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.

Harmony Ends Scheduled Service as Consolidation in Canada Continues

Harmony Airways announced today that it will end its scheduled services, starting with its Vancouver-Toronto flights on March 30, and the remainder of its services by April 9. Harmony has struggled to diversify itself as a Western leisure carrier, as WestJet and Air Canada have expanded service in the region and lowered fares. Harmony mostly flies seasonal flights between the Vancouver-Victoria, BC area to Hawaii. The airline operates flights from Vancouver, Victoria, Kelowna, Calgary, and Edmonton to Hawaii, as well as additional flights from Vancouver to Las Vegas, Palm Springs, and Toronto. At one point, Harmony was also interested in serving the China market, and the airline had hoped that China routes would diversify the company's routes, but due to regulatory issues, the airline was unable to get authority to serve China routes. Unfortunately, Harmony encountered tough competition on Hawaii routes from WestJet, which flies from Vancouver to both Honolulu and Maui on 737 aircraft, as well as the heavyweight Air Canada, which operates multiple daily flights on twin-aisle 767 aircraft to those markets. Now that Air Canada has restructured itself to be leaner and more cost-effective, it is able to compete with low-cost carriers like WestJet and Harmony and can offer even better values to consumers because it operates larger, more cost-effective aircraft on Hawaii routes. Harmony was unable to undercut WestJet and Air Canada's fares in most markets, and the airline had very little else going for them. Unlike Harmony, WestJet is well-liked and well-known in Canada, and passengers like it for many of the same reasons passengers in the States like Southwest. WestJet provides reliable, few-frills service at low fares. Because of this, passengers are much more likely to flock to WestJet, which is a name they can trust, rather than Harmony, which may or may not provide an acceptable experience, particularly since Harmony's fares were often more expensive than WestJet's. Harmony did not do a very good job bundling its flights with hotels and car rentals to create vacation packages, which could have offered customers a better travel value than Air Canada or WestJet. Vacation packages are an excellent mechanism to fill seats, and it's how charter carriers succeed in their businesses. Harmony's inability to effectively bundle vacation packages with flights almost certainly hurt load factors.

The only real surprising thing about Harmony's demise was how soon it came. Harmony's peak season is the winter months, when freezing British Colombians and Albertans head for the sun of the American Southwest or the Hawaiian Islands. Harmony probably could have held out a few more weeks, since there is still substantial Hawaii traffic over the spring break period, since the weather hasn't quite warmed up yet. However, if it didn't come this week, it was bound to come within the next month, because Harmony simply didn't have a coordinated strategy to make it through the off-peak summer months.

It's likely that Harmony will now be able to succeed in leisure markets they currently serve as a scheduled carrier, because the company will create a different strategy. Harmony will probably evolve into a smaller charter operation which will provide air travel to travel companies that sell vacation packages. Harmony could either provide lift for tour operators who need lift, or build their own travel business and sell their own vacation packages. This transition in the long run will benefit the company because a good charter airline or travel company is able to offer consistent profits for its shareholders, albeit at low margins. Harmony will likely serve many of the same routes it does now, but on a less frequent basis. If Harmony were to transform into a charter carrier or a travel company, the vast majority of its passengers would purchase vacation packages, which will help boost load factors and profitability. Harmony could become much like Air Transat, a charter carrier which serves many Florida, Caribbean, and European routes from major Canadian cities. That company has done quite well, and Harmony's best opportunity for transformation is a similar business model on routes to Hawaii and Las Vegas. If Harmony makes the transition between scheduled and charter service with a long-term, but realistic outlook, then it should be able to reshuffle its operations and successfully either market its services to tour operators who need lift or build its own travel business to sell packages. But if Harmony thinks only about short-term gain, then it will be unable to develop many of the long-term relationships necessary to succeed in the charter business, and as a result, it will be forced to end all operations.

Now the low-cost market in Canada has become even smaller, and oddly enough, the routes being targeted by low-cost carriers aren't the traditional short-haul routes, but rather longer routes. Medium- and long-haul flights will become the target of niche carriers in Canada, as Harmony's demise proves that Air Canada and WestJet have the short-haul domestic and US market locked up. Air Transat serves and Harmony will likely serve the important charter market to leisure destinations 4-8 hours away, and Zoom will continue to serve the legions of transatlantic travelers who desire cheap long-haul flights to Europe. Zoom has expanded rapidly in its short history, building its operation by offering cheap, nonstop flights from many Canadian cities to popular destinations in Europe. Zoom is offering much-needed competition to Air Canada, which is forcing Air Canada to be more rational in its international pricing structure. As a consequence of this expansion, Canada seems poised to accept two or three Canadian airlines on most routes, which will likely bring satisfactory, stable competition, and relatively low fares that ensure a reasonable profit for airlines. This new era in Canadian aviation will probably be better for companies than consumers, but it will ensure that many Canadian cities receive adequate service, including nonstop service to many major markets, and that Canadian customers receive reasonable fares. Gone are the days when Air Canada can charge whatever it likes, other airlines, particularly WestJet, will provide real competition. There will still be niche carriers, such as Porter Airlines, the startup out of Toronto which focuses on providing reliable service to business travelers, but they will be less important in the future, now that the two main players, Air Canada and WestJet, have been established for US and Canadian routes and that two or three main players, including Air Transat and Zoom, are firmly established on leisure routes to compete with Air Canada. Now that Harmony has decided to reshape its business plan, Canada's aviation industry should be relatively stable for the time being, but the biggest threat to airlines right now seems to be the economy. If passengers are there to travel, there are a suitable number of airlines to transport them. If passengers hold off on travel, particularly leisure travel, then every Canadian airline will be hurt and more turbulence could follow.

Porter Airlines- Offering Controversial Convenience to Business Travelers

On October 23, Porter Airlines launched its first flight between Toronto and Ottawa, the first of ten that day. Porter is a new Canadian airline trying to break into the ultra-competitive markets between Toronto and major business cities in the surrounding area. The airline offers convenient, punctual service for business travelers who want to quickly hop between cities in Ontario and Quebec. Porter offers higher fares than competitors WestJet and Air Canada in many cases because of the convenience of their service, but many business travelers gladly fork over the extra dough. The airline, with a fleet of ultra-efficient Q400 turboprops, plans to fly 10 flights per day on weekdays and two flights a day on weekends between Toronto and Ottawa. Porter recently announced a new route between Toronto and Montreal that will offer four flights each weekday and one flight a day on weekends. Porter has ten Q400s on order and plans to expand to cities outside of Canada including Chicago, Detroit, and New York.

Porter's novel idea hasn't been without controversy, however. Part of Porter's convenience stems from its use of Toronto's City Centre Airport. The airport, located out on an island in Toronto's inner harbor, was initially Toronto's central airport, but the airport couldn't handle much of the growth in Toronto's air travel, and gradually it became solely a general aviation airport. But it's proximity to downtown makes it attractive for business travelers, and Porter Airlines decided to take a risk and launch from City Centre. Many in Toronto, including the Mayor are opposed to Porter's flights because of the noise generated by the aircraft landing in very close proximity to downtown. The airport is linked by ferry service that is by some measures the world shortest scheduled ferry route, only 121 meters separate the Bathhurst St. Dock from the City Centre Airport. The airport is not linked by bridge, making access to the airport more difficult than it needs to be. Nevertheless, business travelers love the easy access to the airport, and Porter's flights have proved to be quite popular.

Porter is actually replicating the business model of a failed airline, City Express, which began service from the City Centre Airport in 1984 and flew to Ottawa, Montreal, Quebec City, and Newark before failing in 1991. Many other carriers have tried to operate service out of City Centre, and none remain flying from City Centre today. Porter is well-capitalized and well-managed, but it will take more than good management to help this airline succeed. Business travelers need to be willing to pay higher fares for the convenience of flying into City Centre, and without business travelers paying high fares, Porter's business model doesn't work. With more companies cutting travel budgets, this could be a problem for Porter, but the airline can thrive by offering reasonable fares with the convenience of City Centre. Part of Porter's attractiveness to business travelers is that it is the only commercial airline to fly from City Centre.

But that will all change soon. In fact, Air Canada's regional brand, Jazz, plans on commencing service from City Centre to Montreal and Ottawa tomorrow to stem the loss of profitable business travelers who are flying Porter. Porter can't exist without the City Centre Airport, and if local authorities shut the airport down or limit commercial flights, that could spell Porter's doom. Porter's future depends on the City Centre Airport, and people in Toronto should think carefully about the future of the airport. Porter is a boon for business travelers and business in Toronto, but the airport is an ugly structure in the middle of Toronto's waterfront. If Porter were forced out of City Centre and forced to relocate to Toronto's primary airport, Pearson International, Porter wouldn't have any advantage over its competitors. Because it operates smaller aircraft than WestJet or Air Canada, it would be more expensive for Porter to fly passengers between Toronto and other markets. Even if Porter offered frequent service, it couldn't offer fares competitive with other airlines at Pearson and Porter would cease to exist. If Porter's Canadian routes prove successful, they will surely expand to the United States, and the further entrenched Porter gets at City Centre, the more difficult it will be to remove them. The citizens of Toronto need to decide the fate of their oldest airport. I don't know what the best decision is, but if the airport is maintained, the airport needs to be taken seriously and must be upgraded to accommodate more passengers. The airport's semi-comatose state as a hole for tax dollars is unacceptable, and it shouldn't continue to receive as many subsidies as it currently does. Porter offers great promise for the City Centre Airport, but it's up to the citizens of Toronto to decide what kind of city they want.

Who Will Profit from CanJet's Demise?

CanJet, Canada's number three low-cost airline, ceased scheduled flights on Sunday, ending a four-year legacy for an airline that never really got off the ground. CanJet primarily served routes in eastern Canada, including cities such as St. Johns, Halifax, and Deer Lake. But the airline was up against stiff competition from Air Canada and to a lesser extent, WestJet. CanJet also served routes to New York City and to Florida. But while the demise of CanJet was predicted some time back by this blog, it may not be clear at first who wins from CanJet's demise. One airline that everybody knows will win is WestJet. WestJet has delayed expansion in some markets in eastern Canada because of CanJet's potential competition and the desire to avoid a bloodbath with unsustainable ultra-low fares throughout eastern Canada which would be necessary to gain market share. WestJet already has the kind of presence in western Canada that it desires in the East. WestJet serves Halifax and St. Johns, but has a limited presence in both markets. WestJet will likely expand further into eastern Canada, albeit slowly, in order to avoid repeating the mistakes of CanJet. However, WestJet is already expanding as fast as possible, but to Hawaii, the Bahamas, and the continental United States. After the last major Canadian airline collapse, JetsGo in March 2005, WestJet delayed retirement of some older aircraft in order to expand into JetsGo markets. We may see more targeted expansion into former CanJet markets in the next few months, but it may have to wait until after the busy holiday travel season to sunny cities.

But while WestJet may be the obvious winner here, there is another airline that could benefit from the CanJet collapse, but is unlikely to take advantage of the opportunity. JetBlue is in an interesting position to take over many of CanJet's routes. In the United States, CanJet served New York City (albeit at LaGuardia) and Orlando year-round, as well as several other markets in Florida seasonally. JetBlue has a dominant position on routes between the northeastern United States and Florida, why can't they extend that to Toronto, St. Johns, or Halifax? Granted, those markets are located in different areas geographically and have different needs, but JetBlue's E-190 planes can accommodate the requirements of smaller markets, such as St. Johns, Moncton, or Deer Lake. Service to Florida from eastern Canada would make sense, at least seasonally, and would allow the airline to gain a foothold in a growing trans-border Canadian aviation market. Service on E-190s to Florida would likely be far more successful than the only service by a U.S. low-cost carrier to Canada, which is Frontier JetExpress's service from Denver to Calgary.

However, service from New York City and Boston to eastern Canada could also play a role in a JetBlue expansion to eastern Canada. JetBlue could likely operate a daily flight between New York and Halifax, and perhaps even a daily flight between New York and St. Johns, both with the E-190. JetBlue is looking for short flights that generate high yields, and eastern Canada offers plenty of opportunities. New York City may be able to support two or three daily flights to Toronto with the A320, or even more, perhaps a bi-hourly shuttle service on the E-190. Trans-border service from JetBlue could compete effectively with WestJet and Air Canada if the price is right. Considering the duopoly on many routes between the United States and Canada, whether it's by WestJet and Air Canada or other airlines on many routes, JetBlue and other low-cost airlines have opportunities to expand north of the border. A JetBlue connection between Halifax and New York, for example would compete against American and Continental Airlines (who both operate the route with nonstop flights), and would face stiff competition, but fortunately, JetBlue could bring down the high fares. Even for travel months away, tickets on the relatively short route go for over $300 round-trip.

Hopefully, another airline won't sit next to CanJet in the airline graveyard. And in eastern Canada, no airline is poised to do that. But in western Canada, Harmony Airways, which serves sunny destinations such as Hawaii and Palm Springs, may be next. While the airline appears to be well-run and offer high enough fares to stay in business, stiff competition from Air Canada, and particularly WestJet, may force Harmony from the skies. That's a possibility to keep an eye on after the busy Holiday travel season.

Oh Canada! Predictions for 2006!

The coming year in aviation in Canada should be less turbulent than this past year. After the demise of Jetsgo which left thousands stranded, some thought that CanJet could be next. Simply untrue. CanJet is a solid airline with decent loads and level-headed management. While a merger with WestJet could be advantageous for both airlines, that may be unlikely at this point. WestJet is relying on organic growth, and plans to add more routes which will compete with AirTransat or Harmony than with CanJet. WestJet recently launched its new routes to Hawaii, which are barely within the range of WestJet's 737 aircraft. WestJet is planning new routes to Mexico and the Caribbean, and while WestJet is certainly competitive in the Maritimes, the international routes are more lucrative.

A merger between CanJet and WestJet could create a nationwide low-fare powerhouse. However, even though the combined route map would look nice, the fleets don't work too well. WestJet doesn't currently have the 737-500 aircraft that CanJet does, and if a merger were to occur, those -500 aircraft would likely be dumped along with WestJet's 737-200s. Even so, WestJet has many new planes on order and it's certainly possible that in the next couple years, WestJet will just invade CanJet's routes with additional capacity and lower fares. WestJet has in-flight entertainment, friendly service, and punctual flights. That combination could kill a small airline like CanJet. While it's unlikely CanJet will die anytime soon, CanJet needs to continue diversifying itself from other Canadian carriers, particularly WestJet. They have done so by serving routes WestJet doesn't in the Maritimes, and serving Florida nonstop from Halifax and Moncton. However, CanJet may be forced to continue expanding into other routes in the states or the Caribbean. CanJet could also choose to diversify itself by creating a premium cabin, which might inspire brand loyalty among its customers. However, it's important that CanJet take decisive action soon, because WestJet is getting new planes online every month, and WestJet can't dump them on future international routes forever. Stealing business travelers from American carriers and Air Canada could be a lucrative sell as well. But CanJet would have to change its route map, and serve big cities like Boston, Chicago, and Washington D.C. which is certainly possible, but will take some serious work.

An exciting year is ahead for Canadian aviation with the expansion of WestJet, Zoom, and other airlines. Don't expect any failures, but don't count them out either, especially with the smaller airlines. In any case, don't expect a Jetsgo, because Air Canada and WestJet are solid carriers which won't be going anywhere, anytime soon.

Jetsgo Ceases Operations

Jetsgo, a low-cost Canadian airline announced today that it will cease all operations effective immediately due to competitive pressures in the Canadian low-cost market from Air Canada and WestJet. Passengers traveling on Jetsgo are advised to make alternative arangements before arriving at the airport.