ATA Files For Bankruptcy, Shuts Down

ATA, which has in recent years downsized its scheduled service operations to focus more on its charter business, filed for bankruptcy and ended scheduled service flights today. ATA had in recent weeks announced the closing of its Chicago-based scheduled flights, mainly because high fuel prices were making them unprofitable. However, what did ATA in was the loss of a very significant military charter contract, without which, the company was unable to survive. ATA, once the 10th largest airline in the US, was a much smaller player immediately before its demise, and so its loss isn't tremendously significant to the overall market. However, given that the carrier served a number of routes to/from Hawaii, it will deliver another blow to that state, which has been reeling from the loss of Aloha. Fortunately, other carriers will likely fill in the gaps left by ATA, though passengers from Oakland may be forced to trek across the bridge and fly from SFO in order to get to Hawaii. Passengers on Hawaii routes could also wind up paying higher fares, though competition is still plentiful on these routes, and fares won't increase dramatically.

Perhaps the biggest victim of this collapse is Southwest Airlines. Southwest, which had a codeshare agreement with ATA, will be unable to immediately fill many of the gaps that the agreement brought. Southwest funneled passengers from its flights onto ATA flights to Hawaii or Mexico. Since Southwest averages lower load factors than most other US carriers, the codeshare agreement helped the company fill seats on flights that otherwise would not be full, generating critical revenue at a time when the airline was facing higher costs. Southwest is looking to start flights to Mexico with its own aircraft and ATA could have provided additional capacity and travel options for Southwest customers traveling from Mexico or other international destinations. Moreover, at these international destinations, ATA and Southwest could have shared ground crews and gates, reducing costs and making their service more competitive.

With two small LCCs collapsing in the past week, will we see more? Probably not, at least not in the near-term. That being said, there are a couple smaller carriers that are vulnerable. USA3000 may be in trouble, as that carrier is in a similar position as Aloha, facing heavy competition on its routes with low yields. While it still operates a strong charter and vacation package business, that could be threatened due to a potential decrease in consumer spending on air travel, especially leisure travel, as a result of the impending economic slowdown. Sun Country is also trying to figure out a solid business model in this climate, and that carrier may reduce some of its scheduled service operations and focus more on its charter business. However, larger LCCs are unlikely to fail anytime soon, because they have much more substantial cash positions. That being said, in this environment, successful airlines will need to be able to have more control over their capacity, and legacy carriers, with larger fleets and a higher percentage of owned versus leased aircraft than some LCCs, will be better able to make adjustments. The carriers who could be vulnerable are those that don't have many aircraft that can easily be parked (due to high lease costs), and which are facing heavy competition and low yields. Frontier is in this category, and it has the added disadvantage of having a weaker cash position than many of its larger rivals, making it more vulnerable in a time of uncertainty. While the airline is making the smart decision to diversify its operations through regional service, it may not be enough to offset increasing competition on its mainline Denver routes. Unless Frontier finds some way of redeploying its capacity, that company could face trouble, as neither Southwest nor United are going away anytime soon in Denver.

If fuel costs continue to rise, there could be other carrier fatalities, as well as increased capacity reduction in some markets. Airlines will have to pass higher fuel costs on to customers, and not everyone can pay them. Therefore, demand on many routes, especially leisure-oriented routes, could decrease, potentially delivering another blow to LCCs, which tend to have more leisure-centered networks. In the immediate future, the little cuts that most airlines will need to make will add up, though they may not attract the media attention that ATA's collapse did, and customers will begin to notice just how problematic high fuel costs are to our air transportation system.

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Two Airlines Take Increased Risks With New Flights

Frontier Airlines announced that it would start new red-eye service between Denver and Hartford, Connecticut starting March 2. This move makes sense in many regards, but also raises some questions about the level of risk Frontier is willing to take in a new market. Hartford isn't a very large airport, and doesn't have much service to the West. But Hartford does have Southwest with service to several destinations that allow passengers to connect to Western Cities, including Nashville, Chicago, and Las Vegas. Southwest has already lowered fares substantially in the market and may make it difficult for Frontier to compete. One of the few things that Frontier has going for it is that it offers nonstop service to Denver, a city currently unserved nonstop from Hartford. In Frontier's press release, the service to Denver specifically seems to be promoted, more so than other press releases, especially in comments by Governor Rell, and Frontier's own self-promotional paragraph stating:

"Frontier is proud to be the first carrier to fly non-stop between Hartford and Denver, and we're confident passengers who are unfamiliar with our airline will enjoy our new comfortable aircraft, superior service, consistent on-time departures and arrivals, and in-flight entertainment," said John Happ, senior vice president of marketing and planning for Frontier. "We get more requests from passengers to serve New England than any other area in the U.S., so we're looking forward to bringing the Frontier experience to Connecticut and southern New England travelers. Not to mention that with our early morning departure from Hartford, passengers can be in Denver and up to the mountains by noon to enjoy a half day of skiing, biking, hiking or any of the great activities the beautiful Rocky Mountains have to offer."

While the service is timed to offer connections to other cities in the West, it appears that Frontier is launching this service primarily because it will be the only non-stop service between Hartford and Denver. But is there a reason why this market has been previously unserved? It's interesting that United, doesn't serve the Hartford-Denver market, even though both cities are thriving business centers and business travelers are United's core customer base. If United doesn't feel a need to serve the Hartford-Denver market nonstop, then there may not be a need for that flight. Even with Southwest's presence, Hartford is by no means a low-yield destination, and United could easily charge a premium on nonstop service if it wanted to since Southwest doesn't serve the Hartford-Denver route nonstop. Frontier's entering the market with fares that are likely below where United would set fares, which might spur demand, but it also might prevent the flight from becoming profitable.

One challenge for Frontier in Hartford is to make itself well-known. Hopefully the airline and the airport can work together to publicize the new service and make it a success. Southwest is currently the only low-fare carrier at Hartford with a substantial operation and Frontier's new service of one daily flight might get overlooked by consumers when they need to book a trip out West. Many customers in Hartford have never heard of Frontier because Frontier hasn't served New England for several years since they left Boston in 2002. Frontier needs to get it's brand recognized by consumers in the Hartford area if it wants to convince customers that there is a low-fare alternative from Hartford. That could pose a challenge, but Frontier is aware of the problem and will do what it can to stir publicity. Nevertheless, it will be difficult, after all, how does an airline with one daily flight publicize a new destination effectively? JetBlue did this successfully when it launched a daily nonstop red-eye flight from New York to cities such as Seattle/Tacoma, Salt Lake City, or even Denver. All of those routes have been very profitable, so marketing a single daily flight can be done well. Frontier is taking a big risk with Hartford, but if it works hard to publicize the new route and offer fares that are reasonable, the new route should succeed. One suggestion, though, Frontier should make its in-flight television free to all passengers on the route until the end of the summer, so customers can experience all of Frontier's superior amenities over Southwest.

But Frontier isn't the only airline taking risks with new flights. Delta also announced new flights between New York and Chicago, making the market share battle on the route all the more interesting after JetBlue announced new service from O'Hare to JFK several weeks ago. Delta plans to start new service between LaGuardia and Midway, the two most convenient airports for business travelers in New York and Chicago, respectively. Delta's regional partner Shuttle America will operate Delta Shuttle-like service between the two airports with E170 jets that seat 70 passengers. The aim is to attract business travelers, who will like the convenient airports (including the convenience of flying from the Marine Air Terminal at LaGuardia) and the regularly-scheduled flights Delta plans to offer. Delta also plans to add additional flights between JFK and O'Hare on 50- and 70-seat regional jets through Delta's regional subsidiary Comair. The new service will ratchet up the market share battle between New York and Chicago, and will ultimately create some losers. Airlines like ATA or AirTran that have smaller operations between Midway and New York City (ATA to LaGuardia and AirTran to Newark) could be marginalized if larger airlines like American, United, or Delta use their large market share to offer deep-discount fares, driving these smaller carriers out of the market. Both ATA and AirTran might have to withdraw from the crowded New York City to Chicago market if they can't distinguish themselves from their competitors and offer lower fares than carriers with larger market share.

But this move is dangerous for Delta as well. Even though Delta will be operating the new flights with smaller jets, there is still a whole lot of risk involved. Delta has a lot of market share in New York City at both LaGuardia and JFK, but they have less in Chicago. Marketing these flights to business travelers in Chicago as a plausible alternative to American and United may be difficult. Given that business travelers often stick with an airline that they've racked up the most miles with, Delta might have a hard time breaking into Chicago, where there are thousands of business travelers that have racked up significant amounts of miles on American and/or United. Delta also may have trouble operating the standard of service business travelers expect. American and United set high standards of service and comfort for their New York to Chicago flights. But Delta's flights involve smaller jets that business travelers typically dislike because smaller jets are less comfortable to fly on. If Delta truly wants to make the new flights business traveler-friendly, then they should operate them with mainline aircraft. But, if Delta wants to make the flights profitable, Delta should probably use smaller planes. With this latest grab for business traveler market share, there is little doubt that there will be realignment in the New York to Chicago market next year, and every airline that flies the route is vulnerable to competitive pressures. ATA and AirTran are most vulnerable to exiting the New York to Chicago market but all airlines on the route may to cut flights, even the strongest such as American or United. Fares on the route will likely decline slightly in the next six months, but may rise if some airlines retreat and remove seats from the route. It will be a very interesting year in 2007 on the New York to Chicago route, and Delta's announcement will certainly not be the last we hear about the route anytime soon.

By the way, this is a milestone for Airline Bulletin. It is the 300th post since the creation of the site over two years ago. I certainly hope to write at least 300 more in the coming years.

Will Allegiant's IPO Change its Business Model?

Yesterday, Allegiant Travel Company, the parent of Allegiant Air, filed the necessary documents to offer at least five million shares of stock at between $15 and $17 a share. The company plans to list on the NASDAQ under the symbol ALGT. While it's been no secret that Allegiant has planned to file an IPO, it will be interesting to see how Allegiant's IPO goes over with potential shareholders. One of the most recent airline IPOs was JetBlue, which was a tremendous success at first, but then fell like a rock and the stock still hasn't fully recovered from its losses. It's not clear how well investors will react to Allegiant's IPO, but it probably won't be as well received as JetBlue's. Investors like that Allegiant makes money, they made over $10 million on $180 million in revenue for the first nine months of this year, and that Allegiant has an innovative yet successful business model by flying mainline aircraft into small airports several times a week. But, investors may have a couple of concerns. First, Allegiant's business could suffer tremendously if there is another recession. After all, Allegiant is a leisure airline, and if people don't have discretionary income to spend on vacations, Allegiant could lose most of its business. But with the relatively stable economy, what some investors may be more concerned about is Allegiant's long term growth prospects. In the next two to three years, Allegiant should grow at a reasonable rate; Allegiant plans to more than double the number of cities it serves. Allegiant has identified about 70 additional markets that would be feasible in the next few years, and many of them are located in geographic areas that allow Allegiant to add flights to both Las Vegas and Orlando. But after that, Allegiant may have trouble growing. Allegiant will likely expand its operation in Tampa/St. Petersburg as well as their minor focus city in Palm Springs, but investors will want to see additional expansion, and this company likely won't be able to deliver unless they change their business model somewhat and stimulate revenue growth 3-5 years from now.

One way Allegiant could appease investors is by increasing ancillary revenues. Allegiant's use of ancillary revenues was talked about in a recent post and helps explain much of Allegiant's success. Allegiant could increase ancillary revenues through new partnerships such as a frequent flyer program. Most frequent flyer programs generate revenue from third-parties who buy miles from the airline and use them as an incentive for consumers to buy their product. Many companies do this with major frequent flyer programs today; hotels, car rental firms, telecom providers and many more all purchase frequent flyer miles from airlines and award them to consumers who buy their product. But a frequent flyer program brings its own challenges. For one, most Allegiant customers don't fly the airline frequently, most customers fly perhaps once or twice a year for vacations. Most airlines use frequent flyer programs as an incentive for customers to fly more often, but that couldn't happen at Allegiant due to the nature of their business model. Because of that, if Allegiant had a one-year expiration date for miles like other low-cost carriers including Southwest, JetBlue, and AirTran, it's unlikely that many customers would be able to redeem miles or credits for a free flight. That may appear beneficial for Allegiant, but most customers wouldn't bother to earn miles if they realize that they wouldn't be able to earn a free flight. Even if Allegiant had no expiration date on its miles or credits, it would be difficult to see many customers redeeming miles or credits for a free flight unless the redemption level was low, perhaps four round-trip flights for a free one. Allegiant could also increase ancillary revenues through fees for checked baggage or a paid online check-in service similar to Ryanair's, except those who pay to check-in online could receive assigned seating but that wouldn't be as popular with passengers and wouldn't generate the level of revenue many investors demand.

But if Allegiant really wants to grow in the long-term, they may need to make acquisitions of another carrier such as ATA or Aloha. Hawaii is the next logical step for Allegiant Travel to expand to, and if the airline purchased a small airline that offers Hawaiian service like ATA or Aloha, that might allow the airline to increase its reach, although Allegiant would likely have to add a new aircraft type into is fleet. If Allegiant were to acquire ATA, for example, Allegiant could use ATA's 757-300 aircraft, which it could get at a relatively low cost. The 757-300 is an unwanted aircraft like the MD-80 because so few were made that spare parts and maintenance can be expensive. But ATA has a relatively large fleet of 757-300s and those costs could be minimized if Allegiant purchased that fleet. Allegiant could start Hawaii service from current origin cities on the West Coast including Bellingham, Stockton, Fresno, and Santa Maria. And Allegiant could charge a small premium on the flights since they are from a smaller airport that's more convenient to its customers. Instead of driving to Vancouver, San Francisco, or Los Angeles, customers could fly from their hometown airport and save on travel costs to a larger airport. But an acquisition of ATA isn't likely anytime soon. ATA has found its niche, and with the help of codeshare partner Southwest Airlines, ATA is expanding service to Hawaii, not decreasing it. ATA also has other aircraft including L-1011s, 757-200s, and 737-800s that would need to be dealt with. Moreover, ATA still operates some domestic service, such as from Houston Hobby to New York LaGuardia. Also, Allegiant might have trouble filling a 757-300 for Hawaii flights, a 737-800 might work better on some routes, but it would be more expensive to operate per passenger than a 757-300. That is one of the main reasons why a takeover of Aloha wouldn't work as well, since they operate a similar aircraft, the 737-700, which is expensive to operate on a per passenger basis between the Mainland and Hawaii. Also, Aloha conducts intra-Hawaii flying which doesn't fit within Allegiant's business model whatsoever. Like most airline acquisitions, Allegiant's purchase of ATA or Aloha probably wouldn't deliver the synergies promised, but it does look good on paper. But, in two to three years if Allegiant bought only some of ATA's assets, such as their 757-300s it might allow Allegiant to expand to Hawaii without taking over ATA which would likely add considerable cost to Allegiant's bottom line.

In the interim, Allegiant will continue to grow quickly. Allegiant has just made an unannounced deal with Alaska Airlines to purchase 16 MD-83 aircraft to add to Allegiant's fleet. These new aircraft aren't too old, only 9-12 years old on average, although given Alaska's poor maintenance record, their condition is suspect. But, since Alaska is desperate to get rid of these planes in order to transition to an all-737 fleet, the price was probably too good for Allegiant to pass up. These 16 planes will nearly double Allegiant's fleet and allow Allegiant to expand to dozens more cities in the near future. That growth will probably make the stock look good for potential IPO investors, but if Allegiant doesn't adjust their business model, that growth could disappear 3-5 years down the line.

JetBlue Squeezes Into Chicago

On Monday, JetBlue received approval from the FAA to begin serving Chicago's O'Hare Airport in January. It might be appropriate to mention that, after all, one of the greatest movies ever according to this author, The Blues Brothers, was set in Chicago. JetBlue hasn't announced destinations from Chicago, but has said that they will serve existing cities. The most likely candidates are Boston and New York, but Washington D.C., Long Beach, Oakland, Fort Lauderdale, and Orlando may also receive flights. JetBlue applied under the radar to receive approvals within the past couple of months for O'Hare service and surprisingly they were approved, albeit for fewer flights than intended. When JetBlue initially filed its application to the FAA, they requested eight daily flights from Chicago but after objections from American and United, JetBlue cut their request in half to four. JetBlue received four arrival slots during peak hours, one for approximately 8:30 am, two for 11:00 am and one for 4:00 pm. The FAA currently limits operations during peak hours (7:00 am to 8:59 pm) into O'Hare because of frequent delays. In fact, in an agreement with the two largest users of the airport last year, the FAA was able to decrease the number of flights leaving the airport during those hours by 88. The FAA believes that airlines pack too many flights into the day and the airport cannot accommodate all of them. However, the real reason why delays occur at O'Hare is because of the lousy air traffic control network and the thunderstorms that often move through the area. Sadly, air traffic control systems are substandard around the country and plans to improve the network have fallen by the wayside. A substandard ATC system results in increased delays in getting planes off the ground particularly during bad weather. Newer systems with more advanced technology allow for speedier departures and arrivals, and allow the airport to fit more flights into existing facilities. At an airport such as O'Hare with thousands of flights daily, the problems with a substandard network multiply especially during the end of the day. If JetBlue wanted to, they could offer additional flights that arrive or depart the airport just outside of peak hours. For example, a redeye flight that departs California at 10 or 11 pm could get into O'Hare just before 7. JetBlue has been successful at offering flights that are at off-peak hours in other cities so they may be able to expand their O'Hare operation without obtaining additional slots.

JetBlue's entry into Chicago has been delayed numerous times. JetBlue has been interested in serving Chicago for several years and it has been JetBlue's largest unserved market for some time now. Specifically, JetBlue has been interested in offering flights at O'Hare and not at Midway where JetBlue feels there is too much competition. With a renewed focus at JetBlue on serving key business markets in order to achieve profitability, the airline recently made another attempt to serve Chicago. What concerns some observers, however, is that JetBlue will likely commence service to New York and Boston, two cities that already have dozens of flights a day from Chicago, and both also have several airlines on the route. For example, New York to Chicago has American, United, Delta, Continental, AirTran, and ATA. Boston has a similar number of carriers. If JetBlue were to enter markets that are already quite saturated, they might have trouble lowering fares and convincing flyers to fly with them. Even though JetBlue has an attractive set of amenities and flies from O'Hare, AirTran typically has lower fares than JetBlue and offers XM Satellite Radio. Plus, American and United will likely match whatever fares JetBlue offers from O'Hare. If JetBlue chooses not to serve New York nor Boston they will likely look at Oakland and Washington D.C. Both of these markets are currently served by Southwest (although from Midway instead of O'Hare) and Southwest has several flights a day to the two cities. But, JetBlue might have a better time attracting customers on these routes, especially since serving O'Hare would be a convenience to those in the Northern and Western suburbs of Chicago who lack low-fare service to these cities, but it would be difficult to really offer lower fares than Southwest on these routes. Perhaps that's not JetBlue's goal, but it will be difficult nonetheless to compete with so many carriers on the route. JetBlue will run into stiff competition at O'Hare from the established carriers who will do whatever they can to keep their business travelers by reminding business travelers of the frequent schedules offered by the airlines (most major business cities have hourly or bihourly flights), matching JetBlue's lower fares, and offering frequent flyer bonus miles to stick with them. Most business travelers and their companies that pay for the travel will likely stick with the established carriers, but other travelers for leisure or who travel for small businesses and who pay for their own travel might be attracted to JetBlue if the price and schedules are right.

Could Chicago's travel market become increasingly fragmented as airlines with varying clientele and standards of service continue to add flights to the area? Certainly the city is blessed with every low-fare airline in the country, though most of them reside at Midway. Southwest is expanding their operations at Midway, and now Chicago is one of Southwest's top three markets. While AirTran has slowed their expansion plans somewhat, they have maintained their point-to-point service from Midway and may expand services depending on how some of their newer flights work out including service to Dallas/Ft. Worth and Charlotte. ATA continues to offer services to cities Southwest forgoes such as Boston or Dallas/Ft. Worth. Frontier serves the West through its Denver hub from Midway. O'Hare has two other low-cost airlines aside from JetBlue. One is Alaska, which serves Seattle/Tacoma and Anchorage, two markets that aren't especially competitive. Spirit Airlines caters to the very competitive leisure market with service from Chicago to Ft. Myers or Ft. Lauderdale with connections to destinations throughout the Caribbean. Meanwhile, even with the FAA-mandated flight reductions, American and United still possess two gigantic hubs at O'Hare that serve virtually every city in the United States and bring tens of thousands of passengers through the city each day. Meanwhile, business travelers flock to the airlines and American and United reciprocate with generous frequent flyer benefits. With all these carriers in Chicago, is there room for the little guy? JetBlue has terrific name recognition across the country so they wouldn't encounter the kinds of problems that Spirit Airlines might incur when expanding in Chicago because consumers just can't keep track of all these airlines. Now a great number of customers will just go online and buy a ticket from no-name airlines, but if airlines want the higher yields that come with business travelers, they have to have the name recognition and the amenities to go with it. JetBlue has a recognized brand, Spirit doesn't.

Look at AirTran, years ago this airline had very little name recognition but they came into Chicago and gave travelers very low fares (they do a great job of passing on their very low costs) and the amenities that business travelers wanted. Today, AirTran has built upon their past by offering XM Radio, point-to-point service to major business cities, most notably ones that Southwest doesn't serve, including Boston, Newark, Dallas/Ft. Worth, and Charlotte, and a business class section for travelers who will pay for more comfort. AirTran has done a great job of catering to the business crowd from Midway, but as we can see by their avoidance of serving business markets Southwest serves from Chicago, such as Houston, Washington D.C., San Francisco (or Oakland), Los Angeles, or Philadelphia, it's clear that while AirTran has found a niche with business travelers, most of its traffic lies with leisure travelers, and the airline just can't compete directly against Southwest in markets such as the ones listed above. If American, United, and Southwest get better with yield management by offering lower fares more often and charging through the roof only when demand exceeds capacity, then they may be able to pressure smaller carriers out of the market if the big three can offer more loss leading low fares that could force other, smaller airlines to match prices that could be suppressed. That was the fear after Southwest merged with ATA, because a new super-carrier could pressure AirTran out of the market, but AirTran has found its niche, albeit one that is smaller than they desired. At O'Hare American and United may be able to force the FAA to give them more flights or to keep smaller carriers like JetBlue from entering O'Hare in the first place. If this occurs, Chicago could become even more of a three-airline town than it is today. Remember that part of the reason why American and United did relatively little to push back when JetBlue applied to enter is because at four daily flights JetBlue's routes would hardly make a dent in their market share, and more importantly, when both airlines have bids to serve China at the DOT, it's all about politics, and both airlines want to use their governmental relations capital on China routes. Whether that works is still unknown, but one thing is for sure, even with JetBlue entering Chicago, this city will likely gravitate towards three airlines unless the FAA encourages more competition by limiting the number of flights at both airports for competitive reasons, not for operational reasons. If not, that could marginalize the role of JetBlue, AirTran, and other smaller carriers.

Aloha Exits Bankruptcy, But Can They Survive?

As this blog noted a few weeks ago, competition on mainland U.S. to Hawaii is fierce and new ATA service is only bound to make things worse for the little guy. Airlines such as Northwest, Hawaiian, and United are selling thousands of seats on larger, more cost-effective aircraft than those of ATA and Aloha which makes their operations cheaper. However, the core of Aloha's business is inter-island service, where the airline has dozens of inter-island flights each day.

Unfortunately for Aloha, the inter-island business is very competitive, and there is considerable pricing pressure on these routes. The yields on these routes are similar to NYC-Florida, aka weak. Even though many travelers buy tickets at the last minute, which would improve yields, these routes are full of overcapacity and overcompetition. To make matters worse, the Superferry will likely come online in early 2007, and will save the vast majority of customers money over flying with the convenience of being able to bring your car. The ferry will serve Kaua'i and Maui from Honolulu in 2007, and the Big Island in 2009. Mesa is also planning their inter-island service, but with smaller and less cost-effective aircraft. FlyHawaii, the airline on paper which planned to operate service with ATR aircraft went belly-up months ago so they are out of the picture. But Aloha will have continued difficulties. Hawaii is doing quite well economically right now, with very low unemployment and high hotel occupancy rates. Yet this prosperity isn't guaranteed forever, and Aloha, which attracts a different clientele than some of the other airlines since they offer lower fares on average to Hawaii from the mainland. If there is a downturn in the economy, then Aloha may be the first to suffer since United will still be able to sell luxury business class seats to those with disposable income. Hawaiian and Northwest also have actual business classes (Aloha's "First Class" is simply domestic first, while airlines with bigger aircraft offer a better product). Aloha can survive with lower-fare passengers, but like all low-cost airlines, they will need to run an efficient operation if they want to make money.

ATA Plans to Emerge From Ch. 11-But Are Fare Wars to Hawaii the Answer?

As ATA plans to emerge from bankruptcy protection in the near future, the airline has laid out its plans for the future. What's to come? A renewed emphasis on leisure service, and a continuation of the success of its charter business. ATA announced new service last week, and is getting back to what the airline has done best for so many years, leisure service. Excluding the LaGuardia-Houston Hobby service, which was purely in the interest of the Southwest codeshare, ATA will be flying from Ontario and Oakland to Hawaii, replacing ATA's current San Francisco service, allowing travelers expanded access to the Southwest codeshare. The Ontario service will be once daily to Honolulu, while new Oakland service will be 2x daily to Honolulu, as well as 1x daily to Hilo and Maui.

In Oakland, ATA will be battling against another airline in bankruptcy protection, Aloha, which is also in the process of exiting, but not nearly as quickly as ATA. ATA will have the CASM advantage on the route, as ATA uses 737-800 aircraft, versus Aloha's 737-700s. Aloha is already fighting tooth and nail against Hawaiian in inter-island price wars where fares have been as low as $35 each way. Aloha needs the mainland routes to help feed inter-island service. Aloha may not have a place in Hawaii if it can't find its niche. ATA just exposed Aloha's niche in the San Francisco Bay Area, and perhaps in Los Angeles, though ATA decided against serving Orange County, where Aloha's Los Angeles Basin operations are located. Both airlines are restructuring, but one may get squeezed. ATA has the advantage of having an expansive Southwest network to connect to, which could drive traffic ATA's way, but at the other end, Aloha has extensive inter-island service, and can tap into a customer base in any of Hawaii's major islands.

The real problem is cost per available seat mile. There is plenty of capacity to Hawaii, but which is cheaper, jamming passengers into the back of a United 767 or jamming people into an ATA/Aloha 737, which is barely able to fly the distance anyway?  United will leave bankruptcy soon with slashed costs and is capable of filling a 767, especially with the Pleasant Hawaiian Holidays contract that formerly belonged to ATA. Aloha flies to smaller airports with lower costs and ATA will be doing the same soon, but airport costs alone aren't enough to differentiate Aloha from United, Northwest, or Hawaiian. Aloha nor ATA has the right product to command a premium, and Hawaii is a very price-sensitive market, so it's hard to command a premium anyway. Even with higher fares, United can still beat ATA/Aloha hands down in terms of amenities or frequent flyer program. Plus, United has terrific premium class service perfect for business travelers who have been loyal to United on trips to NYC and want an upgrade or for honeymooners on a week-long getaway. Hawaiian and Northwest are also attractive for travelers traveling from the West Coast. In the near future, as both ATA and Aloha emerge from Chapter 11, these two airlines must find a way to make Hawaii work. Both have done it before, but with restructured competitors, fares which are still too low, and that darn oil above $68, they will need to dig deep to find success. Otherwise, Hawaii may be left to the big guys.

Indianapolis- A Perfect Example Of The Low-Cost Battles

At first glance Indianapolis may not be the normal low-cost market. It's not that big and could not support daily flights to many destinations and fares were not exceedingly high when Southwest came to town since there was already competition. ATA had a hub in Indianapolis before they had to reorganize, Southwest entered in 1989 and hasn't been able to expand the market significantly, it started with 11 daily flights then, and only runs around 20 now. But this market is key to explaining what is happening in the low-cost revolution.

After ATA had to reorganize, Northwest Airlines started building up at an airport they have neglected for some time. They started new service at the airport, building a focus city operation out of the city. They had service going to or announced for 16 cities at one point, however, some of those were seasonal destinations. Keep in mind, this is still big considering that they served 3 destinations from IND before, Northwest's domestic hubs.

AirTran announced new flights today out of Indianapolis to Fort Lauderdale, Atlanta, Orlando, Fort Myers, and Sarasota. This helps AirTran gain some important market share that is more difficult than ever to gain from Northwest or Southwest. All these transitions is really a perfect example of the transformations that have been occurring in the industry in regard to low-cost carriers.

Inefficient low-cost carriers, such as National, Vanguard, and ATA have all gone belly up, or in ATA's case, significantly reorganize. Since there was a flood of low-cost competition in many larger markets, such as Chicago, smaller markets suffered, such as Indianapolis. Southwest crushed ATA at Chicago, but didn't add many, if any new flights in response to the unmet demand out of IND. However, Northwest saw an opportunity to take ATA's place by having point-to-point service out of IND. Many in the media believe that one of the key reasons that larger carriers are losing money is because their hub operations are inefficient and costly. Besides, passengers don't want to travel through hubs if they don't have to. However, Northwest has three strong hubs around the Midwest, and this only strengthened their position in that region. They did the same thing in Milwaukee as well, but the low-cost competition in that city was not as strong. Focus city operations, and the idea that airlines can have strong hubs, yet still have non-stop service out of certain markets. This concept should become more widespread over the next five years where "legacy" carriers find ways to compete directly with low-cost carriers in certain markets where they may be weaker. Clearly Southwest hasn't put a great deal of emphasis on IND, and Northwest is taking advantage of that. That doesn't mean that Southwest can't strike back, but will it?

Two Airlines Posting Losses

Frontier reported late yesterday a loss for the past year of $23.4 million, while it lost $3.7 million it its fiscal fourth quarter. The airline has suffered due to higher-than-expected fuel costs, as well as the retirement in the fourth quarter of its last 737-300 aircraft. In addition, the airline expects to post a loss in the first quarter of fiscal 2006 around the $3.7 million it lost in the fourth quarter.

Frontier also announced yesterday two new routes to be operated by its JetExpress service on 70-seat regional jets. The new destinations are Fresno and Dayton, OH and each will be served by two daily flights starting August 31, 2005. The services will go to Frontier's hub in Denver.

Meanwhile, American Trans Air believes that it projects a loss for fiscal 2005 at $392.2 million, while they predict that in 2006 they will make $58.6 million.

Evaluating The ATA/Southwest Codeshare: Is it Working?

It was less than two weeks ago that ATA announced further destinations for its codeshare with Southwest Airlines, and with the further expansion of the agreement, Airline Bulletin wanted to evaluate whether it was working and whether it would help ATA survive as a commercial carrier. The agreement is unprecedented as it is really the first formal codeshare between two low-cost carriers. However, this agreement certainly didn't come from two healthy carriers, it came from two competing carriers, one on the verge of collapse. Southwest decided to take a stake in ATA, hoping to increase load factors on both carriers by expanding where you can fly on Southwest, without actually flying Southwest the entire way. Both carriers were able to survive.

However, for ATA, it was not as simple as a Southwest bailout. ATA wanted to expand at its home city, Indianapolis, and 16 days after issuing a press release saying that it will expand service from Indy, it issued a second one saying that it will cut back service there due to market pressures. Northwest Airlines has overtaken ATA as the number one carrier from Indianapolis. ATA then announced it was selling its Chicago Express regional subsidiary. It still has not finalized that deal.

However, ATA has come back, and will be expanding its Hawaii service over the summer. It announced new codeshare service, supposedly because the codeshare was a success, however that's unclear. It does seem, however, that the operation at Chicago Midway Airport, where most of the baggage and passenger exchange in the ATA/Southwest codeshare takes place, it working well. ATA is now competing more and more with Aloha and Hawaiian Airlines, both of which are in bankruptcy protection, which might give some indication of where ATA is headed next. However, the agreement seems to be helping ATA avoid that fate by being able to draw from a very large number of passengers. (Although Southwest is considered the sixth-largest airline in the U.S. it's number 2 in the amount of passengers carried, expanding the revenue opportunities for ATA).

If ATA makes it to December 2005, it will show that a low-cost codeshare can work, if it is structured properly. ATA goes into many of the markets that Southwest has not (and probably will not) enter in the near future. By avoiding overlapping routes, and focusing on the strengths of both carriers, this might be a winning agreement, but we must wait, at least a few more months...

ATA+Southwest Expand Codeshare!

At Phoenix Sky Harbor Airport, Southwest Airlines is getting 8 new gates in the "D" concourse and expanding its codeshare with ATA by allowing Southwest passengers from many destinations to transfer on ATA to Maui. Southwest and ATA are looking to expand their agreement and help ATA compete more effectively against Aloha and Hawaiian Airlines with increased service to Hawaii by ATA and connecting service to Southwest destinations in the U.S.A. Due to low yields in the Hawaii market, ATA cutting mainland service, and cutthroat compitition in the Hawaii market, this might be a good time for ATA to get out of the scheduled service business and go back to military charters full-time, which they still conduct and is profitable considering the wartime environment in the states.