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.

Allegiant vs. AirTran, the Duel for Orlando

Over the past 12 months AirTran has added a number of new cities to its route map.  Many of these cities have not received service to Atlanta, AirTran's primary hub. Instead, AirTran has targeted these flights to Orlando, a fast-growing market for the company, and one that continues to hold up reasonably well despite the recession. But AirTran faces considerable competition in Orlando, not merely from established LCCs on routes to/from major cities, but also  from Allegiant on routes to/from smaller markets, such as Allentown, Knoxville, and most recently, Grand Rapids, where AirTran announced new service from Michigan's second-biggest airport to Florida, stepping on Allegiant's toes. In response to AirTran's advance, Allegiant has added frequencies in markets such as Grand Rapids, and has shifted the destination of many flights from Orlando's Sanford Airport to Orlando McCoy, the more popular and convenient airport in the city (all of AirTran's flights are to/from McCoy).
 
But while AirTran is having to fight for market share, it possesses a number of advantages over Allegiant, the most important being its generally better value for consumers. Unlike Allegiant, AirTran does not charge for charge for online booking (Allegiant charges an astounding $14 for this privilege), seat assignments (on some AirTran fares, seats are not assigned at booking, but all seats are assigned before boarding), or beverages on board. Moreover, Allegiant charges vacation travelers (who are likely to check luggage) more than AirTran if bag fees are paid at check-in. So on Allegiant, to avoid paying excess fees, one must book tickets at the airport, and pay bag fees at the same time. Not an easy proposition for most travelers who don't know how much they'll be taking. Combine Allegiant's arcane and uncompetitive fee structure with AirTran's better brand recognition and frequent flyer program, and it seems that there should be no reason why travelers book with Allegiant.

While I anticipate AirTran to make strong market share gains in the markets it enters, assuming flights are conveniently timed and priced, Allegiant will not be a pushover. By changing hub airports and adding frequencies, they are fighting back. And where they recognize that they can't make money due to depressed yields from AirTran's competition, they will pull out, as they have of other markets that LCCs have invaded, such as Newburgh, NY. But keep in mind that even if Allegiant's flights, with all their extras, are more expensive than AirTran's, Allegiant markets itself as creating value for customers by selling them vacation packages. Allegiant sells only airline tickets to relatively few customers--the company makes much of its money through ancillary revenues. Customers who want the convenience of booking their flight, hotel, car rental, and theme park tickets can do so in one process at Allegiant's website. Moreover, because of the volume of travelers Allegiant handles, the company negotiates significant discounts with hotel operators, and passes the savings on to customers. Thus if AirTran is to succeed in the Orlando market, it will need to ensure its vacation package offerings and pricing, not merely flights, are competitive.

Nevertheless, I imagine that in many of these cities, AirTran will be the victor, and this I see as more positive for consumers than Allegiant. There are a number of reasons for this, including AirTran's more transparent and inclusive pricing structure outlined above, as well as the fact that AirTran is starting to make Orlando into a hub for Caribbean services, and customers who want to fly from Knoxville to San Juan may soon be able to do so via AirTran, something unavailable to Allegiant customers. But perhaps most important of all, if AirTran succeeds in these smaller cities with Orlando service, it may ease the way for the carrier to offer services to more business-oriented destinations, such as New York, Boston, Baltimore, and Atlanta, the latter two allowing customers to connect to additional AirTran cities. Many of these small markets have incredibly high fares (Grand Rapids, for instance, was recorded by the Bureau of Transportation Statistics, as having the second-highest airfares in Q3 2009). While service to Orlando alone isn't likely to lower fares considerably in these markets, since most business travelers need to head elsewhere, it helps to establish the carrier in the community--essential for starting services against fierce legacy competitors. As with many airline duels, this one will be interesting to watch going forward, and if AirTran is the winner, could have implications for how Allegiant will address competitors encroaching on its other bases.

Trends & Predictions for 2010: Part II

As promised, here is the second part of Airline Bulletin's discussion of trends and predictions to examine in the coming year.

Prediction #1: Industry Consolidation, Especially Abroad
While U.S. carriers have made efforts to reduce their capacity and form strategic partnerships with other carriers, it does not appear likely that we will see a full-fledged merger or buyout in the U.S. in the coming year. This is not to say that such consolidation is impossible, rather that it's simply unlikely. There aren't a lot of perennially weak airlines left to consolidate. Frontier (which has recently showed signs of strength) and Midwest have been combined, Sun Country, to my amazement, seems to be hanging on, and small LCCs like Spirit and Allegiant that have defined business models and solid market niches don't appear to be losing buckets of money either. That being said, anyone is a possible takeover target or buyer. Even Southwest, which has historically avoided growth by acquisition (with a few exceptions), has signaled of late that it is open to potential mergers.

US Airways Deals?
One carrier that still mystifies me is US Airways. The airline has been very aggressive in implementing ancillary revenue-generating programs and cutting costs/capacity. CEO Doug Parker seems to know what he's doing in this regard. But, US Airways may not be very poised for future business travel growth. It operates by far the smallest international route network of any of the 5 legacy carriers in the States, and has actually cut some of its European routes recently due to poor loads. Growth in Asia has taken something of a hiatus, as US Airways let its Philadelphia-Beijing route authority expire after the airline wanted to avoid opening the route due to the recession. And the carrier's position in Star Alliance has been weakened due to Continental's recent entry, and due to the announcement of a strengthening of reciprocity between United and Continental frequent flyer programs. The conventional wisdom has been that American would make a bid for US Airways, since American has avoided much of the consolidation activity within the past 7-8 years, and as a result, has watched its market share decline, while US Airways needs an available suitor. But American and US Airways have almost no fleet compatibility--American is mostly Boeing, US Airways is mostly Airbus. And another merger would only further complicate the labor troubles that have hampered US Airways recently, particularly with its pilots union having trouble integrating seniority between old US Airways pilots and former America West pilots. On the plus side, the route networks of American and US Airways would align somewhat, with US Airways having hubs in the Southwest, Southeast, and Northeast, all regions where American lacks hubs (American's Miami hub, mostly geared towards traffic to/from Florida or Latin America notwithstanding). However, both carriers are relatively weak in Asia and the Middle East, areas where they will need to ramp up capacity if they hope to compete in these increasingly important business markets.

What seems to be a more plausible idea, actually, is a buyout of Spirit by US Airways. US Airways as noted above has been very aggressive, perhaps the most aggressive of any legacy carrier in seeking out new ancillary revenue opportunities, and transforming itself into an LCC which can effectively compete against the likes of Southwest, JetBlue, and AirTran on the ultra-competitive routes along the eastern seaboard. A buyout of Spirit would have very strong fleet complementarities--both carriers fly A319 and A321 aircraft, as well as strong route network complementarities. US Airways tried a few years ago to open a mini-hub in Fort Lauderdale--Spirit's biggest base, with routes to Caribbean destinations, but was fended off in part due to Spirit's competition. There is clearly money to be made on these routes, but US Airways lacked the cost structure several years back to adequately compete. Now the carrier has realigned its costs, and a buyout of Spirit would make accessing such routes much easier.

It would also do something else which is pretty important. The two slot swap deals announced earlier this year, which (if approved) will strengthen legacy carriers at slot congested airports while helping to keep out low-cost competitors. US Airways, even though they are starting to act like a low-cost carrier, is not a low-fare carrier, unless it is forced to be through competition. US Airways would rather stifle demand with higher fares (and higher profits) than lower fares which stimulates demand but reduces yields, which is what Southwest tends to do. Keeping slots in the legacy carrier "family" prevents potential low-cost competition at slot-congested airports (see also Prediction #2). Spirit is one of the few LCCs to have slots at both LaGuardia and Washington National (even though it has relatively few slots in both). A buyout of Spirit would help diminish low-fare competition at these airports, and allow legacies to charge higher fares to business customers. However, I still think that this deal is somewhat improbable, only because Spirit is presumably a money-making carrier with a good market niche, while US Airways is a money-losing carrier with lots of problems that could make a merger tricky. It could be an easy buyout, or it could just be an obstacle to US Airways doing what it needs to do to revamp itself to compete against LCCs while expanding its international network.

European Consolidation
In Europe, the picture is much simpler. I don't anticipate many state carriers to go out of business, however I do imagine that governments will work even harder in the next year to privatize or revamp the following state carriers, named yesterday in Part I:
CSA Czech Airlines
Croatia Airlines
LOT Polish Airways
MALEV Hungarian Airlines
TAROM Romanian Airlines

After additional research, I also want to add the following carriers' names to this watch list:
Aer Lingus¹
Air Malta²
Bulgaria Air

Given the obligation of these governments to maintain positive images, it appears extremely unlikely that they will suddenly pull the plug on these carriers' operations, stranding passengers (voters) and angering the public, a la the recent FlyGlobespan fiasco. However, such airlines are definitely at risk of being purchased by larger airline conglomerates or of being privatized. 

Notes:
1. Aer Lingus may be at risk for another Ryanair takeover attempt in the new year. The carrier has struggled to compete against Ryanair, and has gotten push-back from its unions as management tries to contain costs. Efforts have been made to diversify the carrier away from Ireland, opening new routes from London Gatwick. While the carrier may avoid a Ryanair takeover, serious reforms are needed to make the company profitable once again, and these do not appear forthcoming.
2. Air Malta may also be in need of further reform due to the recent arrival of LCCs in Malta after the airport lowered passenger charges. Air Malta had effectively been protected from LCC competition due to these high charges, but this is no longer the case. As a result, the carrier must find ways to diversify and compete. But since the vast majority of Malta traffic is holiday-oriented, and thus, price-sensitive, it appears unlikely that unless Air Malta can turn itself into a bare-bones LCC, the carrier could face extinction. Another possibility would be a buyout, perhaps by another LCC like easyJet, which would reform the carrier, much as it did with GB Airways, while maintaining most of the its routes.

In terms of LCCs, there are simply too many out there, and too few of them have such well-defended market niches that they can't be attacked by market leaders easyJet, Ryanair, Wizz Air, and Norwegian. I believe that the following carriers are in trouble, and are at risk of potential sudden shutdown. As a traveler, I would do some research before booking with them, and then only with a credit card:
bmiBaby_³
Cimber Sterling⁴
Niki
SmartWings
Vueling⁵
Windjet⁶

3. bmiBaby is unlikely to engage in a sudden shutdown, now that the carrier is owned by Lufthansa. If bmiBaby is closed, it will likely be in a controlled fashion, or if it is sudden, passengers should anticipate far fewer inconveniences than when FlyGlobespan shut down (ie. Lufthansa will likely offer alternate flights, etc.). However, bmiBaby is under heavy competition from easyJet and Ryanair. And while the carrier is growing--it recently expanded at East Midlands which easyJet vacated due to poor yields--it is unclear whether the airline, with relatively old, inefficient planes and infrequent service on many of its international routes, will thrive in the coming years. Lufthansa may use its recent acquisition of British Midland mostly for its aircraft and slots at Heathrow, taking the airline's good routes and using British Midland to help feed into Lufthansa's long-haul routes, while scrapping much of the rest of the company. As British Midland's low-cost subsidiary, bmiBaby doesn't have very much to offer Lufthansa, and a sale or suspension of services appears likely.
4. Who knows what's going on with Cimber Sterling? The carrier seems bereft of a coherent strategy, flying both business and leisure routes with a bizarre mixture of aircraft. Most of Sterling's core routes were taken over by Norwegian and Transavia immediately after that carrier's demise, and Sterling's new namesake has been left with relatively thin routes and little room to grow. I see Cimber as extremely vulnerable to shutdown.
5. Vueling is probably not going to shut down immediately, but will be increasingly vulnerable to competition from easyJet and Ryanair in Barcelona and Madrid. It is unclear whether the combination of Vueling and Clickair has really made the company more financially stable, and due to this lack of information, I am concerned about the carrier's future. However, Vueling has potential to thrive and grow within the coming years. It has a large fleet, a relatively low cost structure, and by operating from primary airports, including Heathrow, can attract higher-yielding business travelers. Thus, it is less vulnerable than most of the other carriers named on this list, but is vulnerable nevertheless.
6. Same issue as with Cimber. It's hard to know what's going on with this carrier. It's privately owned, not discussed much in the press, and it seems hard to believe that they have a real competitive advantage in the marketplace. Now maybe they're like Spirit Air in the U.S., and have a relatively undisturbed market niche on thin routes to/from Sicily. And given Ryanair's recent announcement that it may close domestic routes within Italy, WindJet may benefit through expansion of services. But without clear evidence that WindJet is a profitable LCC with competent management, I have to place them in the same category as Cimber--extremely vulnerable to shutdown.

Prediction #2: Continued LCC Growth
As the economy continues to suffer, expect more businesses to shop around for travel, and send employees on LCCs when necessary. LCCs will try to respond to this growing demand. In the U.S. in particular, LCCs will likely make more efforts to enter or expand services at airports that are dominated by legacy carriers and which are the few remaining bastions of high fares in the U.S. While virtually every large metro area in the U.S. has low-fare airline service, many large, primary airports in these metro areas lack much low-fare service. Examples include Dallas Fort-Worth, Miami, Chicago O'Hare, Newark, Washington National, Cincinnati, Charlotte, Houston Intercontinental, and Atlanta (obviously, AirTran has a large hub here, which keeps fares lower than they otherwise would be, nevertheless, the lack of Southwest, JetBlue, or other LCCs in the Atlanta area at all is problematic and allows a Delta/AirTran duopoly to set prices). Although some of these airports are more congested and delay-prone, they are often preferable for business travelers, as they are easier to access, are located closer to where companies are situated, have better facilities and connections to other airlines, etc. In the coming year, expect expanded service from AirTran, Southwest, and JetBlue to the airports above. While new leisure-focused service will be added, particularly to/from the Caribbean, don't count out future expansions at these key airports for business travelers. Leisure demand has actually held up better than business demand, and so while LCCs will do well in leisure markets, because they are already strong in California, Florida, and the Caribbean, less of the growth in their operations is likely to be concentrated in those regions, since little added LCC capacity is needed to handle this traffic.

In Europe, while it may seem like business routes would also see expansions in service, this does not seem to be the case. Ryanair has announced minimal service of late that will be attractive to business travelers, mostly because it is concentrated in very distant and inconvenient airports. EasyJet, which has aimed to take business customers away from BA and other full-service carriers, has instead recently announced that it will add new service to a host of leisure destinations next summer, mostly in Turkey. Such moves seem to place easyJet and Ryanair in closer competition with European charter carriers such as Monarch than legacy carriers like BA. It will be interesting to see whether carriers like Wizz Air, Norwegian, and Air Berlin follow suit and concentrate growth mostly on leisure routes, but that would be somewhat counterintuitive, given the growing demand of businesses to trim travel costs.

Prediction #3: Increasing Focus on the Environment
While there are other interesting predictions to be discussed, it's getting a bit late and I need to get this out. So I'll conclude with my third prediction, which is something that will be of increasing importance not just in 2010 but in the coming decade. Expect more airlines to highlight their "green" credentials whenever possible, through marketing campaigns, press releases highlighting environmental initiatives (such as this recent announcement highlighting airline participation in a jet biofuel scheme), and programs to offset emissions. Such efforts will be reinforced as Boeing delivers the fuel-efficient 787 Dreamliner to its first customers next year, and as the U.S. Senate debates a cap-and-trade bill to combat climate change. Although we're in a recession and customers are price-sensitive, more and more consumers are going to make what they perceive to be environmentally-friendly choices, given growing awareness of environmental concerns. While airline efforts to address the issue are mostly greenwashing, since the benefits of getting customers to recycle soda cans on the plane or powering one engine with 50% biofuels aren't diddly squat compared to the effects of contrails fully-loaded commercial jets spew out at high altitudes, such efforts will likely succeed at winning customers over since most people don't know any better. What we won't see, however, are serious efforts to make the industry more environmentally-friendly through new technologies. V-shaped aircraft ("flying wings") or better yet, high-altitude airships would radically alter the airline industry as we know it, but they would also make a substantial dent in the industry's pollution levels. But because such technologies aren't compatible with current air transport infrastructure, are not seen by consumers or regulators as safe, and in some cases are slower than conventional aircraft, don't expect Boeing to announce production of such aircraft anytime in the near future. This is not to say that such technology won't be commercialized, but significant steps aren't likely to be taken within the next year due to the recent air travel slowdown and manufacturers' focus on the latest generation of fuel-efficient planes.

In 2010, as the airline industry globally continues to struggle, it will likely once again continue to make headlines as it tends to do, and Airline Bulletin will be here, whenever possible, to offer commentary on these events. Until then, have a wonderful new year!

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.