep free water out of the hands of passengers, except in cases of medical emergency; bottled water and sodas onboard now cost $2.

Yet the fact of the matter is, some of these charges are overreaching, offering airlines far more in bad press than new revenues. Airlines need to maintain their reputations, and they need to maintain low fares. This is the dilemma that carriers face. Yet if carriers adopted a better yield management system, I suspect it could generate just as much, if not more than some of these extra charges. That means offering more deals at the last-minute to fill seats (but making them restrictive enough to prevent their usage by business travelers, whom the airlines need to pay full fare). If airlines aggressively move to fill seats on less popular flights, targeting flights individually, and ensuring that the plane will be as full as possible, additional revenues can be created. It also means further reducing frequent flyer award seats on popular flights, to allow more room for paying clientele. Moreover, increased overbooking, when possible, should be practiced to better fill seats. All these moves will likely be bad for passengers, but they won't deliver the continuous negative publicity that these fees seem to generate. They also will not interrupt the onboard service experience that passengers demand. Airlines are already working these angles, but let's face it, filling one additional seat on a plane at $100 could cover 50 $2 soda sales; they can do more.

Some might argue that the "unbundled" strategy airlines are adopting is what customers want. I don't buy that. Skybus' demise proved that the completely unbundled model cannot work in the US, at least with the high fixed costs that airlines currently face. Yet that seems to be the model many legacies are now replicating. There are services many airlines used to offer (and that a few still do) that weren't being effectively utilized by customers, and there was a great deal of waste. Some examples were airline meals and restrictions enabling customers to check two or even three pieces of checked luggage free of charge. Everyone was paying hidden costs in their ticket prices for services that a select group of customers was taking full advantage of. These are services that should be charged for. By most accounts, after US carriers started offering buy-on-board meals, fewer people ate onboard, but the food was of a better quality.

However, other services, including one free checked bag, snacks and drinks onboard, and free booking of award tickets (without some of the surcharges that certain carriers have recently imposed) should be things that all US legacies offer. These are basic comfort and service amenities that airlines need to retain loyal customers. Frequent flyer award tickets are hardly free if customers must pay to redeem the miles. Spirit and Allegiant will always be the deep-discounters in their respective markets, and charge for everything, but those carriers that are shooting for higher yields need to offer more services included within the ticket price.

True, airlines have yet to impose many of these charges on their most loyal customers, with high elite status or those paying full-fare. But it's not merely the charges themselves, but rather the impression they create to customers, that may hurt loyalty, even with customers unaffected by the charges. Continental, for instance, has resisted adding fees for a number of services. This is in part because of the company's concerns that they could disrupt operations, both on the ground, and in the air, as those passengers affected by the fees resist the changes, causing potential delays or turmoil in the cabin, affecting everyone's experience.

The ability of airlines to cut costs in this environment is rather minimal, without shrinking the size of their businesses. Instead, airlines need to focus on better yield generation. That does include some of the charges being proposed, but it also includes fare increases, and a concentrated effort to fill planes during less-traveled periods. The unbundled strategy has gone too far, and the reputation damage has been done. Airlines need to be extremely cautious going forward about adding additional charges, because discretionary air travel will decrease if the experience becomes too painful, and business travelers will be more willing to consider other options of transport (or conducting meetings).

Allegiant Air Announces New Bases in Time for Winter Travel

Allegiant Air announced today that the airline will open two new bases at the Mesa airport outside of Phoenix, and the Fort Lauderdale airport in Florida. Allegiant’s Phoenix service will begin October 25, and their Fort Lauderdale service on November 14.

While Allegiant will likely be successful in both cities, because the volume of the traffic for both these markets is so great, each market will present its own challenges. Phoenix is a hub for Southwest and US Airways, and fares in the markets are already quite low. US Airways already offers service from Phoenix to some of the smaller markets that Allegiant serves, and US Airways has been known to be a difficult competitor. Moreover, Allegiant will be serving the Mesa airport, which is 45 minutes to an hour outside of downtown Phoenix. The facility may be convenient for some individuals visiting Phoenix’s Southern suburbs, but for those going to Phoenix or points north, flying Southwest or US Airways may be a time-saver, even if customers have to drive to a larger airport for their departure.

However, the Mesa airport does have one advantage: it has virtually no commercial airline traffic, so the airport is much less crowded than Sky Harbor, creating a more pleasant experience for customers used to hassles at larger airports. Compare that with Fort Lauderdale which has seen exponential growth in the past five years, and the facilities at the airport haven’t been able to keep up. Allegiant may find it challenging to offer significantly lower fares in some markets where there is overlap between the Allegiant and its competitors. This is worse for Allegiant on the East Coast because Allegiant often runs into competition from low-fare carriers like AirTran and JetBlue who can match Allegiant’s fares.

And that’s part of the problem, Allegiant has been running into increased competition lately, and I predict that the airline will have a difficult time avoiding other competitors, especially in Fort Lauderdale. The airline pulled out of a route between Newburgh, NY and Orlando, primarily due to new competition from JetBlue and AirTran. Allegiant may find that its expansion opportunities are limited because Fort Lauderdale is served (albeit with connections) from many smaller markets by legacy and low-fare carriers alike. And carriers with connections will not only match Allegiant’s fares, but they will also offer perks like in-flight entertainment and complementary snacks.

And even if a smaller market isn’t directly served from one of Allegiant’s bases, a competitor may serve a nearby market that has overlap and hurts Allegiant’s chances of success. It seems that West Palm Beach might have been a better choice since it has a similar catchment area, less congestion than the Fort Lauderdale airport, lower costs, and less direct competition.

However, Phoenix and the Miami/Fort Lauderdale area are probably the best markets Allegiant had available for new bases. The Florida market hasn’t been saturated, and it’s becoming increasingly popular for East Coast travelers as an alternative to cities out West. While there are other base opportunities out East, including Myrtle Beach, Gulfport, and even New York City (during the peak summer travel season) that Allegiant will I’m sure explore in the future, Fort Lauderdale was the most predictable choice.

Phoenix was also a good choice, given the massive size of the market and it’s potential growth in the next five to ten years. Allegiant may open new bases in Los Angeles, San Diego, or Reno in the future, but given the size and growth potential of the market, Allegiant was right to add Phoenix now.

However, I expect Southwest, JetBlue, and AirTran all to react strongly to Allegiant’s decision. As these low-fare carriers have difficulty finding new markets to expand to, they are expanding to smaller cities, and they are starting to touch Allegiant’s turf. These carriers don’t have to compete directly with Allegiant (at the same origin airports), they just have to be in similar markets. Since Southwest, JetBlue, and AirTran have a more developed reputation than Allegiant, more amenities, and more frequent flights, they are more attractive to the majority of travelers than Allegiant is. While Allegiant still has its niche, it may have to enter smaller and smaller cities in order to maintain it, and that adds risk and uncertainty into what is already a very risky industry.

Allegiant’s next route (to/from Phoenix) will be announced next Thursday, August 9.

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.

Allegiant Plans to Resume Peoria-Orlando Flights

Rumors have surfaced in the past few days that Allegiant will reinstate its Peoria-Orlando flights, even appearing in a recent Peoria Journal Star article. Allegiant will likely announce the new service tomorrow. It appears from Allegiant's reservation system, that Allegiant's flights will resume starting November 16, with flights twice weekly on Fridays and Mondays. The outbound flight #723 from Orlando to Peoria will depart Orlando at 4:40 pm and arrive Peoria at 6:10 pm. The return flight #724 will depart Peoria at 6:45 pm and arrive Orlando at 10:10 pm. These flights mark the return of Allegiant to a market that should have flourished. Peoria has been wildly successful for Allegiant; the airline will offer eight weekly flights from Peoria to Las Vegas this summer, and three weekly flights from Peoria to Tampa. Peoria is one of Allegiant's most successful origin markets. But the city has had an inability to support Orlando flights, likely due to competition from AirTran in nearby Bloomington. Fortunately for Allegiant, its ability to market value vacations will be a real asset as families plan to make vacation plans over the holidays. Families want a one-stop shop for their travel, and Allegiant offers them that. However, Allegiant recognizes that if it flies in a market with too much competition, it won't survive. The airline simply isn't as well-known as major legacy and low-cost carriers, and has been out-marketed by competitors before. But when flying in a market with relatively little competition, Allegiant can thrive. I don't think the Peoria area-Orlando market is oversaturated with competitors, and as long as AirTran doesn't respond to Allegiant's announcement with a sizable increase in capacity and a corresponding decrease in fares, Allegiant should be able to find its niche in the Peoria-Orlando market. As Allegiant focuses on connecting the dots in its network before it opens new bases, the Peoria-Orlando link has been a key missing one. Allegiant is trying to link many of its Eastern origin markets to both its Florida destinations in Orlando and St. Petersburg. It's likely that Allegiant's next few route announcements will be links to Florida, and not links to Las Vegas. After Allegiant links the Eastern cities it feels it can to Florida, then the airline may change how it's expanding, either by focusing on adding more cities to its route map with service to either/or Las Vegas and Orlando or by adding new bases. Allegiant may open a new base before the busy winter travel months and if the airline chooses to do so, that announcement will likely come soon. I suspect that Allegiant's most likely choice for a new base would be in the Fort Lauderdale area, although a location in the West, such as Reno, is a possibility as well. It will be interesting to see how Allegiant's expansion progresses in the next few months, because the airline is clearly determined to fight for a larger share of the vacation market, and Allegiant will likely continue doing what it's doing provided it doesn't run into too much competition.

AirTran Struggles to Deploy New Planes as the Airline is Surrounded by Competitors on All Sides

Although AirTran has slowed the pace of their new aircraft deliveries, new planes are still headed AirTran's way. And AirTran is having difficulty figuring out what to do with them all. While the airline hopes that a merger with Midwest Airlines will give the company more leverage in two key markets, Milwaukee and Kansas City, enabling the airline to expand, that deal seems to be unlikely in the short term. AirTran is trying other expansion tactics, but its strategies have had mixed results, and given the intense competition on the East Coast, AirTran is finding it difficult to expand with the presence of so many competitors in the region. Some examples of AirTran's expansion difficulties follow.

AirTran recently announced new routes between small markets in the Midwest and New York State to Las Vegas, mirroring the tactics of Allegiant Air. Even though AirTran has tried this once before without success, the airline feels it's worth another shot, given the pressing need to deploy additional aircraft, and the recent success Allegiant has mustered. I see this strategy as having mixed results depending on the origin city. If AirTran can tap into a viable market, it will be successful, but time and time again, AirTran has expanded to markets too small to accommodate AirTran's flights.

But AirTran is also trying other tactics its competitor Southwest Airlines has tried. For example, AirTran plans on launching two transcon routes soon, one between Baltimore and Seattle and the other between Orlando and San Diego. AirTran is serving these two routes in part because Southwest doesn't serve them. AirTran has avoided serving some transcon routes already operated by Southwest, such as Baltimore or Philadelphia to Oakland or Los Angeles, but this has left AirTran with routes that may have too little traffic to accommodate its presence. If AirTran's two attempts at point-to-point transcons succeed this summer, it could lead to further transcon flights from markets other than Baltimore or Orlando in the future. Even though AirTran has the capability to launch more routes, and needs transcons to increase aircraft utilization, these routes are risky. Given that AirTran is virtually unknown on the West Coast, new transcon routes have a high probability of failure. If AirTran wants to succeed with transcons, it needs to expand its services from a couple East Coast focus cities and focus on attracting customers in these markets. If AirTran offers every transcon that Southwest doesn't, then AirTran will easily lose money; instead the airline needs to focus on building a couple focus cities such as Boston, Philadelphia, Charlotte, Baltimore, or Orlando, for transcon markets even if it means competing directly with Southwest.

However, in its expansion, AirTran has ignored Caribbean routes even more than transcon routes. This is in part due to Spirit Airlines, which has adopted an ultra-low cost carrier model on flights between the US and the Caribbean. As a consequence, AirTran has avoided many Spirit routes, since AirTran simply cannot compete on price with Spirit. AirTran's only Caribbean route is to Grand Bahama Island, which works well for AirTran, since the aircraft that operates that route can turn around quickly and return to Atlanta; the aircraft can still operate several other flights during the day. AirTran is hesitant about further expansion in the Caribbean, which may hurt the airline, since the Caribbean offers many opportunities for expansion, even with Spirit's competition. AirTran has so much excess capacity, it could strike lucrative deals with tour operators for flights to big tourist destinations in places such as Puerto Rico or the Dominican Republic that would give tour operators a cheap means of transporting vacationers to paradise, and AirTran a steady source of income. AirTran's Atlanta hub is advantageous for Caribbean expansion, and AirTran should take advantage of it.

So AirTran has a dilemma. It has to find a way to grow and attract new customers in a very competitive market. Airlines that struggle sometimes try to shrink to survive, although that's a tactic that gets, at best, mixed results. AirTran is in an industry that is right now grappling with overcapacity concerns. Even though many legacy carriers have removed capacity from domestic services, the industry as a whole is concerned about adding too much new capacity, even with the upswing in the economy. As a result, AirTran is in a difficult position, especially since it has a weaker brand and less customer loyalty than its two principal low-cost competitors, Southwest and JetBlue. AirTran attracts flyers primarily on price, and if AirTran cannot fill planes, it cannot offer low fares. So this begs the question: How does AirTran combat this phenomenon?

My answer would be that AirTran should target its focus city markets for expansion. All of AirTran's focus cities could use more flights, and if AirTran markets itself well and commits to a buildup in service, it could increase customer loyalty, especially among business travelers, in certain focus city markets such as Boston, Baltimore, Orlando, Philadelphia, and Chicago. Focus city markets can serve as real catalysts for growth because AirTran still has relatively little service in all these cities compared to its Atlanta hub, and AirTran has an opportunity to link these markets to major business and leisure destinations across the country that AirTran currently doesn't serve nonstop from that focus city. But not only are focus cities great places for expanding the number of routes AirTran serves; they are great locations for AirTran dumping capacity on certain routes the airline already serves. AirTran already has lower load factors, on average, than most other low-cost carriers, and part of the reason for this is that AirTran has excess capacity on some routes in order to provide convenient service for business travelers. For example, AirTran has up to nine flights a day between Baltimore and Boston, and up to six flights a day between Chicago and Minneapolis/St. Paul, even though these flights are routinely half-empty. With flights spaced throughout the day, AirTran provides convenient service for business travelers, and can attract many customers who travel at the last minute and pay the highest fares. By dumping capacity on these routes, AirTran can lower fares for most customers, and still charge last-minute travelers pricey walkup fares. It's a strategy that has worked well on some routes, and not so well on others. If AirTran can target the right routes for capacity dumping, the airline can make a lot of money, even with half-empty planes. This seems to be the best way for AirTran to use its planes; to add new capacity to existing routes. AirTran needs to expand this model on more routes from more focus cities; it will enable AirTran to increase aircraft utilization and target valuable customer groups at the same time.

But even as AirTran has been making some of these changes, the airline has done it in too much of a vacuum. If AirTran wants to be an attractive choice to business travelers, the airline needs to offer a more competitive frequent flyer program. Recently, Frontier's frequent flyer program, EarlyReturns, won first place in the annual Freddie Awards, sponsored by InsideFlyer Magazine. AirTran's program, A+ Rewards, partners with EarlyReturns to offer more earning and redemption opportunities for travelers on either airline. A+ Rewards isn't a very friendly frequent flyer program to many travelers. It requires passengers to fly 16 one-way flights with AirTran in a year in order to earn a free ticket. While business travelers who fly frequently can meet those parameters, individuals who travel less frequently find little utility from A+ Rewards. For example, A+ Rewards isn't friendly to many small business travelers who travel just a few times a year, but often at the last minute. These business persons would rather travel with an airline where they know their travel is being adequately rewarded, most likely a legacy carrier, and sometimes a good frequent flyer program is the difference between a traveler choosing one airline over the other. With last-minute tickets, the stakes for airlines couldn't be higher, and AirTran should do what it can to court these travelers. Travelers on most other carriers have at least 18 months, and can extend all their miles with any sort of earning or redemption activity. If AirTran cannot make other aspects of its operation attractive to customers who buy tickets at the last minute, then capacity dumping will be worthless.

AirTran has a real challenge on its hands, to add capacity in a profitable manner, when overcapacity is the main concern in this industry. AirTran must reevaluate how it is adding capacity if it is to be competitive in the future, and dumping capacity on certain routes may be a profitable strategy, provided that it is done carefully and methodically.

Skybus Announces Its Business Model and Destinations to the Flying Public

Skybus made its first formal route announcement today, announcing its first eight destinations, with service to start to some cities as early as May 22. Skybus also enabled customers to book tickets online starting today, with introductory fares starting at $10 each way excluding taxes. It's clear that whatever happens to Skybus; it will be a difficult battle ahead. The post ahead will analyze different elements of Skybus's announcement, and comment on the viability of the carrier.

First, a discussion on destinations. While some of the new airports Skybus announced service to today were more conventional low-cost airports, such as Oakland or Fort Lauderdale, others were less conventional, such as Bellingham instead of Seattle/Tacoma and Vancouver or Portsmouth instead of Boston. As a result, it appears evident that Skybus will have more trouble marketing some destinations than others.

Living in the Seattle region myself, I know the Bellingham airport isn't an acceptable alternative for Seattle, being over 75 miles away from the city. While it is closer to some of the Northern suburbs, it's still over an hour's drive from the main population centers in the area. Allegiant Air has capitalized on the demand for low-cost service to Las Vegas by offering cheap and frequent flights between Bellingham and Vegas. However, Allegiant has established itself on the route and has a good market in the area of both Americans and Canadians. Allegiant doesn't need the big population centers near Seattle for its route to succeed. Las Vegas is a destination that can support service from smaller airports like Bellingham because it attracts so many visitors. Columbus, Ohio attracts far fewer passengers and is a different story altogether. A daily flight on a 150-seat airplane cannot be sustained between two markets this small. Consequently, I seriously doubt that even with very low fares, Skybus will be able to succeed in the Bellingham market.

Portsmouth is a bit different. Since Boston, like Seattle, lacks a secondary airport close to the city, low-cost airlines such as Southwest have tried to market service to Boston from distant secondary airports in Providence and Manchester. Portsmouth is about the same distance from Boston (roughly 60 miles) as the other two cities, and as a result, Skybus should have less of a challenge attracting customers there, since many Bostoners are already accustomed to driving such distances for lower fares on Southwest. However, Skybus needs to market itself to travelers in the entire Boston-Manchester-Portland, ME area to maximize their brand awareness among potential customers. Southwest is already well-known by travelers in the area, but Skybus means nothing to them right now. With two initial daily flights, it's clear Skybus has high expectations for Portsmouth. Given Southwest's success using secondary airports in the region, there is reason to support that optimism, but Skybus must first market itself well in order to be successful.

Skybus also announced service to Oakland, Burbank, Kansas City, and Fort Lauderdale. These don't concern me nearly as much as Bellingham, but due to competition from Southwest, Skybus needs to be careful about how it expands in these markets. Southwest Airlines, currently the airline with the largest market share in Columbus, serves all four of these cities (though none nonstop from Columbus), with low fares, friendly service, and frequent flights. Southwest has a lot of loyalty in the Columbus market, and many passengers will be hesitant to ditch Southwest for Skybus, even with Skybus's noticeably lower fares. Skybus has done a good job of targeting markets that lack nonstop service from Southwest, but even these markets which lack Southwest nonstop service are well-served by Southwest nonetheless. As a result, Skybus will attract passengers who want nonstop service, but the airline may also face significant competition from Southwest, both on price, but more importantly on service. If Skybus can offer quality service to Columbus passengers who are used to Southwest's hospitality, it will succeed in Southwest markets. However, if Skybus cannot offer the level of service Southwest delivers, then Skybus will be at a significant disadvantage to Southwest, even with lower fares. Given all the hassles flying entails these days, service is becoming increasingly important for customers and Southwest can deliver in this department, even if it can't offer the lowest fares.

Skybus also announced new service to Greensboro, NC and Richmond, VA. I'm a bit skeptical of the Greensboro service, primarily because it is over an hour's drive from the Raleigh-Durham area, and many passengers would rather take advantage of Southwest's low-fare service from the Raleigh-Durham airport, even if it's not nonstop to Columbus. Richmond, on the other hand, still has need from the business community for increased low-cost nonstop service. This is an airport that has lost travelers due to high fares in recent years, and needs another low-fare carrier to help get them back. However, I am unsure whether Greensboro or Richmond can support a daily nonstop flight on a full-size aircraft. I think both these markets are risky, and may be better suited for three to five weekly flights instead of one daily flight. However, if Skybus is able to market itself well and divert traffic to these airports, there is a potential to make both of these routes work.

In addition to their destinations, Skybus announced some of their amenities and charges today. Skybus encloses their policies in this document, which seems to both insult your intelligence and confuse you at the same time. It includes reasons why Skybus lacks in-flight entertainment, assigned seating, and even a call center (it doesn't say what you do if something goes wrong). It also seems to stipulate some rules that will not make passengers happy, most notably that passengers may not bring their own food or drink onboard the aircraft (unless of course you've "brought enough for the whole plane"). I wonder if Skybus's first bad publicity will be when it refuses to allow a woman carrying breast milk onto the aircraft; that might quickly alienate much of their potential customer base. If a passenger does bring food onboard the aircraft, what are the flight attendants going to do, delay the aircraft, costing Skybus a lot of money, in order to kick the passenger off? Skybus can try to enforce this rule, but it will end up causing the airline more harm than good. Rule 10 seems a bit of a stretch as well; given the previous nine points, I doubt individuals will be so happy onboard Skybus planes. Skybus seems to be essentially everything easyJet is in Europe, with a hip brand, new A319 aircraft, fees for everything (although easyJet doesn't charge for checked baggage), and bare-bones service. But unlike easyJet, Skybus may have a tougher time surviving, especially with so many new planes coming online. How can Skybus effectively expand? The simple answer is: beyond Columbus quickly.

In order to create a successful airline, Skybus needs to do more than offer low fares to individuals traveling to/from Columbus. Skybus will inevitably have to create other bases, since Columbus cannot support 65-70 planes, but the best ones will probably be in smaller airports within 60-75 miles of the city centers. These would be similar to the hugely successful bases Ryanair has created in alternate airports within 75 miles of major cities throughout Europe. Larger airports, such as Oakland and Fort Lauderdale, already have enough low-cost service; Skybus needs a facility that has relatively little competition in order to create the best yields and lowest costs. This means Skybus needs to invest in some of the smaller airports it touts as being hassle-free alternatives to larger airports closer to city centers. Out of the destinations announced today, I believe Portsmouth would create the best base, since it's within relatively easy reach of Boston as well as other metropolitan areas. Portsmouth would be a prime location for Skybus to launch flights to Florida. Greensboro and Bellingham are also possible candidates for new Skybus bases, but these two markets have a smaller base of potential customers than Portsmouth does. Skybus should focus on linking these bases with leisure destinations, which is where most price-sensitive customers go. Bases in the West could be connected with cities in California, Arizona, and Nevada while bases in the East could be connected with Florida.

Columbus has a very limited potential market for Skybus, especially given that many business travelers who fly to the city would rather fly on an airline that gives out free peanuts instead of one that charges for checked luggage. If Skybus focuses too much of its growth in a market that cannot support it, then it will ultimately fail. Therefore, in order for Skybus to survive, it must rethink how it's expanding, and focus on linking underutilized airports near city centers, such as Portsmouth, New Hampshire (near Boston), Gary, Indiana (near Chicago) or White Plains, New York (near NYC). If the airline doesn't recognize what types of customers it will attract and cater to them by flying to leisure destinations, it will fail. I wish all the best to Skybus, but if they continue to expand from Columbus, ignoring other bases, I don't see how the airline can survive longer than two years.

How Allegiant Must Find New Niches to Grow and Evade Competition

Allegiant Air must find new bases that it can succeed in, in order to effectively expand and evade some of its competitors. Allegiant has been successful at three bases, Las Vegas, Orlando, and St. Petersburg, and they appear to be interested in possibly forming bases in Palm Springs and Reno, which will soon have flights to Bellingham. Since Allegiant has already tapped into demand to the most popular vacation destinations, the airline will need to find ways to market destinations that currently have less demand. Allegiant needs to find ways of developing additional bases quickly. Allegiant must broaden its market and offer a greater variety of destinations to appeal to different kinds of customers. Reno and Palm Springs offer customers the opportunity for more adventure and recreation than Las Vegas. This will be important in enabling Allegiant to expand, since its customers, even the most compulsive gamblers and theme-park lovers, want new and exciting vacation opportunities, and if Allegiant can't provide those to them, then another airline will. It's unclear whether the Palm Springs and Reno bases will be successful, although it appears that like many airlines serving Palm Springs, Allegiant will make some of its flights seasonal to that city. Since Allegiant hasn't even started flights to Reno, it's too early to tell whether those flights will be successful either.

However, Allegiant also must consider forming new bases East of the Mississippi. Allegiant will likely develop another base in Florida, likely in the West Palm Beach-Fort Lauderdale-Miami area so that Allegiant will serve West, Central, and East Florida. However, Allegiant should also consider different bases in the East, most notably in Myrtle Beach, a popular vacation spot with seasonally fluctuating demand. Gulfport/Biloxi, Mississippi is also a potential base, although Allegiant recently made the city an origin spot for flights to Las Vegas and Orlando. With its popular Casinos, Biloxi could be marketed as a good vacation spot, although demand for travel to the area is much more limited than travel to Orlando. The important point is that Allegiant must create new choices for customers; without choices, customers will have few reasons to fly Allegiant repeatedly, unless they want to visit Orlando for the fourth time to witness the sights and sounds of a bunch of out-of-control, noisy children (my idea of a great time).

But, since some of these proposed bases have demand patterns which fluctuate seasonally, Allegiant needs to find a way to efficiently utilize its planes during both the winter (typically the more popular season to warm vacation destinations) and during the summer. As a result, it will take a bit more effort for Allegiant to develop popular summer bases, and if Allegiant wants to succeed in those markets, the carrier will need to work closely with local tourism authorities to market the destination. As a result, new destinations will need to be marketed to people who might not have heard of them. Colorado Springs is an example of a successful Allegiant origin market, which could be made a destination market in the summer months. The same is true for Bellingham, which is a gateway to recreation opportunities in the North Cascades in Washington State, as well as the plethora of recreation opportunities the Vancouver-Whistler, British Colombia area offers. However, this strategy is very risky and unlikely, but a possibility if Allegiant is very interested in increasing aircraft utilization.

Allegiant could take another strategy, and market flights from its small origin cities to big cities (through nearby alternate airports) popular with tourists during the summer, such as San Francisco, New York, and Washington DC. These are only ideas of how Allegiant can potentially increase aircraft utilization during the summer months, however, given the difficulty involved in making these destinations, particularly smaller markets like Bellingham and Colorado Springs, attractive, these markets probably won't be Allegiant's top-performing bases. Fortunately for Allegiant, since the company doesn't have expensive leases on new aircraft, they don't feel as pressured to increase aircraft utilization, and as a result, the company has been willing to park aircraft for extended periods of low demand. If Allegiant simply cannot find good places for these aircraft during the summer, it makes little sense for the airline to take unorthodox risks with its capital. Conversely, if Allegiant can't find new destinations for its customers to travel to, the airline will have few repeat customers.

Allegiant will also need to expand the number of origin markets it serves in order to diversify itself from the competition. Already Allegiant is encountering competition in some of its more established markets. AirTran recently announced new nonstop service between Bloomington, Moline, and Milwaukee to Las Vegas. The Milwaukee service is aimed primarily at offering competition to Midwest Airlines and demonstrating AirTran's commitment to increasing air service for the residents of Milwaukee. But that's not the case with the Bloomington and Moline service. Bloomington and Moline can probably support AirTran's new flights with the potential customers in the immediate area of those two markets. However, the Bloomington and Moline service directly targets several of Allegiant's markets in the region. Moline is a perfect destination because it's close enough to three Allegiant markets, Cedar Rapids, Rockford, and Peoria, so that AirTran can attract a wide range of Allegiant customers in the area who might prefer AirTran because Moline is closer by to their home, and because they prefer AirTran's amenities, such as satellite radio, which Allegiant doesn't offer. AirTran would not attract many customers from the cities Allegiant operates in, since they are all at least a 90 minute drive from Moline, but AirTran could attract customers from the outlying areas of those cities who are closer to Moline. AirTran's new Bloomington service offers similar benefits for the airline, since it too has the potential to siphon customers away from Allegiant's Peoria operations. Since AirTran has some of the lowest costs in the industry, they are ready to fight Allegiant, and Allegiant must fight back hard if the airline wants to retain its market share in the region.

As a result, Allegiant must both diversify and protect its origin markets. The company has already received permission to begin service to Canada, and may announce service from new Canadian origin markets soon. Since service between Canada and the US is typically through hubs, Allegiant has the ability to offer attractive point-to-point flights for customers in smaller markets who might be forced to connect in Vancouver, Calgary, or Toronto for most of their travel, which would save Allegiant's customers time and money. Moreover, customers in Canada are more accustomed to the lower-frequency vacation package business model that Allegiant uses, since Canada has several charter airlines, such as Air Transat, which sell vacation packages to popular leisure destinations and fly to them from major Canadian cities. The Allegiant model would take that one step further by offering service from smaller markets. Other Canadian cities which could see Allegiant service include Windsor, London, Hamilton, and Kitchner/Waterloo (all in Ontario), Abbotsford, Kelowna, and Comox (all in British Colombia), and Fort McMurray in Alberta.

That being said, there are still untapped markets in the United States. The biggest hole in the Allegiant network right now is in the South. Allegiant serves no destinations in New Mexico, Oklahoma, and Arkansas, and only serves two in Texas. Allegiant has tried offering service from several markets in Oklahoma and Texas (including Oklahoma City, Tulsa, Wichita Falls, and Killeen), but all these have failed. There are many smaller markets in Texas that have the potential for Allegiant service; the big factor holding Allegiant up is Southwest. Since Southwest already serves Las Vegas from many small Texas markets, Allegiant would have a challenge in many markets, even in ones where they aren't competing directly with Southwest, since Southwest serves airports relatively close to many potential Allegiant markets. As a result, that area of the country may be hard for Allegiant to build up, though Allegiant may want to give it another shot, since Allegiant does have a competitive cost base with Southwest. Moreover, Allegiant is also underrepresented in the Northeastern United States, in part due to the brutal competition among low-fare airlines in the Northeast-Florida market. However, Allegiant could still add service to three to five cities in Pennsylvania before the market in that state is saturated (Allegiant currently only serves one, Allentown, in the state). Similarly in New York State, there are several potential Allegiant markets, such as Ithaca and Utica.

Allegiant needs to take many steps simultaneously to ensure the company meets its ambitious growth targets and protects its market share. Allegiant must defend its turf vigorously in places like Peoria, even if it means engaging in a price war with AirTran, because if AirTran wins that battle, then it will motivate the company to enter other Allegiant markets, which could have a potentially devastating effect on Allegiant. Moreover, Allegiant must expand into new origin markets, especially in Canada, where two big Canadian airlines have created niches to be filled. And finally, Allegiant must find new bases to operate in order to offer more choices to customers. The best bases are ones that can attract enough traffic to support year-round service, such as Fort Lauderdale, but as Allegiant expands, they must be creative about new bases if they want to retain their niche as a vacation provider to people in small markets.

Allegiant Air: Plenty of Markets to Expand to, But Could Their Success be Inhibiting Future Growth?

Allegiant Air has been expanding rapidly in the past couple years, adding new destinations in all regions of the country, as well as routes to Allegiant's new bases in Orlando and St. Petersburg (used as a secondary airport for customers headed to Tampa) from existing destinations. Allegiant has identified many markets where it can expand further, and the airline is bound to take their low-priced vacation business model to even more small and medium-size markets in the next couple years. The airline is slowly receiving new deliveries of used MD-80 aircraft to facilitate this expansion, some of which Allegiant is procuring from Alaska Airlines, which is retiring their MD-80 fleet in order to save money. But nevertheless, the company has become a victim of its own success in some of its more popular markets. On most routes, Allegiant has very little competition, because Allegiant fills an important niche that most other airlines cannot fill. Few, if any, other carriers offer nonstop service to Las Vegas, Orlando, or St. Petersburg. But when Allegiant does encounter competition, it can often be a difficult battle. Larger airlines, or imitators have sprung up in an attempt to take away Allegiant's niche in some of the larger markets it serves. In these markets, Allegiant has grown the leisure market so much from where it had been before Allegiant's entry that it attracts competitors; sometimes Allegiant is well-prepared to tackle competitors, and sometimes it isn't.

One notable example of Allegiant's successful battle against competitors was in Northwest's home turf, the Midwest. In 2005, Northwest Airlines started nonstop flights to compete with Allegiant's from Madison, Des Moines, and Rapid City to Las Vegas. (Northwest also announced service between Grand Rapids and Las Vegas, which competed with Allegiant's Las Vegas service from nearby Lansing). Allegiant did have to withdraw from Madison to Las Vegas nonstop service (as did Northwest), but it forced Northwest out of the other three Midwestern markets. However, the flights were quickly canceled as the market got too crowded, and Northwest couldn't afford to use mainline planes to fly very low-yield routes with poor load factors against an established competitor. In that instance, Allegiant successfully battled Northwest, partly because Northwest's strategy wasn't well-thought out, and partly because Allegiant had developed loyalty from customers in the area. However, that hasn't always been the case.

When Allegiant started service to Newburgh, New York, the airport was eager for new low-cost airline service. The airport had very little airline service, but was in a good location with a wide catchment area. Allegiant recognized the opportunity the market presented, and started service to Orlando in October 2005. However, about a year after that service began, both JetBlue and AirTran announced new service to Newburgh, including nonstop flights to Orlando on both airlines. Allegiant saw sales sag, as travelers jumped at the chance to fly with airlines that offered attractive amenities and more frequent flights. As a result, Allegiant withdrew from the Newburgh market. In the case of Newburgh, low-cost airlines were especially eager to fly from the airport because of its proximity to a large customer base in New York City. However, even in other small airports that don't have the potential to attract customers from large metropolitan areas, Allegiant is still vulnerable. Allegiant has had to withdraw from some of its larger markets that have their own strong customer bases, including Oklahoma City and Tulsa, because the competition, in those cases from Southwest, was too strong.

In some of Allegiant's larger and more successful markets, including Bellingham, Colorado Springs, Peoria, Toledo, Knoxville, and Greenville/Spartanburg, they may face increased competition. But in all these markets (except, possibly in Colorado Springs), it won't be low-cost carriers competing with Allegiant. Legacies desperate to protect their own turf will be the ones competing with Allegiant, much like Northwest did in 2005. Even though these markets are relatively small, they can still use competition. But carriers that choose to compete with Allegiant in these markets will be successful if they target their customers well, by marketing their own vacation products like Allegiant does, and by offering competitively-priced flights. Moreover, in order to offer affordable prices, they need to fly mainline aircraft, not regional jets. Regional jets will annoy customers with their cramped interiors and increase costs. Mainline aircraft are more of a risk, but if airlines can fill them, and Allegiant has proven that they can be filled from small markets, then they will please customers by increasing comfort and lowering costs. If Allegiant continues to spur demand from some of these "larger" small airports, then they will likely encounter greater levels of competition. And well-placed competition can hurt Allegiant, which only has limited resources to compete with larger airlines and limited brand recognition with customers (many customers would prefer to take a "name-brand" carrier that they've heard of over one they've never heard of, such as Allegiant). Allegiant's continued growth will depend on expansion into small markets from which they can grow demand, but only to an extent which still inhibits competitors from entering the market.

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.

Southwest Rejects Gaming, Considers Alternate Methods to Boost Ancillary Revenues

Southwest Airlines CEO Gary Kelly told the Financial Times that the airline has ruled out gaming as a method of boosting its sagging revenue growth. Southwest has been at the forefront of the effort to raise fares in recent months, in part due to the rising cost of fuel for Southwest due to the carrier's expiring fuel hedges. However, Southwest wants to limit those increases in order to keep air travel affordable for passengers, since so many of Southwest's customers in particular are price-sensitive. Many of Southwest's customers take discretionary trips, which would not be taken if airfares were much higher. Instead of using fare increases as a mechanism to boost revenue, Southwest is considering boosting ancillary revenues from various sources, such as hotel and car rental booking engines on Southwest's site. Each time a hotel, car, or cruise is booked on Southwest's site, Southwest receives a commission, a win-win situation for all involved. While these revenue streams can be very profitable to a carrier that operates in leisure markets, Southwest is only collecting revenues from a relatively small number of customers who use the service. Allegiant Air, which operates flights to three of Southwest's leisure markets, Las Vegas, Orlando, and Tampa, has been far more successful in converting air travel purchasers into package purchasers. Southwest could certainly learn a thing or two from Allegiant, perhaps by incorporating Southwest's vacation Web site into their primary Web site better. But even if Southwest is successful at selling more vacation packages, there are still many untapped revenue streams that Southwest needs to exploit. Southwest's costs are rising too quickly, and are already well-ahead of their newer competitors including JetBlue and AirTran. If Southwest increased the diversity of their ancillary revenue streams, not to the point of Ryanair, but enough to make Southwest the US LCC leader in utilizing ancillary revenue streams, (at least until Skybus comes along) then Southwest would be able to lower fares and compete more effectively with other low-cost carriers.

The first area where Southwest can make itself more competitive with other LCCs is in the area of checked baggage. Southwest should realign its antiquated checked baggage policy to make it comparable with other carriers. Southwest is the only major US airline to allow customers to check up to three complementary 50 lbs bags; most carriers only permit passengers to check two free bags. While few Southwest customers check three bags, it would be a good way to raise excess baggage revenues from the small number of passengers who do check three bags, and it would also send a signal to customers that Southwest plans on enforcing baggage policies more strictly. While Southwest would likely face backlash from customers if it decided to reduce the limit even further to one free checked bag, Southwest would be wise to monitor the Spirit experiment closely and see whether customers adapt to Spirit's one-bag policy without too much difficulty or resentment towards the airline. If so, then Southwest should quickly adopt a similar policy. The policy would reduce the number of bags checked on Southwest flights each year and it would increase the amount of revenue Southwest collects in excess baggage fees, an important ancillary revenue stream. If Southwest implemented the policy, it would likely be successful for both passengers and the airline provided that: a) Southwest gives customers sufficient time to make the transition, and helps customers by offering clear, accessible information about revised baggage policies. b) Southwest charges a relatively low fee for the second checked bag. Spirit plans to charge $10, which seems reasonable for Southwest, since it still allows customers who want to check two bags to benefit from low fares, but simply pay a small fee to reimburse the airline for the cost of checking that second bag. c) After a transition period, Southwest strictly enforces both checked and carry-on baggage allowances. Customers who try to cram too much into their carry-on should be forced to check that bag at their own expense. This approach to reducing the amount of baggage carried on aircraft shouldn't be unique to Southwest. United has already considered charging for checked baggage under their "bare fare" concept. Other low-cost airlines should consider adopting stricter baggage policies, following the guidelines above, but only if customers adapt to Spirit's new baggage policy without too much trouble and animosity towards the airline. Otherwise, the increased excess baggage revenues and the lower baggage handling costs will mean little as airlines lose valuable repeat customers. But even if Southwest doesn't adopt a one-checked bag policy, they should at least realign their baggage policies to make them comparable with other carriers.

Southwest should also consider charging for seat assignments. Southwest is the only US carrier to not offer any seat assignments, but the airline is developing procedures for doing so. If Southwest used seat assignments as a revenue source then the airline could attract customers who are turned off by the airline's "cattle call" boarding system. However, if Southwest sold seat assignments, there would inevitably be passengers who wouldn't purchase one. If Southwest wanted the system to work in a humane way that benefited customers the most, they would offer three boarding groups. The first group would be pre-boarders, such as the disabled and parents with small children. The next group would be passengers with assigned seats, and the final group would be passengers without assigned seats, who would choose seats onboard the aircraft like the "cattle call" system Southwest currently uses. However, if pre-boarders boarded before those with assigned seats, there would likely be conflicts of parents being forced to move after they've taken a seat. So if Southwest sells assigned seats, they should do it in much the same way Northwest does with its Coach Choice program. Certain window and aisle seats (for simplicity's sake, in the first few rows only) could be booked in advance, as well as bulkhead and exit row seats. That way, flight attendants could direct pre-boarders away from seats that had already been assigned. While paying for assigned seats might make Southwest uncompetitive with low-cost airlines like JetBlue that assign virtually all seats, it would allow the airline to raise revenues and still allow customers who don't desire a seat assignment to not have to pay for one.

There are other numerous ways Southwest could raise ancillary revenues, and they are too numerous to discuss in great detail. However, gaming will not be the only form of ancillary revenues that Southwest will reject. Southwest will likely reject in-flight mobile phone use, at least for the time being, because most customers find the idea of ringing phones in-flight too distracting and it would add to the stress of travel. When the technology is perfected, then Southwest might consider it. However, the only way in-flight mobile phone use might satisfy customers is if passengers can only text message with people on the ground, and don't have the ability to talk to them. A text message-only service would be far less distracting for most passengers. However, Southwest won't likely implement such a system for many years because of the technological imperfections and the high installation cost. Another source of ancillary revenues that I doubt Southwest plans on tapping anytime soon is in-flight food and beverage offerings. Southwest, like most low-cost carriers, offers complementary snacks and nonalcoholic beverages to passengers. Many passengers relish this perk, and it's unlikely Southwest will modify this policy anytime soon. It's likely that Southwest won't offer expanded snacks or meals, such as sandwiches or salads to customers, even for a fee. Southwest recognizes that most of their flights are short, and customers would rather purchase a higher-quality meal at the airport than a sandwich in the air. However, Southwest's flights are getting longer on average, so in the future, Southwest may consider adding a selection of sandwiches or salads that customers can purchase on longer flights. However, I don't expect Southwest to implement that change in the near future, but it's not completely out of the question. If Southwest can find the right suppliers at the right cost, they may decide to test heartier food on some of their longer flights. But implementation of buy-on-board food on Southwest probably won't be for at least one to two years. Finally, Southwest may add in-flight entertainment to their aircraft. If Southwest does so, they may consider charging for the service. Southwest will want entertainment that is versatile, that customers on flights of an hour or four hours can use and enjoy. That means that Southwest will probably not be showing movies in the cabin anytime soon. Video screens would be prohibitively expensive for the short flights Southwest operates since customers need a longer amount of time to enjoy video entertainment. However, satellite radio is a definite possibility, and Southwest may be able to charge for the service. While offering satellite radio could help Southwest's image and their bottom line, Southwest should consider charging a nominal fee for the service. That fee could be nothing on short flights, but on longer flights, many customers would be willing to pay a fee of up to $5 to listen and Southwest should charge. AirTran, which like Southwest operates relatively short flights, has installed satellite radio on all its planes and doesn't charge customers to use it. However, customers who don't have headphones can purchase a pair for the nominal fee of $2. Adding satellite radio is a more realistic possibility than charging for seat assignments or meals, but it's still not a certainty, and the implementation of the technology will depend on the direction the airline plans to take. Southwest has a lot of options for boosting their ancillary revenues, but any attempt to do so has to coincide with a transformation the airline is making. If Southwest is trying to transform itself into a more competitive airline with somewhat higher costs, then they need to offer some of the services passengers expect such as in-flight entertainment or seat assignments for free. But if Southwest wants to raise revenues and keep costs down, they should only implement services and products that will raise revenues. However, if Southwest adds these frills, then the airline needs to give customers the option of using the product or service. Some customers may want to, and others won't, but Southwest needs to accommodate all its passengers if it expects to remain competitive in the future regardless of the direction the airline plans to take