How Will Southwest Transform in Response to High Fuel Prices and Increasing Competition?

Southwest is in the midst of a transformation from being a pure low-cost carrier, with non-labor costs trimmed as much as possible, to looking more like a legacy carrier in certain aspects of its operation, with some additional costs for commissions and amenities. Even though the airline still wields enormous power within the industry, Southwest is being attacked from all sides, and the airline is becoming increasingly less competitive. Southwest's costs are also rising quickly. The airline has been able to profit from artificially low fuel prices in recent years due to hedgess, but with the hedges expiring, the airline may be forced to raise fares. And the airline is still growing, though Southwest will have to carefully navigate how it grows in the coming years. Should the airline focus more on attracting higher-yield business travelers, or should it focus on lower-yield leisure travelers? Since Southwest already has considerable market share in many popular leisure destinations, Southwest has decided to focus on business travelers since that market has more growth potential. This choice to focus more on attracting business travelers is demonstrated by some of Southwest's latest destinations. Denver, Philadelphia, and Washington Dulles, three airports which were unlikely to see Southwest service ten years ago, are now served by Southwest, the first two being well-served with over 30 daily flights in each market. Southwest plans to fill a niche from markets with large concentrations of business travelers to offer nonstop service between these cities and other cities that have little or no nonstop service. In many cases, only one airline offers nonstop service on a route Southwest is entering, and Southwest is able to lower fares considerably for business travelers, spur demand, and hurt the competitor which had a former monopoly on the route. Southwest also plans to soon enter another airport that is one of the few high-fare fortresses in the United States still remaining: San Francisco. But Southwest's route network isn't the only way the airline is changing its strategy to meet the needs of business travelers, other areas of its operation are changing as well.

One of the biggest ways Southwest is changing is by offering its tickets through global distribution systems (GDS), which many business travelers and companies use to purchase tickets. Even though Southwest will have to pay GDS a commission for every ticket sold through that booking channel, it's a necessary tradeoff if Southwest plans to reach a larger share of business travelers. Since travelers who purchase tickets on GDS are more likely to pay higher fares than travelers who book on Southwest's Web site or over the phone, that helps to cover the added costs of using GDS. This is a major transition for Southwest, which has been the only major US airline to not offer customers the ability even to search (instead of book) any of its flights on any third-party sites. Southwest has long insisted that by not enabling customers to view or book flights through any third-party site that the airline can trim its costs and simplify its operation. However, this has made it difficult for customers to compare Southwest flights, since they have to search on Southwest's site in addition to another third-party site in order to compare fares for all major carriers, increasing the amount of time they spend searching. This policy has also hurt Southwest's ability to fill its planes, since customers who aren't aware that Southwest's flights are only available on its Web site or over the phone can't book tickets with the airline. Hopefully, Southwest's listing of fares on GDS will enable the airline to reach a broader set of customers, which Southwest needs if it expects to keep growing.

But Southwest will also need to transform in other ways. For example, the airline will probably change its seating policies in the not-too-distant future. I suspect that if Southwest adopts assigned seating, it will do so in a manner similar to how AirTran does it. If customers pay a higher fare, because they book late or want flexibility with their travel, then they would be able to assign their seat when they book. Customers who book lower fares could only receive a seat assignment when they check in. A variation on this idea could be that customers who book lower fares but are willing to pay extra (between $5 and $10 each way) could select assigned seats. Also, Southwest may place more restrictions on checked baggage. Right now the airline allows people to carry on up to three checked bags free-of-charge, a policy that needs to change. This could be a very beneficial step for the airline, since it could raise additional revenues and cut costs. Since most business travelers don't carry more than one checked bag anyway (and many only bring carry-ons to save time), Southwest could probably lower its checked baggage limit to one free 50 lb bag per passenger while still appealing to business travelers.

Southwest needs to improve some of its add-on onboard amenities. The two biggest areas Southwest can do this are in meals and entertainment. While it's unlikely that Southwest will offer full meals, even for a fee, Southwest will probably expand its onboard food service offerings in the next couple of years. Southwest will probably continue to offer peanuts and other goodies in very small bags to passengers for free, but the airline may follow the lead of other carriers by offering more food items, such as sandwiches or salads, for a nominal price. The only caveat with this is that if more food items are added, that could mean the provisioning crews that load food and beverages on the ground could take longer to do their jobs, threatening Southwest's ability to offer 25-minute turnarounds. Southwest may also add some sort of entertainment in the coming years. I expect that it will be relatively simple; but friendly to business travelers. Satellite radio would be the most likely candidate, but video entertainment, either in-seat or on screens above seats is also a possibility. However, if Southwest were to add in-flight entertainment, it would likely pale in comparison to JetBlue's. Southwest isn't trying to lure people to its planes based primarily on entertainment and amenities, but it is trying to maintain its competitiveness with legacy carriers in this area. Southwest's entertainment will probably be just enough to entertain travelers on longer flights, but nothing special.

One bright spot for Southwest is its frequent flyer program, which will need few, if any, changes in the coming years. It was recently changed to give customers two years (instead of one) to earn the necessary credits for a free flight. However, credits expire two years from when they're first earned, and cannot be renewed, unlike miles on most legacy carriers. By forcing travelers to fly 16 one-way flights within a two-year period, Southwest is weeding out customers who fly irregularly, but who may have racked up enough credits for a free ticket over many years. This lowers the number of people who can redeem their credits, and ultimately benefits those who fly most frequently, such as business travelers, since award seats are limited.

If Southwest can transform itself to look less like an LCC and more like a legacy carrier, with many of the same touches that have gained Southwest customer loyalty and notoriety in the past decades, Southwest will be able to attract a greater share of business travelers. While Southwest is unlikely to replicate legacy carriers in every way, since Southwest will still likely operate a 737-only fleet and serve a limited number of international destinations in the coming years, Southwest will take many other pages out of the legacy playbook. These may raise Southwest's costs, but it will ultimately put Southwest in a better position to attract a wider array of travelers, which is critical as the airline grows.

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.

David Neeleman Ousted as JetBlue CEO

David Neeleman was ousted as JetBlue's CEO in a surprise announcement today. He will be replaced with the company's longtime COO, Dave Barger. To put it simply, this is a major mistake for the company. Even though Neeleman blew it when it came to the Valentine's Day debacle, he is still the best person to run the company. The popular rationale for this announcement, which is probably true to an extent, is that JetBlue's board believes that now that the company has reached a certain size, it needs a person at the top who is more operations-oriented instead of vision-oriented. It was Neeleman's vision that many believe caused the mess on Valentine's Day, because the company grew too quickly without the proper emergency support systems, and it didn't cancel flights because of Neeleman's creed that customers prefer a heavily-delayed flight to a canceled one.

But while this departure may satisfy the board in the short-term, I suspect that in the long run, the board will regret its decision. The airline industry in the United States is very, very competitive right now (as if there were a time in recent memory when it wasn't), and operating a good airline is very important in order to retain customers. Unless the operation is run well, customers will have no reason to return. Given all the hassles flying entails these days, with weather delays and security hassles, any problems being caused by the airlines themselves are looked at with closer scrutiny by customers. Operations will destroy an airline if they aren't dealt with well (Ryanair may be the lone exception to this rule), and it's why Southwest Airlines has been so successful over the years. Southwest has a very simple business model, and has executed it very well with high on-time arrival rates and few mishandled bags.

If David Neeleman didn't run a good operation, then JetBlue would not have succeeded as well as it has. For example, Neeleman instituted a policy at JetBlue that required notification of headquarters if baggage delivery took more than 20 minutes. He also has been very generous with vouchers for free travel, even before the Valentine's Day incident. Passengers routinely receive vouchers if their in-flight entertainment doesn't work, a gesture passengers rarely see at other carriers. And he has created a company that provides some of the best customer service in the industry. There is little doubt in my mind that Neeleman has run a fantastic operation up until the Valentine's Day meltdown. That's not to suggest operations at JetBlue have been perfect; the airline has one of the lowest on-time performance ratings in the industry (partly due to JetBlue's concentration of flights in the Northeast, which is frequently hit with storms), although Neeleman has been working to correct that by scheduling flights with longer turnaround times to compensate for delays. Neeleman has learned from his mistakes during the Valentine's Day incident, and he deserves a second chance. Removing Neeleman won't help solve JetBlue's problems and it's unlikely to boost JetBlue's brand in the eyes of most customers. Even though he hurt the company tremendously because of the enormity of his errors that weekend, he is uniquely qualified to lead JetBlue forward, and the Board of Directors failed to recognize that.

What is needed in this industry right now, because of the intense competition within, is vision. JetBlue went on a mission over seven years ago to "bring humanity back to air travel". They did a very nice job of that, and they need to do that again. Flying has become much more difficult in the years after 9/11 due to longer lines at airports, more planes flying with an insufficient number of air traffic controllers to handle them, and hassles associated with more time-consuming (though not necessarily more rigorous) airport security. JetBlue needs to innovate once again, and only Neeleman is capable of doing that. The transition from Neeleman to Barger is symbolic in JetBlue's development as a company. This transition will help mark the moment JetBlue stopped being a start-up airline focused on innovation and instead becoming a mainstream airline focused on survival.

Innovation is what enabled JetBlue to develop such an enormous following from customers, and it's what enabled the airline to survive in the face of massive competition on the East Coast. Granted, JetBlue may not be able to make nearly as many innovations in the next seven years as in the previous seven, but it's essential to JetBlue's survival that the airline finds new ways to keep customers happy. Legacies have been able to gain and retain customers, particularly business travelers, with more amenities (such as premium classes), more extensive schedules and route networks, and attractive frequent flyer programs. Southwest, Frontier, AirTran, and Spirit have been able to gain and retain customers mainly due to low prices and simplicity of service. JetBlue is able to attract customers because it can find a happy medium between the two extremes. JetBlue offers low fares and plenty of amenities. But JetBlue's fares are typically higher than those of other LCCs, and if JetBlue fails to innovate, then the airline will be unable to maintain its price premium of $10-20 on a round-trip ticket. Other LCCs are adding amenities in a bid to compete, look at Virgin America (with first class seating and a fancy entertainment system) or AirTran (with business class seating and XM Satellite Radio). An innovation price premium is how JetBlue is making its money right now, and unless JetBlue tries to remodel itself and lower its costs substantially, the airline needs that premium to survive. Operations are important for retaining customers with any airline, but in JetBlue's case, innovation is just as important. I wish the best of luck to JetBlue, because I see trouble ahead if competitors can innovate more quickly. Neeleman can innovate; he has a track record of doing it. Barger may be able to, but in my mind, he's a much bigger wild card for the company than Neeleman is. Given the level of competition in the industry right now, the transition isn't worth the risk.

More About Intra-California Competition

Why are so many airlines entering the intra-California market?

There are a few reasons, but the first is that the intra-California market is growing. California is one of the nation's fastest growing states, and the population is expected to balloon in the next several decades. While this population increase may be unsustainable and incredibly damaging for the long-term health of Californian society, it means big bucks for airlines. As the population increases, the demand for intra-state air travel will increase, and it's much easier for an airline that is established with significant market share on a route to expand to meet increasing demand than for an airline with little or no market share to meet that demand. Also, with the improvements made to San Francisco International to make it more cost-competitive with other area facilities, and along with the new competition being brought by Virgin America, other low-cost airlines are taking more of an interest in intra-state air travel. Also, LCCs that have to find places for new planes would rather expand on the West Coast where fares are higher than on the East Coast, where competition is even fiercer and yields are lower. But the final reason intra-state air travel is becoming increasingly attractive for airlines is because their revenues have suffered recently. Airlines can make more money on short hops than on transcon flights, since the airline can charge higher rates per mile flown for a short flight than for a long one (due to fixed costs airlines incur regardless of the length of the flight, such as landing fees, baggage handling costs, and the cost of using gate and check-in agents.) But, airlines can fly more short-haul flights with a single aircraft than long-haul flights, and efficient aircraft utilization is an easy way to increase revenues. Even though airlines have fixed costs, when many of those costs have been trimmed, then airlines are fighting for revenue, and the revenue equation is better for shorter flights where airlines can fly more flights in a given amount of time with the same plane.

How will airlines compete in this market?

What airlines will be competing on in the intra-California market are three things. The first is price. Flying up and down the state, even on a low-fare carrier, can get expensive, and customers want to minimize the cost of their travel. That will mean that a fare war of epic proportions may occur if or when JetBlue and Virgin America expand services. I wouldn't be surprised to routinely see $29 fares to the other end of the state during this fare war. It's also likely to be a prolonged fare war since there aren't any weak competitors in this market. This means that a fare war will give Californians some great bargains for many months, but it will also hurt the financial health of the airlines.

The second is convenience. This is both in terms of flight schedule as well as airport location. Low-cost airlines need to ensure that they offer enough flights to accommodate business travelers, who typically want flights very early or very late so they can work a full day. As a result, airlines like Alaska and Southwest, which are already established in many intra-California markets and offer a convenient menu of flight times, will have an advantage over other LCCs like JetBlue or Virgin America, which may only offer one or two flights at a time a business traveler would find suitable instead of four or five. Airlines will also have to win the convenience war with the airports they serve. Now that San Francisco is becoming more popular with LCCs, low-cost carriers will be a more viable alternative for business travelers to the legacies American and United from the San Francisco area. It will be the job of LCCs to ensure that they offer flights to a sufficient number of destinations on either end of the state. This is true especially in Southern California. Right now, the Ontario Airport is most ripe for expansion of service, though it's likely that LCCs will increase service at all the commercial airports in the region (excluding Palmdale, which will need a little more time before it can be attractive to LCCs.) Travelers heading to or from the LA Basin want to avoid driving as much as possible given the horrific state of traffic in the region. As a result, many travelers, leisure and business alike, will be willing to pay a bit more for service to a more convenient airport. That doesn't always mean LAX; Burbank, Orange County, Long Beach, and Ontario all offer convenience to a segment of intra-state travelers, and LCCs will need to cater to all of them if they want to win the revenue and market share battles.

Finally, as passengers expect more from LCCs, onboard amenities won't be the battleground, but frequent flyer amenities will. Airlines will try to fill seats, and especially try to lure business travelers, by offering bonus miles (or credits) for frequent travelers. Southwest requires eight round-trips for a free ticket. I suspect that if competition gets heated, Southwest will give customers 1.5 or 2 times the normal credits, giving them a free flight after six or even four round trips. JetBlue will need to improve its frequent flyer program the most. Right now, customers have to fly 12.5 round-trips within California to be eligible for a free ticket. That must change if JetBlue wants to lure business travelers. TV is a nice thing to have, but it's much better to have more free flights. Similarly, Virgin America will need to ensure that its frequent flyer program is competitive with its in-state rivals. American and United will certainly retaliate against LCCs, offering similar promotions to retain their hold on business travelers, and if they seriously retaliate, a frequent flyer promotion could be very effective. Business travelers would rather stay loyal to their current carrier than move to another, and if American and United offer the right promotions, those business travelers won't be going anywhere. If the competition gets really heated, then frequent flyer miles will be another major battleground (in addition to fares and convenience) on which airlines fight for customers.

As competition increases on California intra-state routes, airlines will fight harder than ever for passengers, and in six months to a year is when the results will finally start to show. When they do, there will likely be clear winners and losers. Southwest and United are the two airlines best positioned to succeed, and JetBlue, Delta, and Virgin America, are taking the most risks. But given that this is California, anything can happen, and after the first stage of this battle is over, Southwest and United may be in much worse competitive shape than when it began.

See the post JetBlue Considers Bolstering Intra-California Service for more information on the topic.

JetBlue Considers Bolstering Intra-California Service

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

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

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

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

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

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

Frontier Announces Termination of San Francisco to Los Angeles Service

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

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

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

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

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

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

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

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.

Delta Exits Bankruptcy and Rebrands: Can the Airline Now Compete Freely?

Delta Air Lines formally exited bankruptcy today, ending its protection from creditors. But the airline exits bankruptcy when the industry is still experiencing difficulties, particularly with regard to fares that are still too low and potential overcapacity with two new competitors coming on line this year. Delta's restructuring has focused on reducing costs, and the company has done a fair job of that. Delta will continue to face uncertainty in several areas, but particularly with regard to its hubs. Right now, much of Delta's profits are being made with customers flying to or from a hub, and that will inevitably change in the future, given the expansion of low-cost carriers in this country. As a result, Delta will need to focus more on connecting traffic, especially to higher-margin international destinations for a greater share of its profits.

One of Delta's largest profit centers is in Cincinnati, where according to the Department of Transportation, the airport has the highest average fares of any major airport in the country other than Anchorage (which for geographical reasons is likely to have very high fares). Cincinnati even has higher average fares than Honolulu! And while Delta has a virtual monopoly in Cincinnati, that probably won't last. I suspect that in the next couple years an LCC, most likely AirTran or Frontier, will add service to Cincinnati (although Southwest and JetBlue are reasonable possibilities as well), and Delta will try to drive its new competitor out of town, a tactic that has worked in the past and may work in the future.

However, if an LCC can maintain an adequate foothold in Cincinnati, especially one that offers connections to many business centers across the country, then fares in that market will decrease, and the massive profits Delta is making in the city will decline sharply, which could spell more bad news for employees at Delta's regional subsidiary Comair, who have already had a tough time accepting significant pay cuts during Delta's bankruptcy. It's important to note that since Comair operates an all-regional jet fleet, its costs have skyrocketed in the past few years, since regional jets are more fuel-hungry than larger planes, and as a result, its competitiveness has decreased. Pay cuts, which have damaged employee morale, were necessary to help stabilize the company (though it's debatable whether Comair management made cuts that were too steep). Since Comair does much of Delta's flying in Cincinnati, an LCC could force employees at the subsidiary to sacrifice even more, and Delta's network at the hub may shift, since additional regional jets may get trimmed from the network in order to reduce Delta's costs. Those changes may be necessary soon if low-cost competition enters Cincinnati, and in any case will eventually be within 5-10 years in order to modernize Delta's hub there and lower its costs. These changes could make Delta's overall transformation strategy more difficult, especially if yields from Cincinnati decrease substantially.

Delta's other two hubs in Atlanta and Salt Lake City may also face changes, but not nearly as many as Cincinnati will. Atlanta and Salt Lake both have low-cost competition, and Delta has adapted nicely to the competitive climate in both markets. Both Delta and AirTran are struggling to figure out how to add capacity in an East Coast market which is oversaturated by low-cost competition. As a result, Atlanta will see mainly a boost with international flights in the next few years. The number of domestic services may increase, especially if Delta increases frequencies on routes where larger 767 aircraft are being replaced with smaller 757 or 737-800 aircraft, but the amount of capacity will not change substantially. AirTran will likely focus on building domestic operations in focus cities outside of Atlanta (as I will discuss in a post to be added within a day or two), while Delta will concentrate on adding service from Atlanta to a growing number of destinations, particularly in Latin America and the Caribbean, Europe and the Middle East, and depending on the DOT's decision in 2008 concerning China route authorities, Delta could add additional service to Asia to complement China flights.

Salt Lake City is a bit harder to analyze, because the West will become increasingly important for Delta, as the airline tries to target additional traffic to Latin America as well as in the growing Southwestern United States. Salt Lake City will be an important connection point for Delta destinations in the West, but its importance in the Delta network could diminish if Delta cuts regional services to many smaller cities due to high costs. Right now, Delta doesn't seem to be heading that direction, in fact, the airline seems to be using its massive regional jet fleet (much of which is service Delta contracts to SkyWest Airlines in Salt Lake City) to serve a growing list of destinations, including Yakima, WA and Salem, OR. However, much of Delta's future depends on the viability of regional jets as a cost-effective means for transporting passengers. If fuel costs skyrocket, then Delta's transformation plan could get derailed, and the effects in Salt Lake City and Cincinnati would be disastrous. Let's hope Gulf War III doesn't start anytime soon.

However, the future importance of Salt Lake City could also depend on how Delta's expansion in Los Angeles goes. Delta seems to be using its reoriented international focus to turn its Los Angeles focus city into a small hub, adding to the list of cities it serves from Los Angeles in both the US and Mexico, partly through a new regional jet contract with ExpressJet Airlines for ten regional jets to serve cities on both sides of the border. Delta plans on offering convenient connections between major cities in the US and destinations in Mexico. If Delta's Mexico flights don't attract sufficient yields and loads, then the entire Los Angeles operation could be downsized, and the importance of Salt Lake City could grow. However, if the Mexico operations in Los Angeles succeed, then Delta could place a renewed focus on Los Angeles, adding flights from the city to other key markets in South America, the Caribbean, and possibly Asia.

Delta's focus cities in Washington DC, New York, and Boston will continue to be important for the airline in the near future. This is especially true in New York, where Delta has a sizable presence at JFK with transcon and a growing menu of international flights as well as at LaGuardia with a profitable mix of flights popular with high-yield business travelers. Boston and New York will continue to receive point-to-point flights from major US cities in the near future, even though Delta has reduced its presence somewhat in Boston due to low-cost competition. Business travelers are very important for Delta from all three markets, and will be courted even more aggressively as Delta continues to improve its amenities and services on shuttle, transcon, and international flights. Moreover, the Delta Shuttle operation is still a very profitable enterprise, even with new competition from JetBlue, and it will continue to be profitable unless demand from business travelers slows significantly. There is no reason to believe that Delta will want to realign capacity at its hubs and engineer a pullback from its lucrative business markets in these three cities. As a result, Delta's focus city operations from the three major East Coast business centers will continue for the time being.

As part of the announcement today, Delta announced an agreement with Pinnacle to fly 16 CRJ-900 aircraft in a 76-seat two-class configuration to help feed Delta's operations. This should enable Delta to add frequencies on routes to select midsize markets while still being able to cater to their premium class customers. But in addition to this minor announcement, Delta plans other announcements throughout the week, as it celebrates its emergence from bankruptcy. These announcements may include a major new aircraft order. Delta has dozens and dozens of older 767 variants that need replacement in the next ten years, and the airline has been rumored to be considering the 787. It's entirely possible that Delta and Boeing have negotiated an agreement for new aircraft, and are waiting to announce it until after Delta's formal emergence from bankruptcy protection for legal reasons. A Delta 787 order is a rumor, but one that makes perfect sense given Delta's need to transform into a more cost-effective carrier with an international focus. Within the few years, Delta plans on transitioning from using many of its widebody aircraft from routes within the lower 48 to international routes, where they are needed more. Delta is launching service to more and more international destinations, and has been strained to use 767s on some longer routes, such as to Lagos where the aircraft needed to be retrofitted with special crew rests. Delta needs aircraft other than 777s (of which Delta may order more as well) for its longest international routes, and since some variants of the 787 can fly farther than comparable 767s, it may make the plane even more attractive to Delta as a partner for 777s on very long routes. It's also possible that Delta will order additional short-haul aircraft, most likely Boeing 737-800s, which Delta will need as it upgrades frequencies on domestic routes when additional 767s are replaced. However, Delta may wait until Boeing or Airbus release a new 737/A320 variant before making a large purchase. Even though this is pure speculation, given the opportunity Delta has right now, a major widebody aircraft order makes sense. 

But what Delta needs even more than new aircraft is a new way to target travelers through amenities and services. Delta is upgrading its amenities on transcon and international flights, but it's still not enough if Delta wants to compete with international carriers. Delta needs to invest more in upgrading its amenities in all classes of travel. One key service that Delta needs to improve is its frequent flyer program, SkyMiles. Even though the program partners with Northwest and Continental, offering its members hundreds of ways to earn or spend miles, it is still considered by many business travelers to be one of the more mediocre frequent flyer programs in the US. Delta, and all airlines for that matter, need to make a renewed effort to increase award availability for its business travelers. Because planes are fuller than ever, airlines have trimmed the number of seats that can be redeemed with the lowest number of frequent flyer miles. Delta needs to ensure that its most frequent flyers are given preferences when searching for available award seats, but Delta also must enable those who fly less frequently to still have a realistic shot at redeeming miles. With rising ticket prices, frequent flyer miles are becoming a more important source of tickets for travelers and a more important component in a traveler's decision when choosing an airline. Because of this, Delta must do what it can to maximize availability without sacrificing revenues. If Delta doesn't take the lead on this issue, then it will hurt the airline's reputation with business travelers, which will only diminish the airline's yields and the overall effectiveness of its transformation plan.

Another service Delta plans to offer is carbon offsetting, a first for a US carrier. This is a brilliant move by Delta that I believe will serve them well in courting many younger, more environmentally aware travelers, who typically flock to low-cost carriers. Carbon offsetting is gaining popularity in Europe (though not necessarily respect, as the Guardian discusses here), and it's an important service that airlines will be expected to offer their customers within the next five years. By getting a jump on the competition in this area, Delta is preparing for a long-term trend in the industry of environmental awareness and action. Delta appears to be approaching this issue, and the other pressing issues facing the company with a long-term focus, which is exactly the kind of thinking that will keep Delta out of bankruptcy long into the future. Even though Delta will continue to encounter difficulties from all sorts of pressing issues facing the airline, now that Delta has had an opportunity to restructure, the company seems to be better prepared for the challenges it will face in the future.

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

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

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

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

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

Will Skybus Ever Leave the Station?

Yes it will, and sooner than many have anticipated. It appears that Skybus will essentially copy the Ryanair model in the United States from its base in Columbus, Ohio. Skybus, which will fly 150-seat A319 aircraft, predicts that their startup operations will commence May 1, although this depends on when they get final approval from the DOT and the FAA. The Columbus Dispatch wrote about Skybus' wait for government approval in a recent article. Initial flights will likely be from Columbus to leisure destinations in Florida, California, Nevada, and Arizona (since most of the customers who want bargain-basement tickets are flying for leisure), and tickets will be priced in the $10-$40 range each way. As the company has hinted at before, Skybus will copy the Ryanair model in many ways. Like Ryanair, the exterior and interior of Skybus aircraft will be covered with advertising, no free food or drink will be provided, flight attendants will sell a range of products on board, much like a retail store, and customers will need to pay to check luggage. Right now, the airlines most similar to Skybus in the United States are Allegiant Air, which makes around $15 per customer in ancillary revenues, and Spirit Airlines, which prides itself on its $.05 cost per available seat mile (excluding fuel), which is far lower than available seat mile for most legacy carriers, which can hover around .08-.10 cents per available seat mile (including fuel). Ancillary revenues are a critical component of Allegiant's revenue stream that helps subsidize Allegiant's low fares. These revenues come from the commissions generated by vacation package sales, revenues from on board food and drink sales, and commissions generated by the sale of other services, such as travel insurance. Skybus, like Ryanair and easyJet, will also try to use alternate airports whenever possible. It's likely that they will initially serve airports such as Orlando Sanford instead of the primary Orlando airport-McCoy, St. Petersburg instead of Tampa, and Fort Lauderdale or another nearby alternate airport instead of Miami. But while this airline seems to be adopting many proven cost-cutting features of the Ryanair model, they are also adopting some dangerous, unproven features which could hurt the airline's reputation. The most notable unproven feature is that the employee payscales will be comparable to a regional airline (in other words, very low). One individual writes about his experiences interviewing for a Skybus flight attendant position here (and some of the information in this post is taken from his accounts). Even Ryanair and easyJet pay salaries in most cases competitive to their legacy peers, and the airline their business model is copied from, Southwest, is one of the highest-paying carriers in the United States (which has enabled the company to retain quality employees, but it could be a liability for the carrier down the road). However, unlike Southwest, Ryanair and easyJet outsource most of their ground and maintenance staff, and their contractors may pay low wages, but the employees who actually work for Ryanair and easyJet (mostly flight attendants and pilots) get paid decently.

The other main concern about Skybus is that they will start services from a relatively small market, and given their rapid and extensive plans for growth, they will be unable to use all 65 of their planes on order from Columbus. Ryanair has been successful in part because its bases are at such large cities that suffer from high fares and poor service by legacy carriers. Not all travelers in a given market will fly Ryanair, but Ryanair has the ability to find their niche in such large markets. Columbus is America's 54th largest market in terms of passengers embarking and disembarking at the airport according to the DOT. (These figures can be somewhat misleading, however, because they include connecting traffic, and some cities like Atlanta, with large hubs but substantially lower origin and destination traffic can skew the figures, but nevertheless, Columbus is still too small a market to be starting an airline in.)Skybus' low fares may be able to stimulate the market and increase passenger numbers, but not as much as many believe. If Skybus were flying from Chicago, they may be able to find more of a niche for themselves, even though they would endure more competition. However, with a market where the largest carrier is Southwest, which already offers relatively inexpensive fares, Skybus may be up against a tough competitor with a strong base of loyal customers in the area. At least on Southwest, you will be able to pay a bit more than Skybus and receive a free beverage and snacks and a free checked baggage allowance, without the pain of being hounded by flight attendants selling cheap goods. Columbus is somewhat underserved by the carriers that currently serve the city, including Southwest, in part because the market in Columbus is so fractured. No carrier has more than 25% of the market in the city (Southwest has about 22.75%), and consequently, there is no hubbing airline to offer nonstop service to many destinations Columbus origin and destination traffic cannot support. And unless Skybus plans on a hub-and-spoke operation, and they haven't given any indication of this so far, then they will serve many destinations from Columbus unsustainably, because even with ultra-low fares stimulating traffic, Skybus cannot sustain service to too many smaller destinations that currently lack nonstop service from Columbus because ultra-low fares can only convince so many people to fly. However, if Skybus is able to deploy their aircraft at other bases, such as Cincinnati, Chicago, Minneapolis, or Dallas, all of which are hub markets that have relatively high fares, then Skybus may be able to survive.

Take one example, Cincinnati. Delta and its regional partners dominate Cincinnati, with over 90% of the passengers that come through the airport. If Skybus entered Cincinnati, they could substantially lower fares in a market with more opportunities for growth than Columbus. If Skybus provided low-cost, punctual flights, then they could potentially capture a share of Cincinnati's lucrative business market as well. There are, however, three big challenges that Skybus will face in Cincinnati, or in most hub markets they enter, for that matter that they don't face in Columbus. First, because Delta has such a large share of the market, they have tremendous pricing power, and if Skybus enters the market, Delta will fight tooth and nail to retain its market share. Skybus may be able to gain some market share, but Delta will pressure Skybus by adding flights and lowering fares in markets where the two airlines compete. This is the most important reason Skybus is staying out of hub cities. Skybus will be attractive to passengers on fare alone, and if a legacy carrier with more amenities matches their fares, passengers will most often fly with the legacy carrier. Moreover, as a startup, Skybus cannot sustain a prolonged fare war for as long as Delta. If Skybus is successful in Columbus, then they may have the awareness among many Ohio consumers, as well as the financial capital necessary to sustain a long fare war, to enter Cincinnati. But, the formation of another base won't be for at least a year after Skybus launches services in Columbus. Second, because Delta has such a large market share in the region, it has a lot of brand loyalty from travelers in the area, particularly business travelers. Skybus' business model doesn't seem conducive to the needs of many business travelers, and as a result, Skybus may struggle to get many business travelers on board. Third, the Cincinnati airport, like many hub airports, is unattractive to low-cost carriers because it gives those carriers higher costs. The Cincinnati airport has high fees for its users, and they may be too high for Skybus' ultra-low-cost business model. But on the upside, Skybus would face no low-cost competition whatsoever, since no low-cost airlines currently operate from Cincinnati. Not Southwest, not AirTran, not JetBlue. I think those carriers have missed a big opportunity; with Skybus adding 65 planes to its fleet, Cincinnati is a good location to use them, but only after Skybus has developed a market in Columbus. In hub cities like Cincinnati, Skybus would certainly face challenges, and possible difficulties implementing their ultra-low-cost business model, but they would find markets with greater growth potential, and with greater monopolies that are keeping fares high.

But if Skybus' management believes that its growth can come mostly or entirely from Columbus, then they could be another Independence Air. Remember, Independence Air thought they had lower costs and more of a market that could be stimulated by low fares in smaller cities than they actually did. Because Independence Air believed this, they offered fares that were too low, which drove their company into the ground. Without more information, I can only suspect that Skybus will head the same direction. However, Skybus could become immensely profitable like Ryanair, if they successfully stimulate a strong customer base with their ultra-low fares and are successfully able to develop their ancillary revenue streams. If they can do those things in Columbus and in other underserved, high-fare markets, then they can be successful, but if they can't, then they will burn their cash and go the way of Independence Air.

The Limits of Future Low-Cost Airline Capacity Increases

This first full week in March is important for many reasons. It's the last week before daylight savings time resumes, yesterday was the most beautiful day the Pacific Northwest has seen all year (with temperatures exceeding 60 degrees), and airlines are reporting their monthly traffic figures. And the trend on traffic reports this month has been lower load factors, particularly at low-cost carriers. LCCs are adding capacity wildly, even though many markets cannot support additional service. LCCs still have hundreds of planes on order, but with many markets having been satiated in terms of the level of capacity received, LCCs are being forced to serve markets that aren't as attractive, or to add service on routes that already have sufficient capacity, thereby providing more options for customers, but higher costs and lower load factors for the airline. Southwest Airlines yesterday indicated a slowdown in air travel demand is ahead. Many markets simply have sufficient capacity, and demand cannot be spurred much more with additional low-cost airline service. However, that hasn't stopped LCCs from trying to gain a foothold in some of these markets. Load factors at Southwest, AirTran, Frontier, and Alaska were all down in February. JetBlue hasn't reported traffic results yet, but they too will likely see decreases in load factors. As a consequence of this, low-cost airlines that do have new capacity coming on line soon are struggling to deploy it, and many are changing their tactics in order to fill seats and get a competitive edge. Those that aren't changing with the times face a growing threat of red ink.

Southwest, for example, is facing higher costs and tougher competition, especially in some of its most established markets including Las Vegas, Phoenix, Chicago, Baltimore, and Oakland. While Southwest is growing from these markets, adding new routes and additional flights, much of Southwest's growth is being targeted at newer, large markets Southwest has only recently started to serve. Four out of Southwest's five latest new markets are large (within the top 40 airports nationwide). Southwest's last relatively small market addition was Fort Myers back in 2005. Washington Dulles and Denver are the two most recent examples of this. Southwest's Denver operations started out with little more than a dozen or so flights to a few different cities. Now Southwest serves 11 markets from Denver, and plans on expanding their operations even further. Moreover, Southwest plans on soon expanding to another large market: San Francisco, where the carrier will likely build a strong presence in the city rapidly with dozens of daily flights. As Southwest expands to new markets, it will inevitably have to enter smaller cities, but for now, the airline still has certain large markets that it can enter cost-effectively. I predict that Southwest's next new city may be smaller than Denver or San Francisco, but of Southwest's next three new city announcements, I predict that one or two will be larger markets. The prime target may be Boston. Even though the airport is still expensive, gate vacancies (particularly with a recent Delta pullback in service) may be forcing the airport to lower its rates and work more cooperatively with airlines, opening the door for both Southwest and Frontier. Larger markets like Boston are likely where Southwest will deploy some of its new capacity (in addition to connecting the dots between select cities) in the short-term.

Frontier has also changed its strategy to adapt to changing market realities. It is developing a strong regional operation with 70-seat aircraft that will allow it to generate a more diverse feed of passengers through its Denver hub, allowing the airline to expand its mainline operations methodically without adding too many additional routes. Frontier knows that it serves most of the markets it can from Denver with their A318 and A319 aircraft, so the primary source of its expansion will come from routes outside of Denver, or from additional frequencies on already established routes from Denver. But in order to support those additional frequencies, Frontier needs additional traffic flows, hence the expansion into regional services. This strategy should work, provided Frontier's regional operations target the right markets, and that they have sufficient yields to make them profitable to serve with 70-seat aircraft.

Alaska is also changing its strategy, but more slowly than other low-cost carriers. Alaska is expanding primarily through expansion of point-to-point routes to cities East of the Rocky Mountains, as well as new services to Mexico. However, Alaska's challenge isn't as significant as Southwest's or Frontier's because they aren't growing as quickly, and their growth is more conservative. Alaska already has strong customer bases along the West Coast, so opening new routes to major markets on the East Coast isn't too dangerous for Alaska, provided there are sufficient traffic flows on the routes. While Alaska's market share on transcon routes is less than on West Coast routes, it is still significant in part because they have competitive fares and can draw on such a strong customer base. This strategy should work well for the time being, provided they aren't forced to add too much new capacity on lower-yield California routes.

The two airlines that will have the most difficulty adding capacity are JetBlue and AirTran. JetBlue has struggled to find new markets that it can serve competitively, and has been forced to slow growth in the past year to grow profits. JetBlue has delayed delivery of some aircraft, although they still have plenty on order, enough to promote strong growth. But, JetBlue has had difficulty establishing itself outside of its New York and Boston strongholds. Its Long Beach operation is sizable, but its future growth is limited due to slot restrictions at the Long Beach Airport. Oakland operations have increased considerably, however, JetBlue has been hesitant to add too much capacity to lower-yield routes along the West Coast where capacity could be deployed more efficiently than on transcon routes. JetBlue has avoided these routes because they would directly compete with Southwest, and JetBlue has tried to avoid direct competition with Southwest throughout its history. If JetBlue wants to succeed, it will need to find outlets for its new capacity outside of New York and Boston, because those markets are seeing lower fares and on many routes, JetBlue has sufficient capacity. JetBlue should not add too many new flights to Florida because the yields there are very low. JetBlue will need to find new focus cities with high enough yields for both its A320 and E190 aircraft, and unless they move with some dispatch, other carriers with new capacity coming on line soon may get a jump on JetBlue.

But even though JetBlue has significant problems deploying its new capacity, at least they have been able to maintain relatively high load factors throughout its capacity reshuffling, in the high 70s. AirTran filled a pathetic 69.5% of seats in February, and has filled only 65.7% of their seats in the first two months of the year. These difficulties are partly why Midwest Airlines has been opposed to AirTran's buyout. AirTran's business seems to be sinking, while Midwest's is growing. However, while that is an important factor, the main reason Midwest is opposed to the buyout is because AirTran isn't offering enough for the company. Like JetBlue, AirTran has a sizable amount of capacity coming on line in the next few years, but what's more alarming in AirTran's case, is that the airline is heavily committed in very low-yield markets, most notably Florida. AirTran is also committed in many smaller markets, some of which cannot support AirTran's mainline flights very well, but which AirTran serves in order to create a competitive hub in Atlanta. As a result, AirTran is receiving less for these seats than they would if they were focused on larger markets with higher fares, such as New York or San Francisco. Many low-cost airlines that operate in low-yield markets must fill a lot of seats to be profitable. Spirit has done this quite well with flights to the Caribbean. But unfortunately for AirTran, they are good at charging low fares in an attempt to fill seats, creating low yields, but they aren't good enough at actually filling seats. As a result, AirTran has been hesitant to add a lot of new capacity on point-to-point routes, because most of them are served sufficiently through Atlanta, even though there may be demand for a nonstop flight. Just look at AirTran's latest route announcement. AirTran will only add new nonstop flights between San Diego and Orlando two days a week (Friday and Sunday, the busiest travel days of the week), because the airline believes that it cannot sustain too much additional capacity when passengers will have the option to travel through Atlanta. The five days of the week the plane isn't flying, it will be sitting on the ground overnight, which will likely prevent AirTran from losing money if that plane flew across the country. AirTran has already delayed some aircraft deliveries and they may have to delay additional ones if they cannot find profitable routes. Unfortunately, AirTran seems to be grasping at straws with their two latest transcon routes. Even though their new routes between Seattle and Baltimore as well as San Diego to Orlando might be the start of a larger capacity shift, it will only occur if AirTran can fill planes on point-to-point transcon routes in addition to transcon routes from Atlanta. Right now, AirTran isn't capable of doing that without additional marketing and lower fares, both of which should spur demand. If AirTran cannot find additional transcon routes to easily serve, they may have to push additional capacity into intra-East routes from select focus cities. This could help AirTran in certain markets like Chicago, Philadelphia, Boston, Raleigh-Durham, and Charlotte where AirTran has unmet demand, and yields are higher. Those markets seem to be the best places for AirTran to add their new capacity. These markets have sufficient yields, and insufficient service to many other important AirTran markets. If AirTran doesn't add their new capacity in markets which have higher yields then AirTran is taking a much greater risk that it will be able to spur enough demand to compensate, which they would want to avoid doing at this time given their poor track record. If AirTran chooses to deploy its new 137-seat 737-700s on low-yield transcon routes or low-yield Florida routes then AirTran will likely lose money and only gain a marginal amount of market share.

As low-cost carriers add capacity, they are faced with bleaker choices about how, where, and when to deploy it. Some carriers have recognized that they need to change their tactics while others have been slower to adapt to the demand slowdown. However, as the air travel business gets even more competitive later this year, with the likely entry of two new airlines into the US market, Virgin America and Skybus, established LCCs will need to adapt to industry changes even quicker, because their new competitors with lower costs could easily take market share if they aren't prepared. LCCs will likely add fewer new routes this year, and will focus on larger, more established markets with higher yields in order to steer themselves towards profitability, but this may not be enough to protect themselves from the new competitive realities that low-cost airlines are faced with.

AirTran Transforms its Baltimore Focus City Into a Small Hub

AirTran really surprised me yesterday. This was because AirTran announced new flights between Baltimore and Seattle/Tacoma, a route that is grossly underserved but one that I doubted AirTran would serve. Even though over 600 passengers a day fly between the two cities, up until now, there was no nonstop flight. AirTran will fly five times a week (Thursday-Monday) between the two cities with their 737-700 aircraft. AirTran's expansion from Seattle is surprising, given that flights to Atlanta are been seasonal, indicating that AirTran lacked a strong enough competitive position in the Seattle market for year-round service. With such a weak position, particularly because of the distance of AirTran's major hubs and focus cities (Baltimore, Atlanta, and Orlando) from Seattle/Tacoma, it's surprising that AirTran felt they could find a market in the Seattle area, but because the route is so underserved, I think it's possible that AirTran will be able to tap into the Seattle market, even though the airline is only known by very few people in the area. AirTran also announced new flights between Baltimore and Dallas/Fort Worth, Milwaukee, and Charlotte. While the Seattle service is surprising, the rest of the flights aren't. The flights to Dallas/Fort Worth and Milwaukee are only the return of seasonal service, while Charlotte is receiving only one additional flight, which is well-deserved given the dearth of low-cost service at Charlotte. But this new service does signal that AirTran is determined to make Baltimore more than simply a focus city, AirTran wants to make Baltimore a small alternate hub to Atlanta.

While there are many reasons for AirTran's refocus on Baltimore, I will try to outline a couple. First, Atlanta is growing increasingly crowded, and while AirTran has been able to hold its own against Delta for years, there are certain markets where AirTran is struggling because it's not a fair fight. For example, even though AirTran is the second-largest carrier on the Atlanta to Orlando route, AirTran only operates 717 and 737 aircraft, which hold 117 and 137 passengers respectively. But Delta operates approximately the same number of flights per day (around a dozen) primarily with 767 aircraft with which can carry 250 or more passengers, depending on the variant. But because Delta operates such large aircraft, it's difficult for AirTran to make money because their costs are much higher than Delta's on that route in particular. Also, this massive amount of capacity from both airlines easily satisfies the demand from Atlanta passengers, so AirTran feels that it should reposition their aircraft in another strong focus city market that has less competition and the capability to expand when AirTran enters. If AirTran wants to fill their planes, they need a healthy mix of local and connecting traffic, and AirTran may not be securing enough local passengers in Atlanta. But the Baltimore market, and that of the greater Washington DC area, still has room to grow, and AirTran's new service into Baltimore will spur local demand and allow AirTran to steal passengers away from the myriad of other carriers in the city. Moreover, in Baltimore, AirTran won't face pesky nonstop competition from Delta, and instead face Southwest, which has similar-sized aircraft and higher costs compared to AirTran's.

The second reason AirTran is expanding into Baltimore is that it allows the carrier to compete with certain low-cost carriers (Southwest and JetBlue) on routes these carriers are vulnerable on. AirTran wants to battle Southwest on certain routes to Florida. Most of AirTran's passengers connecting in Baltimore will connect on routes to Florida, a very low-yield market, but because AirTran has lower costs than Southwest, AirTran can absorb lower fares. The Baltimore to Florida market is a Southwest stronghold, but AirTran has lower costs and some higher-yield connecting traffic than Southwest (from destinations such as Milwaukee, Rochester, or Portland) which will make AirTran more competitive in an otherwise hopeless competitive situation. Also, in addition to service that competes directly with Southwest, AirTran has a mixture of cities that lack Southwest service, and consequently, AirTran can charge higher fares on these routes, allowing the carrier to truly profit from their Baltimore operation (and perhaps subsidize their fight against Southwest on Florida routes). AirTran also is trying to tackle JetBlue with this latest round of service expansions. AirTran's new service to Portland, Maine, announced on Wednesday, competes indirectly with JetBlue's, since both airlines offer convenient connecting flights to the same Florida destinations through different hubs. Even though JetBlue has a lot of capacity in Portland, they have not started nonstop service to Florida, and the same is also true from Rochester (both Portland and Rochester are served by AirTran from Baltimore). With connecting service through Baltimore, AirTran can compete with JetBlue on many Florida routes, and a larger Baltimore operation also gives AirTran a launching pad from which they can expand to more JetBlue destinations in New England. AirTran has the capability to expand to JetBlue cities such as Albany, Syracuse, and Burlington. But with connecting service through Baltimore, AirTran can make a smaller commitment to the markets, but offer more to customers. AirTran would only need to start two or three daily flights to Baltimore if it wanted to compete with JetBlue from these markets. For example, Portland, Maine will have three daily flights to Baltimore. But AirTran offers more cities in Florida to connect to for less. AirTran serves Daytona Beach (a market JetBlue doesn't serve) nonstop from Baltimore. Also, AirTran offers more flights and more convenient connections to passengers traveling to other Florida markets such as Sarasota or Tampa. Even though AirTran lacks amenities some travelers desire, such as television or assigned seating for all passengers at the time of booking, AirTran can still offer a superior value to customers than JetBlue or other carriers, and that is true on routes to Florida, as well as on routes to other cities like Charlotte. There is one final competitor AirTran is targeting with their new service: Midwest Airlines. The return of Milwaukee seasonal service allows AirTran to claim that it is committed to the Milwaukee market and desires to expand its operations there. This is in order to promote a takeover of local Milwaukee carrier Midwest Airlines by AirTran. AirTran's new Milwaukee to Baltimore service will link Milwaukee to an important AirTran focus city, offering customers inexpensive nonstop flights to a major destination, or convenient connections to another market. This new route will also improve AirTran's visibility in this market, which is something AirTran needs if it wants to execute the takeover.

These new flights should enhance AirTran's connectivity in Baltimore, helping the airline to build an important alternative hub to Atlanta. Some of the new flights (such as service to Seattle or Dallas/Fort Worth) are designed to offer point-to-point service to underserved markets, but most of AirTran's new flights aim to offer passengers more choices when traveling to the Southeast with connecting service. The new flights should be successful for the most part, and I predict that at least one route (Baltimore to Milwaukee) may be made year-round. If AirTran can hold its own against Southwest and JetBlue in these markets, then their new Baltimore flights should thrive. But if AirTran faces over competition and lower yields, or a shortage of demand due to a particularly strong hurricane season, then AirTran may be forced to make some cuts in Baltimore in the short-term. But in the long-term, AirTran's flights should succeed, because they exploit demand in an underserved but growing market, and the new flights currently offer the best value for most passengers on these routes, and ultimately in the airline business, just like any other commodity, passengers are looking for the best value.

JetBlue Announces a Flurry of New Seasonal and Year-Round Routes

JetBlue today announced several new routes that will allow the airline to connect the dots between many of its major destinations. JetBlue announced new seasonal service to two island destinations that already have service from NYC, but lack JetBlue nonstop service from these new markets. This May JetBlue will start new seasonal nonstop service between Boston and Bermuda, as well as seasonal nonstop service between Orlando and Ponce, Puerto Rico. But more importantly, JetBlue will also reenter a Caribbean market they had left previously due to stringent competition. JetBlue will restart service between New York City and Santo Domingo in the Dominican Republic. JetBlue will reenter the market with two daily flights, instead of the one red-eye flight JetBlue previously operated the route with. Like many Caribbean routes, JetBlue will face stringent competition from American Airlines. American has a massive amount of market share and consequently is well-known among travelers in NYC and can depress fares on the route if it needs to. American has the capability to match or even undercut JetBlue's fares in order to win over customers on a very price-sensitive route. Moreover, American operates larger, A300 aircraft to Santo Domingo, which carry passengers more cheaply than JetBlue's A320 aircraft, but more importantly can carry more baggage. JetBlue had difficulties on the route the last time they operated it in 2004 because they were unable to handle the massive baggage loads that typically occur on routes to the Caribbean that aren't marketed solely for tourists. It's not tourists who bring so much baggage on Caribbean routes (although many do use up their entire free allowance), it's residents who carry massive amounts of stuff with them. With two daily flights, including one during the daytime, JetBlue should be better-positioned in the Santo Domingo market than in 2004, however, they will still face difficulties on the route because American will present such stiff competition. Also, JetBlue's Caribbean routes might see loads drop substantially if there is a strong hurricane season this summer. The hurricane season this past year was practically nonexistent, but that's no reason to believe there will be just as few hurricanes this year. The frequency and intensity of hurricanes is a cyclical pattern, but there can be substantial year-to-year variations. It's important that this factor is mentioned, because a mild hurricane season could greatly benefit the passenger loads on these routes as both locals and tourists flock to the Caribbean. But a wild hurricane season, particularly one that does a considerable amount of damage to Puerto Rico or the Dominican Republic, could greatly disrupt loads on these routes, so JetBlue better ensure that their hurricane contingency plans are better than their snow and ice contingency plans.

Also, JetBlue announced new service between Washington Dulles and Orlando, as well as between Charlotte and Boston. This new service is also augmented by a number of frequency additions JetBlue is making to routes from Raleigh-Durham, Charlotte, Portland, Maine (seasonally), and Santiago in the Dominican Republic (also seasonally) to New York, as well as from Las Vegas to Long Beach. These two new routes have been expected. Charlotte is an important business market that JetBlue wants to connect to another important business market, Boston, while JetBlue has had flights to Fort Lauderdale from Washington Dulles for years, but hasn't connected the dots to add service to Orlando. These new routes should perform well, and JetBlue is expanding conservatively, but nonetheless intelligently. In this latest round of expansion, the only new destination was Santo Domingo, and this is a market that JetBlue has served in previous years. Moreover, these new routes are between markets that JetBlue has been very successful in, and JetBlue should have no problem making money on any of these routes (except the Santo Domingo route, for the reasons I discussed above) because JetBlue is already firmly established in these markets. These new routes will be important for JetBlue as part of their new growth strategy to transition from expanding to many new markets to focusing on connecting current markets, particularly with their new Embraer E-190 jets. All indications suggest that these new routes will help JetBlue meet the objectives of that growth strategy while improving profitability.

AirTran and Midwest Launch New Routes to Underserved Markets

It turns out the rumors are true, and AirTran will begin "seasonal" service to Portland, Maine starting June 7, 2007 with their 117-seat Boeing 717 aircraft. AirTran announced this service as an open-ended seasonal service, so it has an easy excuse to cancel flights if they don't do so well. In all likelihood, these flights will be successful enough for AirTran to offer year-round service; the use of the term seasonal is simply a way for AirTran to gracefully exit the market without too much backlash if it is forced to. Interestingly enough, AirTran will not serve Atlanta from Portland, not even with one daily flight, and will instead serve Baltimore with three daily flights and Orlando with one weekly flight on Saturdays. Service to Baltimore instead of Atlanta provides AirTran two advantages. First, the Washington D.C. market is bigger than the Atlanta market (even though most passengers will connect in Baltimore, there will still be a fair number of passengers that will terminate there), and fares have been high between Portland and Washington ever since Independence Air left the market over a year ago. Portland was one of Independence Air's best markets, and so it's no surprise that AirTran wants to enter it and once again lower fares substantially for passengers like Independence Air did, even though AirTran will serve Baltimore instead of Dulles. But the second reason that it's advantageous for AirTran to serve Baltimore is just as important. AirTran has intelligently recognized that most of their customers will be bound for Florida. After all, just over half of Portland's passengers are headed for Florida, and so it only makes sense that AirTran would cater to them. While Atlanta offers a wider variety of destinations to connect to, Baltimore offers nearly as many routes to Florida as Atlanta offers, but by going through Baltimore, AirTran can avoid direct competition with Delta and expand their Baltimore hub operation, which is important to strengthening AirTran's overall network. If Portland service is successful, then it will likely be made year-round (although flights on some routes from Portland may be added or reduced during different parts of the year), the Saturday flight to Orlando will likely be upgraded to daily service, and AirTran may add additional flights to Atlanta or point-to-point service to Fort Lauderdale and/or Tampa. AirTran's Portland service will put the airline in competition with JetBlue on Florida routes. And since JetBlue has 600 seats in the Portland market already, a sizable amount for a relatively small market, AirTran's addition of over 350 daily seats (351 to be exact) will make the market much more competitive, and could hurt both airlines in the short term. AirTran will certainly lower fares in Portland, in part because JetBlue has been able to charge higher fares in a market such as Portland where they are the only low-fare airline in town. But in addition to lowering fares, AirTran will lower load factors, until the market grows to accommodate the new capacity. AirTran can handle lower load factors, they are used to them on many Florida routes and have a lower break even percentage than JetBlue. But JetBlue will have a harder time if AirTran starts taking a significant part of their market share. If AirTran lowers fares enough, then their Portland service will succeed, even though they only plan on offering one weekly nonstop flight to Florida. But if AirTran cannot offer Portland customers a good value, then many customers would rather fly with an airline they're more familiar with, most likely JetBlue. However, I predict that AirTran's Portland service will be quite successful, and that before the peak winter season late this year, AirTran will add additional flights to Atlanta, Orlando, and possibly Fort Lauderdale and/or Tampa.

Midwest Airlines also announced new flights today from Milwaukee to Seattle/Tacoma beginning June 18, 2007. This new service will be in addition to Midwest's new nonstop service to Seattle/Tacoma from Kansas City that starts on May 1, and this new service is somewhat of a surprise, since in the press release that announced the new Kansas City service, Midwest showed schedules for the fastest connection between Seattle and Milwaukee via Kansas City, something most airlines don't do on a press release unless they are trying to justify not serving a city pair nonstop. Midwest's new flights will be welcomed in Seattle, which has long suffered from a dearth of service to the Midwest. But more importantly, it indicates the importance of the Pacific Northwest market, a market that until recently, both AirTran and Midwest have paid lip service to. AirTran doesn't even serve Seattle/Tacoma right now. Their seasonal service will resume in May and run through Labor Day. The Pacific Northwest is of increasing importance to the country economically, with many important companies such as Boeing, Microsoft, and Starbucks all with major operations in the Seattle area, not to mention companies like Nike and Intel with large operations in the Portland area. But sadly, the Pacific Northwest has been dominated by a few airlines for many years, and that has resulted in high fares, particularly on routes to the Midwest and East. Alaska Airlines is the predominant carrier in the Pacific Northwest, but their stronghold has been routes up and down the West Coast. They bill themselves as a "low-fare" airline, but Alaska has been able to keep fares high on its coastal routes, as well as on their few transcontinental flights. United, which still has a sizable operation in Seattle, has trimmed its schedules in the city over the past few years and is the antithesis of a low-fare carrier. Southwest is expanding in Portland (although only on Western routes) while they've halted further expansion in Seattle due to high airport costs. Southwest's presence really hasn't lowered fares and spurred demand on routes to the Midwest and East Coast. Both AirTran and Midwest are airlines that predominantly operate in the East, but in a few months, both will serve Seattle/Tacoma. The flights on both airlines should be successful at first, particularly because Seattle is a strong market in the summer with many cruise passengers flying to Seattle to embark on cruises to Alaska. But, if both airlines are truly committed to the Pacific Northwest, then both should consider adding service to Portland, Oregon in the near future. Moreover, both should expand the number of flights in Seattle, because Seattle sorely lacks low-cost service to the East Coast. Aside from JetBlue's service to New York and Boston, Seattle doesn't have a lot of low-cost airlines that offer easy access to the East Coast. While I would like to see new routes added, I don't think that Midwest and AirTran will expand much beyond this. The Pacific Northwest simply isn't an important part of either carrier's business plan, and while it's wishful thinking to believe otherwise, sadly, AirTran's seasonal service and Midwest's daily flights to Kansas City and Milwaukee are all the new routes the Pacific Northwest will receive from these two carriers in the near future. The Pacific Northwest is simply too geographically distant for both carriers to set up sizable operations in the market. It's too bad, because Seattle, like other markets poorly-served by low-cost airlines, such as Cleveland or Charlotte could accommodate the new service. If a low-cost airline were to challenge Alaska's dominance in Seattle or Portland, it would probably be Frontier, but they seem to have refocused their point-to-point expansion on Las Vegas and Memphis for the time being. As low-cost airlines become increasingly important across the country, regional strongholds such as Alaska's in the Pacific Northwest will start to disintegrate, especially given that in many of these regional strongholds, the dominant airline doesn't offer sufficient service to meet the needs of the traveling public. Unfortunately, however, AirTran doesn't seem as committed to challenging Alaska's dominance in the Pacific Northwest as it is in challenging JetBlue's dominance in Portland, Maine, and that will continue to result in customers (such as myself, a resident of the Seattle area) paying higher fares than necessary in order to travel to the Midwest and the East Coast.

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AirTran's Changing Competitive Position on the East Coast

AirTran Airways today announced new service to Charleston, South Carolina. AirTran will bring much-needed relief to the travelers of South Carolina who have had to endure Delta's high fares for many years. AirTran will offer two daily nonstop flights between Charleston and Atlanta, starting June 7, 2007. The service is indicative of one of AirTran's many survival strategies on the East Coast. With so many new jets coming online, AirTran has been trying to figure out how to place them, and the airline has developed a few different tactics that allows them to compete effectively against larger carriers. One strategy is simply a head-to-head fight with Delta in Atlanta. Since both airlines share a hub in Atlanta, they operate many of the same routes to/from the city. And in the past, Delta has been able to offer high fares because it had a monopoly on many routes to/from Atlanta, but AirTran's new competition, particularly to small or mid-sized markets relatively close to Atlanta, has lowered fares considerably. This is what is happening in Charleston. It's a city close to Atlanta that will benefit enormously from AirTran's connection opportunities, opportunities that many passengers have lacked because of Delta's high fares. AirTran has lowered fares substantially in other small markets around the Southeast that had previously been dominated by Delta including Pensacola, Mobile, Savannah, and Gulfport/Biloxi, and AirTran seems to have succeeded in gaining market share in these cities. They should be able to do the same in Charleston. By targeting markets that are smaller than ones typically targeted by low-cost carriers such as Southwest and JetBlue, AirTran has been able to avoid competition from other low-cost carriers in smaller markets while at the same time making an easy target of legacy carriers like Delta that charge high fares. This strategy has proved successful for AirTran in the past, and I predict that it will again prove successful for AirTran in the future. Other markets in South Carolina such as Colombia or Greenville/Spartanburg could probably support two daily AirTran flights, depending on fares and the amount of capacity Delta and other airlines add to compete with AirTran. When AirTran recently announced service to another small market, Newburgh, New York, Delta retaliated and added new service to the market simply to compete with AirTran. While due to the nature of the capacity additions (service on high-cost regional jets), Delta's new service likely won't have a major effect on AirTran's loads, it does demonstrate that Delta is willing to fight back when AirTran tries to take market share, which could make it more difficult for AirTran to enter markets that are Delta strongholds. If Delta retaliated by adding new flights on regional jets in a market Delta doesn't care about, think about the retaliation Delta could inflict on AirTran if AirTran expands into a Delta stronghold in the Southeast. So far, AirTran has survived, but AirTran has plenty of unserved markets in the Southeast because of a fear of Delta retaliation that could make the route unprofitable to operate.

But a head-to-head battle with Delta isn't AirTran's only tactic. AirTran is one of many airlines trying to take on JetBlue. Unlike other airlines, such as Delta's former Song brand, Southwest, Continental, US Airways, and others, AirTran has a reasonable chance of damaging JetBlue. Instead of trying to copy JetBlue with many attractive amenities and a hip style, AirTran has consistently offered lower fares than JetBlue's. And given that AirTran has the lowest cost structure in the industry, (I cannot overemphasize this point) AirTran is still able to break even or make a profit, even with load factors under 70%. AirTran has done a remarkable job of taking away market share from JetBlue in markets that they once dominated. In Rochester, for example, AirTran has expanded to offer nonstop service to Tampa, Orlando, and Fort Lauderdale in addition to flights to AirTran's Atlanta hub. JetBlue only offers service from Rochester to New York City, and hasn't added Orlando flights like they have in Syracuse (where AirTran doesn't fly) because AirTran has forced prices down so much on Florida flights. AirTran is not only trying to target smaller markets that are dominated by Delta's regional jets (or those of their outside regional jet contractors like SkyWest), but they are also trying to target mid-sized markets that are inhabited and in some cases dominated specifically by JetBlue. AirTran has tried to battle JetBlue in as many markets as possible, and AirTran will continue to announce new routes from the Northeast, especially from smaller markets such as Newburgh or White Plains. AirTran may add further service to upstate New York, including service to Albany or Syracuse. But AirTran may also soon enter another market that JetBlue is dominant in. With great fanfare, JetBlue started service to Portland, Maine last year with four daily flights on large A320 aircraft. With 600 seats a day in a mid-sized market, JetBlue made a large commitment and took a big risk in Portland, but so far their service has been a hit with passengers. However, other low-cost airlines like AirTran may be able to lower fares further and offer more convenient service to customers.

There are rumors, and I want to stress that these are only rumors, but ones that are plausible nonetheless, that AirTran is considering adding service between Portland, Maine and Atlanta as well as at least one Florida destination (likely Orlando), which the company will announce within the coming weeks. Portland service would make a lot of sense for AirTran. It would allow AirTran to disrupt JetBlue's low-fare monopoly in Portland, and it would also give the airline a foothold in a market that doesn't simply attract passengers from Maine, but also some from New Hampshire and to a lesser extent Massachusetts. Just over half of the passengers departing from Portland are bound for Florida, yet there is no nonstop service between Portland and Florida. AirTran could change that, because its 717 aircraft are small enough to allow AirTran to add at least one daily Orlando flight, and possibly service to Tampa and Fort Lauderdale as well. AirTran could profitably offer Portland customers lower fares and more convenient flights than what JetBlue is offering, or even what Southwest is offering from nearby Manchester. Portland would be a perfect AirTran destination, and even if the airline doesn't announce new service soon, it will eventually announce service because Portland is in danger of becoming a JetBlue stronghold, and AirTran wants to keep JetBlue on its toes, because the last thing AirTran wants is the ability for JetBlue to have pricing power and significant market share in a midsize, New England market. It would make it difficult for AirTran to then lower fares or raise fares when it needs to, and it could ensure JetBlue's profitability in Portland for years to come. While it's entirely uncertain whether Portland will become AirTran's newest city, I believe there's enough evidence to suggest that it's a definite possibility.

The third AirTran strategy that it uses against its East Coast competitors is its focus on Florida, which ties in to both of the earlier strategies. Because AirTran has such low costs, it can pass those savings onto leisure customers bound for Florida. Combined with AirTran's convenient nonstop service to many Florida cities, not just Orlando, from a variety of midsize and large markets in the East, it makes AirTran's flight offerings very attractive for vacationers. While JetBlue has been able to gain many customers through its use of innovative entertainment, AirTran consistently offers the lowest fares. AirTran doesn't necessarily offer the lowest fare on every flight to every city, but overall, AirTran's flights are cheaper than JetBlue's or Southwest's. AirTran will continue to focus on Florida in the coming years because it's an increasingly popular destination for vacationers. AirTran must be careful when it expands to Florida markets, that it targets flights carefully. A Tuesday flight between Milwaukee and Orlando probably won't make the airline much money, since the plane will likely be half-full. But a Sunday evening flight between the same two cities will probably make AirTran thousands of dollars. AirTran has too many daily flights when it should instead focus Florida flights on Thursdays through Mondays. If AirTran freed up more of its aircraft on Tuesdays and Wednesdays, it could conduct additional maintenance and add flights between major business destinations, instead of simply flying those aircraft on a daily basis when it's unprofitable to do so. Outside of that issue, AirTran has done a good job pricing, targeting, and timing flights to Florida, and Florida will become an increasingly important for destination for AirTran as it continues to battle with JetBlue.

AirTran is well-positioned to deal with competition both from legacy carriers such as Delta, but also from low-cost competitors such as JetBlue. AirTran will continue to face challenges in the coming years, as it tries to increase its yields as well as its load factors, but overall the airline has positioned itself well, and is adding a reasonable balance of transcontinental flights to larger cities like Seattle/Tacoma and San Diego as well as short flights to smaller markets like Charleston. If the buyout of Midwest Airlines goes through, it will mean even more benefits for AirTran, but if it doesn't go through, AirTran will still be a competitive airline nonetheless. With Delta and JetBlue diversifying themselves and adding new flights to avoid competition from AirTran, AirTran appears to be making headway against these two giants, but they still have a long way to go, considering they have dozens of new aircraft on order that need to find a home in their network, and that means AirTran will continue to expand its timetable for many years to come.

JetBlue: Still One of America's Best Brands

JetBlue is truly a remarkable company. Seven years ago, the fledgling carrier started flights between New York and Fort Lauderdale, with a goal of "bringing humanity back to air travel". They aimed to do that with free LiveTV at every leather seat, low fares, cool snacks (the blue potato chips they serve onboard are quite tasty), and great service. And for several years, as JetBlue rapidly grew, everything was working well. Customers were trying the airline for the first time and returning in droves leading to load factors above 85% during some months. JetBlue expanded their onboard product offerings and the airline continued to offer very low fares. JetBlue developed a well-known and well-liked brand that made some speculators believe the company was virtually invincible. But after these first few blissful years, three major events had the potential to significantly tarnish the company's image. However, like with other great brands, the long-term reputation of the brand hasn't suffered significantly in spite of these events.

The first event was when the company started to lose money in certain quarters due to high fuel prices. A swift drop in the company's stock price followed, and the stock hasn't significantly recovered since. While this is certainly understandable, most low-cost airlines lost money during the rapid rise of fuel prices several years ago, it hurt JetBlue's image with investors as one of the few airline stocks that could make them money. When JetBlue's stock price declined, it became evident that losing money, even for only a few quarters, would decrease the Wall Street and media hype surrounding the company. JetBlue was no longer the little airline from New York that customers and investors thought was invincible, it too had succumbed to the realities of the airline business, and this realization by many halted much of the positive publicity the airline was receiving about being a competitive menace to other carriers. However, JetBlue was still a special airline with many customers because it offered amenities no other airline offered. Customers still flocked to JetBlue, even though many in the business community started to see JetBlue as just another airline.

The second event was when JetBlue released customer data to a contractor for the Department of Defense in breach of the airline's privacy policy. JetBlue was asked to provide the data to assist with a project concerning military base security, but after the airline released the information, the media picked up on the story and it threw into question the company's ability to guard its customers' privacy. Yet even after this event which made headlines across the country for several days, the company's brand was still relatively strong. The incident didn't affect the "JetBlue experience" customers sought, and with the airline still offering low fares and a pleasant flying experience, customers didn't have much to complain about. JetBlue worked diligently to verify that no customer information had been released, and it assured customers that it would avoid participating in certain security exercises that didn't meet privacy requirements set forth by JetBlue. Because JetBlue responded well to that incident, their brand wasn't significantly damaged in the long-term.

But the third event that had the potential to ruin the company's image was the fiasco at JFK Airport in New York City this past weekend. Customers were stranded on planes for over 10 hours in some cases, hundreds of flights were canceled, and worst of all, other airlines seemed to handle the inclement weather with far fewer problems. Moreover, the story has been swirling in the national media for days, and clearly the publicity for JetBlue hasn't been good. But, it's unlikely that JetBlue's reputation with customers will suffer over the long-term. Not only has JetBlue provided more than adequate compensation to many stranded and frustrated customers in the form of a refund and a free flight, but the airline is developing a passenger "bill of rights"; that it plans to announce tomorrow, which apparently will be much stricter than anything members of Congress are contemplating. JetBlue's fiasco these past several days was the result of poor communication and poor planning from JetBlue's management. But the incident was also exacerbated by a noble desire (albeit a misguided one in this instance) not to cancel flights whenever possible. JetBlue has a policy of avoiding flight cancellations at all costs, and consequently the airline has the smallest cancellation rate of any major airline in the country. But in this case JetBlue made a big mistake. When inclement weather was imminent, most airlines canceled flights before customers came to the airport, but JetBlue felt the need to keep revenue flowing into its coffers during the busy President's Day weekend. Unfortunately, this led to thousands of stranded customers, hundreds of stranded and confused employees, and difficulties getting aircraft off the ground.

But although JetBlue made some critical mistakes during its handling of the incident itself, the airline seems to be doing a good job handling the aftermath of the incident, which is what customers really remember. If, in fact, JetBlue implements a strict passenger "bill of rights" that would pay passengers for each hour they are stranded on board an aircraft, pay adequate compensation to passengers stranded by this weekend's incident, and institute better contingency planning, they and their customers will be able to move beyond this incident. What is amazing in corporate America these days is that if a company's brand is strong enough, it can withstand almost anything. And the company's core customers will still stay loyal to an attractive brand, even if it's been tarnished repeatedly. For JetBlue, youth who appreciate JetBlue's sense of style and value and families who travel to sunny vacation destinations like California and Florida will likely stick with the brand. Most customers in these two groups have had many positive experiences with JetBlue, and these customers understand that this past incident was an aberration, not a pattern. However, customers who are outside of JetBlue's core base, such as business travelers and the elderly may avoid JetBlue in the future. Because they don't relate to JetBlue's brand as well, it's easier for these groups to be turned off by one incident, and JetBlue might have a tough time getting business travelers and the elderly to give the airline a second chance.

The fact remains that JetBlue's brand is the most important asset the airline has. JetBlue may be suffering from rising costs, new competition, and lower load factors, but in the midst of the airline's troubles, it has nurtured a brand that people feel overwhelmingly positive about. The best examples of other brands like JetBlue's that have a core base of users who won't abandon the brand, regardless of how it's tarnished, are Apple and Google. Both these companies have strong followings of youth who identify strongly with the brand and who don't care about what happened with Apple's executives and stock options, or about how Google is helping to censor the Chinese people. Other brands, such as Microsoft, are viewed quite negatively because a negative story about the company, such as the severe lack of control users have over their computers with Microsoft's new Vista operating system, simply add to a customer's frustrations with using their product. Most people have to use a computer, and they use Microsoft because it's what they're used to, not because it's a pleasant experience. Conversely, most people enjoy using iPods or the Google search engine, and they enjoy flying JetBlue. They enjoy doing these things particularly because competitors have defined the industry they compete in as consumer-unfriendly. For example, many customers find Microsoft products difficult to use and Microsoft software is far more susceptible to getting viruses than Apple software, yet Microsoft dominates the software industry. Similarly, American and United which dominate the airline industry are two big, impersonal airlines, and most customers find flying with them to be a hassle, while JetBlue offers a pleasant experience. Because people like using a helpful or enjoyable product or service in an industry that is notorious for consumer-unfriendly products or services, brands can quickly develop and expand their appeal to fed up consumers. JetBlue's brand has done just that, and the airline's core base of customers will not leave the brand, provided JetBlue continues to handle this latest incident in an appropriate manner. It will take a lot more negative publicity for these customers to avoid using JetBlue. If a similar incident had happened at any other airline, it would have turned many customers away from the airline forever, but because JetBlue's brand is so strong, an incident like this won't damage the company too much. Watch for JetBlue's announcement tomorrow, because that will indicate how well JetBlue is handling the situation, and how much JetBlue's brand will benefit or suffer from this latest incident.

By the way, Airline Bulletin has added some exciting new features. You can now receive email updates that contains the latest post from Airline Bulletin, just look for the Get Posts By Email option on the right column of the page. You can also link to our RSS feed by clicking the links under the Syndicate This Site heading below the email subscription option. Airline Bulletin is excited to present these new options to readers, and I hope you continue to visit this site for analysis and commentary on the airline industry.

Southwest Announces Resumption of San Francisco Service

After a six year absence from San Francisco International Airport, Southwest Airlines announced on Friday that it is in discussions with the Airport Authority in San Francisco to resume service from San Francisco International Airport, presumably starting in early fall. This announcement is another blow to Virgin America, which has yet to receive final approval for its operations, and has already come under assault from low-cost competitors. Two of Virgin America's largest potential low-cost competitors in San Francisco are Southwest and JetBlue, and neither airline made public its intentions to serve San Francisco until less than a month ago when JetBlue announced new flights to New York and Boston. Southwest's announcement is only a signal that they have an intention of commencing service at San Francisco sometime in the fall, the precise date of when that new service will start and what cities Southwest will serve from San Francisco, are still a mystery. When Southwest vacated San Francisco in 2000, it left behind an airport with extremely high costs, long delays, and stiff competition from entrenched airlines, primarily United. But the San Francisco Airport has changed since then. User fees have been reduced, strategies to control delays have been implemented, and low-cost competition at San Francisco, and nearby Oakland (particularly from Southwest) has forced United, San Francisco International Airport's largest tenant, to reduce fares. But nevertheless, Southwest still faces a very challenging competitive environment at San Francisco. In many ways, they have adapted to the new realities of San Francisco International Airport slowly, and unfortunately, it will likely lead to Southwest finding itself at a competitive disadvantage in terms of routes and amenities when it starts flights from the airport.

San Francisco will become the new battleground in the ever evolving competition between airlines to offer superior amenities. Virgin America will offer the best entertainment in the skies, with TV, music, movies, games, interactive chat networks between passengers, and more. JetBlue will have a hard time keeping up with all these features, given that their entertainment system was designed in 1999, not 2006. Frontier, which is building a small focus city operation in San Francisco, also has JetBlue's LiveTV, and they too will have trouble staying competitive with Virgin America when it comes to offering the most attractive amenities to customers. Virgin America will also offer seat pitch, snacks, and service standards competitive to JetBlue, which will make it difficult for customers to distinguish between the two carriers, something neither wants. However, there is one important distinction business travelers will notice: Virgin America will offer a first class section for passengers willing to pay extra, a feature JetBlue lacks. JetBlue has struggled to cope without a first class section by offering customers who purchase more expensive tickets choices of more comfortable seats. Southwest will be unable to compete with these carriers, unless it makes some changes between now and when it commences San Francisco service. Southwest doesn't have any in-flight entertainment, and doesn't offer seat assignments, a feature all other US low-cost carriers offer, and a service that passengers have come to cherish. Because Southwest can't compete for passengers with its amenities, it must compete on price.

Like in most of Southwest's other new markets, San Francisco has high fares, especially on short-haul routes. Frontier has lowered fares on a couple of important routes, from San Francisco to Los Angeles and Las Vegas, and Virgin America will likely lower fares when it starts flights to Los Angeles, Las Vegas, and San Diego. But Southwest will be able to lower fares considerably from San Francisco to additional, smaller markets, or simply ones that lack a lot of competition from the Bay Area. The Pacific Northwest is a perfect example. Only Alaska and United serve Seattle and Portland from San Francisco; although Southwest offers nonstop service to both cities from Oakland and San Jose. Southwest could start new service from San Francisco to cities in the Pacific Northwest and end the duopoly that has kept fares between the two areas artificially high for some time. But that's not where Southwest could make its biggest impact. Markets like Albuquerque, which are relatively small and only served nonstop from San Francisco by United could see fares come way down. Even though Frontier offers competitive fares on connecting service, United still charges high fares on nonstop flights, upwards of $300 round-trip even on advance purchase tickets.

This means that Southwest will have to expand carefully in San Francisco. When it left in 2000, Southwest was still serving San Diego and Phoenix nonstop, but Southwest may want to modify which routes it focuses its San Francisco expansion on. Southwest's best bet is to focus on what they do best, short-haul flights, since transcon flights will see very low fares with JetBlue and Virgin America's new service. Moreover, Southwest would have difficulty competing profitably on routes to many major markets on the East Coast, since Southwest uses secondary airports in the big three East Coast markets (Boston, New York, and Washington DC) that are unpopular with business travelers. However, the one exception to that is Southwest's operations at Washington Dulles, but the number of flights Southwest currently offers at Dulles pales in comparison to Southwest's focus city in Baltimore, making it difficult for Southwest to contemplate transcon expansion from Dulles because they haven't built up the market at that airport yet. If Southwest focuses on short-haul routes from San Francisco, flights to the Pacific Northwest are a distinct possibility, but beyond that, service to a series of markets in the Midwest and Southwest could lower fares for consumers, offer more nonstop service to cities underserved from San Francisco, and draw reluctant passengers to Southwest instead of Frontier or other LCCs. Some potential markets where Southwest could considerably lower fares include St. Louis, Kansas City, Omaha, Tucson, El Paso, Albuquerque, Oklahoma City, Tulsa, Austin, and San Antonio. All of the markets listed above are markets Southwest currently serves, and all have disproportionately high fares from San Francisco. It's cheaper to fly to New York City than to many of these cities, and some even lack nonstop service from San Francisco. Southwest will likely start San Francisco service with service to major Southwest focus cities including Los Angeles, San Diego, Las Vegas, and Phoenix. In the next wave of expansion, Southwest will likely expand to add more intra-state service, but hopefully after that wave, the airline will add more lucrative service to underserved cities in the Southwest and Midwest regions. Southwest could build a very strong market in San Francisco if it put strong downward pressure on fares to select markets that the airline is already strong in.

But, what Southwest has to be careful about, is usurping its strong Oakland focus city. Oakland is Southwest's fifth largest market with 142 daily departures, as of November 3, 2006. Southwest has grown quickly in Oakland in the past several years, and the airline has added a variety of flights on short-haul and medium-haul routes across the country. Southwest already serves many of the destinations listed above nonstop from Oakland, and Oakland service has failed to put downward pressure on fares from San Francisco. But if Southwest augmented or even replaced some of its Oakland flights with services from San Francisco, it would provide convenience to more customers, since many customers are crossing the Bay to fly cheaply from Oakland, and it would put strong competitive pressure on United, particularly since United is weaker with short-haul service than it is with transcon service. Southwest needs to find the right balance between Oakland and San Francisco service, but it will all depend on what customers are willing to pay for. Oakland flights will likely be cheaper, because it's cheaper for Southwest to operate from Oakland, and Southwest already has an established presence in Oakland where it exercises considerable leverage over fares in the market. Due to San Francisco's higher costs and the very high fares from San Francisco currently offered by United, Southwest could likely get away with not lowering fares from San Francisco as much as it typically does in other new markets, particularly on less competitive routes, such as to Kansas City or Austin. Consequently, Southwest will probably charge more for equivalent flights from San Francisco than from Oakland, although the difference will probably be relatively small, my guess is that it would be no more than $20 per round-trip ticket.

Southwest will have a difficult task when it commences service from San Francisco this fall. They will need to overcome their lack of amenities, particularly their archaic seat assignment system, and compete in a very difficult environment with every other major US LCC. Southwest would be wise to focus on short-haul nonstop service from San Francisco to underserved cities that Southwest already has a strong presence in. Southwest's success in San Francisco will depend on whether the airline can lower fares enough to make their no-frills flights attractive for customers used to flying with airlines such as United that offer more amenities. Otherwise, the hip San Francisco crowd would rather fly with JetBlue, Virgin America, Frontier, or United than Southwest. The competition from San Francisco this coming summer will be a good indication of which airlines will be able to compete successfully with Southwest in such a difficult market. By the end of the summer, it will be clear which airlines are in an advantageous position in the market, and which ones could be forced to reduce service or exit if locked into direct competition from Southwest. One thing is for certain, Southwest's successful reentry into the San Francisco market will be a very different task than Southwest's relatively recent entry into other new markets, such as Washington Dulles and Ft. Myers because of the level of competition from most major US LCCs and one of America's strongest legacy carriers, United, as well as the immense downward fare pressure that Southwest and other low-cost airlines must put on shorter and longer routes alike in order to fill seats.

Airline On-Time Performance Rates Decline; What's Needed to Reverse the Trend

The Bureau of Transportation Statistics, an arm of the Department of Transportation, yesterday released on-time performance rates for the month of December, and for the entirety of 2006, and the results aren't good. Overall, 75.4% of flights were on-time in 2006, compared to 77.4% in 2005. This trend is indicative of the hassles and frustrations people feel when traveling by air these days. Not only do passengers have to endure longer lines and go through "stringent" security checkpoints, but flights are being delayed more often. However, the BTS statistics need to be taken with some skepticism. First, some airlines look worse on paper due to delays or cancellations they aren't responsible for. For example, in December, Frontier Airlines had the highest flight cancellation rate of any airline with 9.4% of flights canceled. That sounds like a lot, but when taken into consideration the December snowstorms that shut the Denver airport for several days, Frontier had a reasonable rate of cancellations, since all of Frontier's canceled flights during the days of the snowstorm counted towards cancellations on BTS statistics. Also, JetBlue had one of the worst on-time performance rates in December, with 64.8% of flights arriving on time. But that's in part because JetBlue has a policy of avoiding cancellations whenever possible, even if it means long delays. JetBlue had the lowest cancellation rate of any airline in December for this reason, with only .4% of JetBlue flights canceled in December. Also, some airlines can easily boost their on-time performance results by elongating the flight time to more than it actually takes to fly between two given cities. This allows airlines to look good to customers because planes often arrive early, and fewer "delays" occur. Delays are defined by the DOT as any flight that arrives 15 or more minutes late than the scheduled arrival time the airline sets. The government doesn't have strict rules governing what flight times airlines set between cities, so airlines can manipulate flight times to their needs. Southwest could set a flight time between two cities of 180 minutes, and United could set a time of 210 minutes, both within reason, but if both airlines fly flights that take 200 minutes to get between the two cities, Southwest's flight is late, and United's is early.

Nevertheless, these on-time statistics are still alarming, and airlines need to focus more energy on improving on-time performance. One of the ways airlines can do that is by speeding up the boarding and deplaning processes. By doing this, they can minimize the number of aircraft that arrive late and lead to additional late departures. Airlines have experimented with methods of moving people on and off planes faster, and that has helped cut turnaround times, allowing airlines to fly more flights with the same amount of aircraft. But airlines can do more, starting with the number of personnel who are turning aircraft around. Southwest is able to consistently turn aircraft around in 25 minutes at every airport it operates virtually all the time. This seems to be lost on many airlines, even so called "low-cost" airlines like Frontier and JetBlue which schedule 35-40 minute turnarounds at a minimum because they are afraid of causing delays that will reverberate for the remainder of the day. Southwest is able to do it because of the consistent teamwork of a large number of employees who all work together to create speedy turnarounds. This is in part due to a low employee/supervisor ratio (only 10 or 12 to 1 at Southwest, versus up to 40 to 1 at other airlines.) Other airlines need to do a better job of achieving fast turnarounds. The next flight doesn't necessarily need to be delayed simply because the previous flight arrived slightly late; quicker turnarounds would help keep planes on-time. However, turnaround times aren't the only source of late arriving aircraft. Sometimes airlines have errant passengers who check-in but don't board or mechanical delays that delay the remaining flights that aircraft is scheduled to fly that day. Those are unavoidable, and while airlines may do their best to prevent them from happening, most passengers understand that they will happen and aren't the airline's fault, even though it can be frustrating for passengers to endure these delays.

But there are more significant concerns about why flights are being delayed. In the United States, like in much of the industrialized world, our air traffic control (ATC) system is antiquated, with aging ATC equipment and infrastructure that was constructed decades ago. Delays due to ATC problems have been increasing, and they are costing airlines billions of dollars a year in lost revenues, additional labor costs, and compensation for passengers. New ATC equipment could not only keep a growing number of planes operating safely and quickly through our congested skies, but it could also allow aircraft to takeoff and land in some adverse weather conditions that they can't currently safely operate in. However, the FAA has repeatedly delayed many ATC improvement projects, and time is running out before a major slowdown in air traffic could occur due to equipment failures. But an even more pressing concern is the shortage of air traffic controllers monitoring our skies. In 1982, the air traffic controllers strike resulted in many air traffic controllers being fired because they stayed on strike after Regan's deadline. This meant that a new wave of individuals were hired to monitor the skies, and many of them are now reaching retirement age. Thousands of controllers are predicted to retire within the next five years, and that could leave this country with a critical shortfall of experienced controllers. With fewer people to staff control towers, flight patterns will slow as pilots wait for available controllers to guide them to the ground safely, and it will be difficult for airlines to add additional flights at a time when demand for air travel is growing. While pay and benefits for ATC controllers is adequate, many earn over $100,000 a year, the work is tedious and requires literally years of specialized training at a particular airport. The FAA hasn't sufficiently addressed this looming crisis, and it will only hurt airlines more in coming years. If we want to solve the problem of excessive aircraft delays in this country, ATC delays are increasing at an alarming rate, and this trend will only accelerate due to ATC controller retirements unless significant corrective action is taken soon to fix aging ATC infrastructure and hire additional controllers.

Of the delays that humans can control, late arriving aircraft and air traffic control delays are the two primary categories of delays that can and must be controlled better. But there are some bright spots, and passengers might be surprised to hear the statistics. Very few flights are delayed for security reasons, even though it seems to many passengers that with the various layers of airport security, security delays would occur frequently. Just .10% of flights in December suffered security delays, which is equivalent to one out of every 10,000 flights. More flights were diverted (2.3 out of every 10,000 flights) than were delayed for security reasons. Traveling by air is becoming increasingly difficult because of more passengers on planes, tougher rules at security checkpoints, and more frequent delays. Passengers understand the increasing demand for air travel and the necessity of stringent security, but for many, a delay is the last straw, and they get fed up with an airline, or traveling by air in general regardless if the delay is caused by the airline, the government, or Mother Nature. If the FAA and airlines can work together to at least alleviate some of the controllable delays, it would help tremendously towards making air travel more comfortable for passengers at a time when many passengers are avoiding air travel because of the numerous hassles associated with it.

Low-Cost Carriers Look to Premium Class Seating to Increase Revenues

As LCCs look to increase revenues, some are looking towards a more traditional approach practiced by legacy carriers, premium class seating. But in the US, many carriers don't want distinguished seating to be considered "premium class". Already, LCCs operate premium products for all their customers compared to the dismal experience most customers have with legacy carriers. However, with customers demanding more amenities, but lower fares, LCCs are trying to find a way to provide those amenities while recovering the additional cost of the service. Here are two examples. JetBlue CEO David Neeleman mentioned (you may need to login to access this article, bypass the signup process here by using their login combinations) to a reporter recently that JetBlue is considering setting aside a few rows of seats in the front of the aircraft for passengers who book late and pay higher fares. Now that JetBlue is removing an additional row of seats from its aircraft, configuring their planes with 150 seats, the first 10 or so rows of the aircraft in front of the emergency exits will have 36 inches of seat pitch, while the remaining 15 or so rows will have 34 inches. JetBlue feels that it should reward customers who pay higher fares by helping them find seats in more comfortable section so they will be more inclined to fly JetBlue again, hopefully paying that same high fare. However, most customers who sit in the rear won't feel that they've been put in the steerage section. 34 inches of pitch is still considerably better than the 31 inches most legacy carriers offer. Also, Midwest Airlines announced that it is reconfiguring some of its aircraft, adding a de facto business class on certain routes. On some leisure routes, Midwest flies aircraft configured in a 2x3 Saver configuration, while on the remaining routes they fly similar aircraft configured in a 2x2 seating configuration. Midwest decided that on they would reconfigure the first few rows of their 2x3 Saver aircraft with Signature seating due to customer demand. Presumably, Midwest will charge more for these seats (even though they are standard on other flights), because it's akin to business class seating.

LCCs in the United States that lack premium seating, including Southwest and Frontier may feel pressured in the near future to adopt some level of premium seating. The advantage both these carriers have is that they both have semi-premium products, better than AirTran and Spirit, but not as good as Midwest or JetBlue, so they haven't yet felt pressured to adopt a more luxurious product. Both Southwest and Frontier boast 33-inch seat pitch, friendly, punctual service, and a loyal base of customers to support them. But business travelers may be turned off both these carriers for differing reasons. Frontier has assigned seats and LiveTV at every seat. But Frontier also has a hub in Denver that many travelers would rather avoid if they could get a point-to-point flight. Frontier has few point-to-point options, and given the hassle of travel today, most business travelers would rather avoid hubs if possible. Southwest offers these point-to-point flights (although they also offer plenty of connection opportunities on their more sizable network as well), but lacks entertainment or seat assignments. Southwest will be able to become more attractive to business travelers simply by adding assigned seats, and possibly entertainment. Southwest has been around so long that business travelers understand Southwest's model and either love it or hate it. If business travelers want to fly business class, the last place they know to look is Southwest. If they want economical travel, then they look to Southwest, and they might consider Southwest more in the future if they add assigned seats, which is the biggest complaint business travelers have of Southwest. Southwest is already distinguished enough in the minds of most business travelers that it doesn't need to resort to full-fledged business class.

However, Frontier may be wise to consider some form of premium seating. Given Frontier's close marketing partnership and similarities with AirTran in terms of network structure and destinations, Frontier might want to consider adding similarities in another area by adding some premium seating like AirTran has. Premium seating would allow Frontier to generate additional revenues, particularly if it decreased the seat pitch on its remaining seats to 31 or 32 inches (which is still better than AirTran's 30 inches). Frontier could still keep TV for all passengers and the same coach product (minus an inch or two of legroom). Frontier competes in a very difficult market, Denver, where United, one of America's leading airlines for business travelers, operates a hub. United attracts the majority of Denver passengers because they offer more flights, but also because they offer more seating choices for customers. If Frontier were to operate a business class service, it could attract many of the business customers it loses to United. Because business travelers are so profitable to United, it might be worthwhile for Frontier to consider tapping into this profitable market. If LCCs in the United States continue to offer premium amenities to customers, they need to find ways of providing a balance between more amenities and higher fares. Premium class seating is a way of doing that, and it's something LCCs shouldn't be scared of, simply because Southwest doesn't have it. LCCs will face increasing cost pressures in the future, particularly as legacy carriers continue to control their costs judiciously. By finding methods such as premium class seating to control the cost of amenities to passengers who don't wish to pay a premium for them, while increasing revenue-generating opportunities for the airline, LCCs will be able to compete effectively against legacies in the future.

Should LCCs Realign Non-Hub Point-to-Point Flights?

American low-cost carriers, particularly those designed to operate a hub-and-spoke model, such as Frontier and AirTran, have had significant challenges in adapting their low-cost model to point-to-point markets away from their hubs. Often the flights are started as an attempt to build support in a market for an eventual focus city operation. However, flights that are empty lose a lot of money for airlines that start them, and often, point-to-point flights have been very unsuccessful because they are started in the wrong markets without enough advertising backing from the airline. There have been numerous examples of this occurring with American LCCs, and it's a disturbing trend, because it could inhibit growth just as these carriers have increasing numbers of aircraft in their fleets that they want to use in markets outside their hubs.

A couple years ago, Frontier started nonstop flights from Los Angeles to Minneapolis and Philadelphia, with an intent on building a focus city in LA. However, those flights were unsuccessful, and were suspended. Instead, Frontier refocused their point-to-point flights on Mexico, a strategy that was riskier, but has paid off for the airline. Frontier focused initial flights in cities where the airline already has a significant amount of market share (compared to other spokes), and built up demand for service between these cities and Mexico with cheap flights. Frontier adopted a strategy akin to Allegiant's, by offering several weekly flights to a popular vacation destination (Cancun) from various cities in the United States. Frontier doesn't sell seats nearly as cheaply as Allegiant, but does offer a good vacation value for customers, which is why the flights have been, for the most part, successful. However, on domestic routes, Frontier has struggled to expand outside of their Denver hub. While Mexico is a terrific growth opportunity for the airline, there are only so many point-to-point routes that can be launched to Mexico.

This is partially why Frontier has focused on the California market as one of its engines of growth in the coming years. While Frontier's focus city operation in LA was a failure a couple years ago, Frontier still is committed to the California market, because it is growing quickly, and is relatively close to Frontier's Denver hub, so Frontier hopes that they will become the airline of choice for Californians who want to fly intra-state, to Mexico, or transcontinental. To demonstrate its commitment to California, Frontier has concentrated much of their point-to-point Mexico flights from California cities, but they also started San Francisco to Los Angeles service as a way to build loyalty, particularly with business travelers, in a very competitive region. The San Francisco to Los Angeles route is dominated by America's two largest airlines, American and United, which both have many daily flights between the two cities. These flights are very popular with the business travelers Frontier wants. Leisure travelers who need to travel to the other end of the state typically fly low-cost airlines like Southwest from alternate airports such as Oakland or Ontario. Frontier, as a low-cost airline, took a bold step by competing with American and United on such a competitive route, and it's a step that hasn't quite paid off yet. Frontier CEO Jeff Potter admitted last week that the route "is slow" but that Frontier management expected that because Frontier isn't well known outside of Denver, and because they are up against such stiff competition. However, with five daily flights on the route, Frontier may be losing a lot of money on the route, and with the company losing money (they recently announced a $14.4 million loss for their fiscal third quarter), the route may have to be trimmed if it doesn't start performing better soon. Frontier has tried to attract business travelers initially with free TV and bonus frequent flyer miles that enabled customers to fly a free round-trip after three paid flights. Frontier is doing the right thing by trying to expand outside of Denver, and California is a good market to do that in. But Frontier needs to remember who their clientele is. An airline as small as Frontier can't be all things to all people. Frontier, with their frequent Mexico service is primarily a leisure airline, and Frontier can make that a profitable business. Even though intra-California flights may be a good way to lure business travelers to Frontier, it's certainly an expensive way to do so, perhaps too costly for Frontier. While Frontier is making an investment in California, it might be best to hold off on some of that investment until Frontier has sufficiently saturated the point-to-point Mexico market. It's unlikely that other airlines (except Virgin America) will step in Frontier's void and attempt to grow their California operations from the business markets Frontier's targeting. And during this time, Frontier could still build their name recognition in California because Frontier could continue to operate their point-to-point Mexico flights, as well as flights to their Denver hub from several California cities. Frontier should definitely consider stepping back from California for awhile by suspending San Francisco to Los Angeles flights until they can refocus their business towards a more specific set of customers, and reinvest in California with more targeted, and hopefully more profitable flights.

But Frontier isn't the only airline that has had difficulties expanding point-to-point services, AirTran has also faced difficulties in building focus cities and finding profitable markets outside its Atlanta and Orlando hubs. AirTran has tried to grow from many different focus cities, with varying levels of success. In 2005, AirTran expanded its point-to-point offerings by providing nonstop service to Las Vegas from several cities in the Midwest, including from other successful focus cities such as Akron-Canton. But even though AirTran's costs are the lowest in the industry, the airline had difficulty making money on the routes because the yields were simply too low. Eventually, those routes were dropped. AirTran has done a good job focusing their point-to-point routes primarily on leisure customers. Most AirTran point-to-point routes run between cities in the Northeast and Midwest to Florida. The yields are low, but AirTran's ultra-low cost structure enables the airline to compete with more popular providers, such as JetBlue. But that has made it difficult for AirTran to expand point-to-point routes between markets that have fewer leisure customers. Even though AirTran has strong focus city operations in business markets such as Baltimore, Boston, Philadelphia, and Chicago, they have had difficulty expanding between these and other business markets because of heavy competition, low yields, and customer loyalty to other carriers. For example, AirTran had to suspend service between Chicago and Newark because of too much competition, and they have overexpanded on some routes which has resulted in extremely low load factors. For example, AirTran has up to nine daily flights between Boston and Baltimore, a city pair that isn't served by Southwest, but nevertheless, doesn't require nine flights of capacity. However, AirTran offers the frequencies because it's attractive for business travelers, even if it's expensive to operate all those flights. AirTran needs business travelers more than Frontier does, but AirTran should be competing on more than simply flight frequency. AirTran needs to expand focus cities in fewer markets, but by concentrating their resources in fewer markets, AirTran can offer more flights to more destinations from those cities. AirTran needs to raise load factors, and the easiest way they can do that is by offering fewer point-to-point flights. On many routes, they offer multiple services, often three or more flights a day, so AirTran should do a better job consolidating those flights in order to obtain higher load factors. Can flights to the Atlanta and Orlando hubs be consolidated? Yes, and AirTran should consider doing that, but point-to-point flights often have lower load factors and in most cases, aren't integral to the airline's network. It's more important for AirTran to offer more frequencies on hub flights, than on point-to-point flights, because the strength of AirTran's network, and the ability passengers have to fly on AirTran to dozens of different cities, depends on frequent connection opportunities in Atlanta. AirTran also has a lot of different point-to-point flights, many of which aren't part of the airline's unified network, but rather flights to fill a void in service between two cities. If those flights make money, then they should continue to operate, but if AirTran wants to start targeting business customers, then they need to focus on fewer markets but offer a higher standard of service with better punctuality. AirTran shouldn't be diversifying itself so much that it loses its ability to compete in important markets because it lacks suffucient service to the market. AirTran doesn't need to operate point-to-point flights between certain cities such as Dayton and Baltimore or Indianapolis and San Francisco, because it simply distracts the airline from where it should be targeting their flights to make them more successful. Like Frontier, AirTran is making investments in the future, but AirTran may be making investments in too many places to be successful in the future, unless it reconsiders some of its point-to-point routes.

Point-to-point flights have an important role to play in the networks of LCCs that are primarily hub-and-spoke, but they need to be targeted at the right set of customers, and they need to be added with care, because often they can quickly turn into loss-makers if they aren't added in the right markets. Frontier and AirTran both have work to do to realign their point-to-point flights, and to focus new point-to-point flights on certain markets where the airline has more market share and thus a competitive advantage over other carriers, and on certain groups of customers that the airline wants to attract. By refocusing point-to-point flights with these two elements in mind, the right markets, and the right customers, hopefully LCCs can make their point-to-point flights more profitable.

Virgin America Makes Ownership Changes That Should Allow it to Fly

Virgin America announced late today that the Virgin Group, a foreign-owned company, and a minority investor in the startup airline has given up a board seat and direct control of its voting shares in order to remove doubt about Virgin America's ownership. The startup airline has been delayed by difficulties in ensuring the Department of Transportation that the company is complying with foreign ownership requirements, which permit foreign companies to have no more than 25% control in an American-based airline. The Virgin Group will still have two of eight board seats and will move its voting shares into a voting trust with a trustee approved by the DOT. What this announcement should mean is an end to the speculation concerning whether Virgin America will fly. This announcement should be the signal to customers that the wait for Virgin America's launch is almost over. When Virgin America receives approval, which should be within the next few weeks, it will then only be a matter of weeks or months before they commence service. Even with their ownership dispute, Virgin America has been busily preparing for its launch. For example, Virgin America recently announced a deal with EchoStar DISH, that will put Satellite television at every seat. The new interactive system will be superior than JetBlue's, because it will allow customers to also play music, games, and even order meals on-demand. But even with all the excitement surrounding the startup, some questions linger.

Unfortunately for Virgin America, Jetblue recently announced service to San Francisco International Airport. JetBlue is Virgin America's worst nightmare, since JetBlue already has a hip, upscale brand similar to Virgin America's and a strong contingent of loyal customers in the San Francisco Bay Area because of JetBlue's years of service to Oakland and San Jose. Many loyal JetBlue customers may be reluctant to try Virgin America when JetBlue will offer convenient service from San Francisco International Airport. Virgin America has received a lot of good press and is well-known in the San Francisco area, but it will be extremely difficult for Virgin America to compete as an upscale competitor when it's facing two of America's most upscale carriers, United and JetBlue, from San Francisco International Airport. It's unclear whether Virgin America will compete successfully in the coming months, but it's likely that the airline will try to expand quickly and diversify their routes. It's also possible that Virgin America will serve routes that are underserved by United or JetBlue from San Francisco. Virgin America will likely launch flights first to New York and then to Boston and/or Washington DC. But after that, routes to Miami, Charlotte, or other smaller, but underserved markets on the East Coast may be in the works, as Virgin America tries to evade the competition. It will be fascinating to see what approach Virgin America takes to beat the competition. But clearly, 2007 will be a very interesting year for the San Francisco market because of the changes in the competitive landscape that will be brought about by the Virgin America launch.

JetBlue Announces New San Francisco Service: Are Airport Costs Being Controlled by American "Low-Cost" Carriers?

Today, JetBlue announced new service between San Francisco International Airport and JFK as well as Boston. San Francisco International (SFO) is notorious for being a delay-prone and very expensive airport to operate from. JetBlue already offers extensive transcontinental service from cheaper airports in Oakland and San Jose, so why did they decide to expand to SFO? There are a number of potential motives for this move. One is the delay of Virgin America's entry into the marketplace. Since Virgin America's application has stalled, JetBlue, the other hip, low-cost brand, wants to get a jump on Virgin America and steal some of their potential customers. Many potential JetBlue customers are also potential Virgin America customers. These potential customers live in San Francisco, have a significant amount of discretionary income, and a willingness to pay a little bit more for a better experience. These potential customers haven't used JetBlue in the past because it required a trip to Oakland. This is partly why United has been so successful in its runway robbery strategy to charge ultra-high fares for leisure and business customers alike from San Francisco. United offers a decent flying experience and nonstop service, which is more than can be said for most airlines from SFO, so they can justify charging sky-high prices. The other main reason JetBlue is entering San Francisco has to do with convenience and revenue factors. JetBlue, like most airlines, is doing all it can to boost revenues, even at the expense of higher load factors. Fares for JetBlue's new service will be between $159 and $399 each way, which are lower than United's fares, but not significantly lower. This move is indicative of a seismic shift in JetBlue's strategy. Instead of entering a new market to drastically lower fares, like Southwest has done, JetBlue is entering new markets that will allow the airline to raise revenues by offering a superior product to airlines already in the market. JetBlue may still lower fares when it enters a new market, but JetBlue doesn't want to compete on fares alone, they want to compete based on product. In most markets, JetBlue can still draw sufficient customers even at higher fares because of their superior product.

But what is most significant about this move is that it's indicative of a trend that's occurring with many U.S. low-cost airlines. Unlike European low-cost carriers, which often use cheaper alternative airports to help lower costs, most U.S. low-cost carriers have shunned cheaper airports. Europe has an abundance of cheap airports. In fact, some of the airports low-cost airlines like Ryanair and EasyJet frequent are former cold war-era military bases that have been decommissioned and are now used as commercial airports. The reason for this dismissive attitude towards cheaper airports from U.S. low-cost carriers is two-fold. First, many cities lack suitable alternate airports. Cheaper airports simply don't exist. Many major U.S. cities, including Seattle, Phoenix, Denver, Las Vegas, Boston, Philadelphia, and others lack sufficient alternate airports. Some airlines have experimented by using airports in other nearby cities, for example flying to cheaper Colorado Springs instead of Denver or Providence, Rhode Island instead of Boston. However, these Ryanair-esque tactics typically result in low catchment from the main city the airline is targeting customers because the fares offered aren't low enough to drive customers 50 miles in some cases to another airport. On most Southwest flights from Providence, for example, most passengers aren't from the Boston area, but rather from the area closer to Providence. This leads into the second reason why low-cost airlines in the U.S. have been hesitant to use alternate airports. Most passengers expect substantially lower fares for using a less-convenient airport, and in most cases, the cost savings from using an alternate airport simply can't justify the fare decreases passengers demand. Ryanair can offer fares for ten Euros each way, and that's enough to drive people 50 or more miles to an alternate airport, but the savings in the United States aren't that substantial and don't drive customers that far out of their way.

There are also instances of low-cost carriers rejecting certain airports because of crowding or operational issues. San Francisco is a perfect example. In the late 90s, Southwest used to operate from SFO, but pulled out in 2000 primarily because of operational issues. Southwest runs a very tight schedule, and one delay can cascade to flights throughout the day. Many early morning Southwest flights were being delayed by the inevitable San Francisco fog that often descends on the airport. Not only was San Francisco more expensive to operate from, but it created reliability issues that hurt Southwest's reputation with its customers. JetBlue is starting in San Francisco carefully with four daily transcontinental flights to New York, and one daily red-eye flight to Boston. Only one of JetBlue's flights will take off before noon, so hopefully the fog will have sufficiently cleared on most days to allow JetBlue to operate a relatively delay-free schedule from SFO. It's likely that JetBlue will only offer limited operations from San Francisco; unless their new flights prove to be enormously successful, most of JetBlue's growth in the Bay Area will come from Oakland. JetBlue has the potential to expand service from Oakland to the Pacific Northwest and to other nearby destinations in order to increase aircraft utilization while allowing JetBlue to compete on price. It's unlikely that JetBlue will start any short-haul service from SFO anytime soon because of the inability for JetBlue to offer sufficiently low fares from SFO due to high airport costs, and the inevitable weather that would likely delay flights and decrease JetBlue's aircraft utilization.

As airlines come under increasing pressure to cut costs, will airport costs be looked at seriously? The answer is yes, but unfortunately for airlines, they can do little to change the status quo. Passengers want service from convenient airports, not from some airport out in the boonies, and most passengers are willing to pay $10 to $15 extra to fly from a convenient airport. Airlines will serve cheaper airports when possible, but not at the expense of potential revenue. Revenue is the name of the game as airlines, low-cost and legacy alike are trying to boost revenue faster than the pace of rising costs. Airports like Houston Hobby or Chicago Midway will continue to be frequented by low-cost carriers, since both airports give these carriers flexibility in their operations, an advantageous location closer to downtown than the larger airport in the city, and lower operating costs. But most low-cost carriers will continue to use higher-cost airports in Seattle, Denver, San Francisco (Southwest is the only major low-cost carrier that will not fly from SFO after JetBlue's arrival), Boston, and other cities. What is important to note is that not all low-cost carriers are alike. Southwest has different needs than JetBlue, which has different needs from AirTran. Southwest is interested in boosting revenue from its customers, but to a point. Southwest won't explicitly target business travelers, and they won't sacrifice the 25-minute turnarounds that the airline prides itself on. Business traveler-friendly airports like New York LaGuardia or Washington Reagan are unlikely to become members of the Southwest network because of their cost, the operational issues they present, and the difficulty Southwest would have at acquiring slots at the airports. The interests of AirTran and JetBlue are more closely aligned. Both of these carriers are interested in flying to as many airports as possible. JetBlue wants to provide convenient service to its customers, and will soon serve up to six airports in the New York metro area with their E-190 jets. Newbergh service has already started, but JetBlue plans to announce service to White Plains very soon (JetBlue has made a commitment to serve the city, and simply hasn't made a formal announcement yet), and the airline will eventually announce service to Islip. JetBlue cares about targeting passengers that are a bit more upscale with point-to-point flights. This is a very important statement; JetBlue can justify charging more for nonstop flights, and for its product, so airport costs aren't a big issue if adding an extra airport means bringing JetBlue's profitable product to a new set of customers who currently fly other carriers because flying JetBlue from another airport is inconvenient. AirTran is competing on price, not product, and wants to serve many airports to help build a low-cost hub-and-spoke network that will differentiate the carrier from its competitors, particularly Delta. AirTran cannot justify charging a revenue premium, so they have built an efficient hub in Atlanta to help move passengers around their network very cheaply. AirTran has proved they can do that, they have some of the lowest operating costs in the industry, and it's because of their strong hub network that gives passengers flexibility in terms of their airports, not in spite of it.

When possible, low-cost carriers should push for minimal airport expansions and lower airport costs, but unfortunately, high airport fees will be inevitable for low-cost airlines in the United States for some time. As a long-term strategy, low-cost airlines would be wise to help push airports for cheaper terminals with basic facilities, particularly at airports in leisure destinations like Las Vegas and Orlando, whose visitors depend on cheap flights. Anything airlines can do to lower the cost of travel will help carriers increase load factors and turn a profit on leisure flights. A terminal design similar to the mp2 terminal in Marseilles would help low-cost carriers cut costs without reducing functionality. This kind of basic terminal that provides functionality, security, and reliability is the eventual solution to the problem, but the answer in the short term is that in most markets, low-cost airlines have very little recourse against high airport costs. Instead, low-cost carriers are doing what they can to cope by operating flights that will help increase revenues and build strong networks. Airport costs do matter, but they don't matter to the extent that they do in Europe because airlines have learned to mitigate these costs successfully.

Virgin America Gets Denied: Will They Ever Fly?

The Department of Transportation denied Virgin America's application to commence service starting in early 2007. The DOT believes that the company doesn't adequately meet foreign ownership and control requirements, and should not be allowed to fly until those issues get resolved. The airline will appeal the DOT decision by January 10, and plans to prove to the DOT that in fact it does meet foreign ownership and control requirements. The DOT cited a series of Cayman Island corporations that gave the foreign owners more than the maximum 25% control that is legally permissible. This decision is a major victory for Continental Airlines, which has been at the forefront of slowing Virgin America's entrance into the U.S. market.

In order to please regulators, Virgin America may have to reduce foreign control to well under 25% to make it obvious to authorities that the airline is controlled by U.S. citizens, and they may even have to ditch the Virgin brand in order to please observers who see the brand as a symbol of outside control by British nationals. The Virgin brand is associated in the minds of most people with its founder, Sir Richard Branson, an innovator, but also a British citizen, and a person who can't have a large stake in a U.S. company. Losing the Virgin brand may be the only way to demonstrate to regulators and to outside observers that the new company is American-owned. While it's likely that the company will find a way to work with the DOT to commence operations, by making some changes to its ownership and demonstrating that it is abiding by U.S. law, but if Virgin America is unable to find a way to start up, it could have serious repercussions throughout the industry.

Virgin America frightens legacy carriers, particularly United and Continental, because it plans on targeting business travelers. Business travelers are still the most profitable group of customers for airlines, and United and Continental in particular, since those two carriers focus more on business travelers than other legacy carriers. What is important to note, is that Virgin America is very different from an innovative startup that scared airlines almost seven years ago. JetBlue worried legacy airlines because it entered a crowded market with a plethora of amenities and low fares. JetBlue quickly lowered fares and stimulated traffic to upstate New York and Florida. But JetBlue as a startup primarily targeted leisure travelers. Most business travelers don't need to fly from New York to Orlando, but families do. JetBlue also demonstrated this by flying to alternate airports (such as Fort Lauderdale instead of Miami) that have lower costs and are popular with leisure travelers, but not with business travelers. This is not what Virgin America plans to do. Virgin America plans on serving expensive airports that are business traveler-friendly and initially serving transcon routes that are more important to business travelers and are still dominated by legacy airlines. This is why Virgin America plans on flying between San Francisco and Boston, Newark, and Washington D.C. Dulles. All those airports are primarily dominated by legacy carriers, and Virgin America would bring much needed competition on transcon flights to these cities. Virgin America plans on offering features that are similar to JetBlue such as innovative entertainment (though not in-flight television), comfortable seats, and plentiful snacks, but aimed towards business travelers. Consequently, legacy carriers are more afraid of Virgin America, because it could attain a cult-like following among customers, except it wouldn't likely be among "replaceable" leisure customers, but among "essential and profitable" business travelers. Once a business traveler flies on Virgin America, he or she may never want to fly on a legacy carrier domestically again, and that could spell trouble for legacy carriers who have worked hard over the past several years to retain business travelers from low-cost competitors.

If Virgin America doesn't fly, the two biggest winners will be United and Continental. United, with it's San Francisco hub that caters to business travelers with convenient flights, but higher fares, is Virgin America's prime target. Even in the face of low-fare competition at Oakland and San Jose, United has been able to keep fares relatively high at San Francisco, charging a premium for convenience. If Virgin America doesn't fly, then United won't be pressured to lower fares and engage in promotional tactics (such as bonus frequent flyer miles) to minimize Virgin America's growth. If you remember how United reacted to the Independence Air startup in Washington D.C., which was billed as an attempt to defeat United's high-fare monopoly at Dulles, United will likely react the same way to Virgin America, with bonus frequent flyer miles to loyal travelers, lower fares, and more marketing in the San Francisco Bay Area. United's big fear is having competition on transcontinental flights from San Francisco that Virgin America plans to operate. Flights from San Francisco to Boston, Newark, or Washington D.C. are prime Virgin America targets, and if Virgin America doesn't fly, then United won't have to cut fares on those routes, a move that could have hurt United financially, but allowed it to retain market share.

If Virgin America doesn't fly, the other big winner is Continental. Continental has fought to keep Virgin America out of the skies because Virgin America plans to target business travelers, and Continental targets business travelers more than any other domestic airline. Demands from Continental's core customer base, business travelers, are why Continental has kept amenities like free food or pillows and blankets onboard while other legacy carriers have scrapped these. Virgin America plans to fly from Newark to San Francisco, and that is a route Continental doesn't want increased competition on. Virgin America has said that it may consider expanding from Newark, one of Continental's primary hubs, to cities on the West Coast, including Seattle/Tacoma, San Francisco, and Los Angeles. This could substantially hurt Continental, and if Continental doesn't respond with lower fares and more frequent flyer miles for loyal flyers, Virgin America could gain significant market share from Newark. JetBlue has added flights at Newark, but its expansion has been mitigated by Continental's effective marketing that has kept business travelers flying on Continental, preventing JetBlue from significantly expanding the number of routes from Newark.

Continental is doing the right thing from a competitive standpoint by trying to block the Virgin America startup. In the end, it's likely Virgin America will fly, but there may be significant ownership and/or brand changes necessary in order for the company to do so. However, even if changes are made, Virgin America will be a major threat to legacy airlines, and particularly to United and Continental, much more so than other startups like JetBlue or Independence Air because unlike JetBlue and Independence Air, Virgin America is specifically targeting business travelers. Legacy carriers fear that Virgin America's formula for converting business travelers to Virgin could be another setback to retaining market share and maintaining profitability in key business markets.

Does Southern California Have Enough Airport Capacity at a Reasonable Cost?

While Southern California has plenty of commercial airports, to be sure, LAX, Ontario, Burbank, Long Beach, Orange County, and Palmdale, the region is also a mecca for low-fare airlines. And as land becomes increasingly developed in the region, airports may find it increasingly difficult to expand, and new airports aren't being built. If airports can't expand, current facilities will become increasingly valuable, and the costs to rent them will rise. Moreover, as existing facilities become increasingly utilized to a point, airports will have to raise rates to cover increased costs. However, aside from LAX, a facility utilized heavily by legacy airlines such as United which operates a hub from the airport as well as international carriers that operate flights to Asia, facilities in the LA Basin don't have the flexibility to fully utilize their facilities. As residential areas have sprawled in the area around many LA Basin airports, residents have convinced some airports to institute noise curfews or slot arrangements that limit the number of flights at the airport. This may protect residents in the short run, but it will ultimately hurt the economy of the LA Basin more in the long run. Does the region have sufficient airport capacity for long-term growth by both established carriers and low-cost carriers that congregate in alternate airports in the region?

One recent announcement by LAX makes me question the price airlines are willing to pay for landing in the LA region. LAX announced that they plan to raise rates for low-cost carriers that have short-term leases in some LAX terminals. Currently, low-cost carriers like Southwest that have shorter leases at LAX than legacy carriers have been paying well below what it costs the airport to provide services to these airlines. For terminal rental and use of LAX facilities, Southwest has been paying around $13 million annually under LAX's old fee structure. Under the new fee structure, approved yesterday by the airport's board, Southwest's annual rent will jump to around $49 million. Hopefully, some of that money can go towards improving security at LAX. In an earlier post, I detailed some of the ramifications this could have for Southwest's expansion in the region. Fares will likely increase to compensate for Southwest's increased costs, and that could deter some wanna-be vacationers who want to make a quick, cheap jaunt to the Bay Area or Vegas. It's worrisome to see this occur, because if Southwest slows expansion at LAX, it will then likely expand at other, smaller airports in the region. The worry there is two-fold. Many of these airports lack the terminal infrastructure and runway infrastructure for increased flights. Look at Long Beach, which is expanding its terminal over resident objections, or Orange County (or Burbank for that matter), which has a very short runway that makes it impossible for airlines to operate long flights from the airport. The other worry is that alternate airports in the LA Basin are closer to residential areas and many, including Long Beach and Orange County, have imposed restrictions on the number and/or the timing of flights in order to make the noise levels bearable for residents. Residents living near these airports might oppose any substantial increase in new flights. It remains to be seen how the rate increase at LAX will affect fares or expansion by low-cost airlines, but it's likely that these alternate airports could see substantial growth.

There is one airport in particular that wants this growth. Palmdale currently has no commercial service. The last commercial service the airport had was in 1998, when United's regional brand, United Express, ended service to the airport. With increased growth in the LA Basin and little room for new airports, many airlines may take a second look at Palmdale. The airport in Palmdale recently changed its name from Palmdale Regional Airport to LA/Palmdale Regional Airport as part of a wider effort to make the airport appeal to more airlines and passengers in the LA area. Palmdale has the facilities for several airlines with full-sized narrowbody aircraft to start service. As long as the airport ensures that its fees it charges airlines are competitive with nearby airports, Palmdale should see new commercial service within a couple of years. What may happen in Palmdale is that a low-cost carrier or two decides to commence service to the airport, seeing the facility as underutilized and wanting to take advantage of the competitive void. But then as other airlines fight for space at other facilities, many may decide to start expanding at Palmdale, however, by that time, most of the gates at the airport will have been taken by the early birds. This could be a similar situation to what happened when JetBlue announced new service to Long Beach in 2001. The airline revitalized a sleepy airport with little service and instigated a legal battle for every last available slot at the airport when other airlines suddenly decided to expand services from Long Beach. Now Long Beach receives the maximum number of flights allowed by a noise ordinance in the city of Long Beach that prevents more than 41 daily flights by any commercial aircraft and an additional 25 flights by regional aircraft. Palmdale doesn't currently have a slot arrangement, but it could implement one if growth occurs too quickly. My guess is that Alaska may first initiate service from Palmdale. Alaska would serve routes from Palmdale to Seattle, Portland, and San Francisco, but I predict Southwest would then soon follow with service to Oakland, San Jose, Sacramento, Las Vegas, Reno, and Phoenix. Southwest is looking for places to put its new planes, and it's not afraid to redirect some expansion away from higher cost airports if they force the airline to raise fares too much. It's unclear at this point how much the LAX decision will affect Southwest and some of the other low-cost airlines that operate there, however, it's likely that as cost pressures continue to face low-cost airlines, particularly Southwest, which is losing its cost advantage over other airlines because their fuel hedges are expiring, some low-cost airlines may make cuts to lower costs, including reducing service to higher-cost airports or cutting amenities. And as the skies get more crowded and airports get harder to build and expand, consumers will ultimately pay the price. The LA Basin is only one example of a region where more airports are likely necessary, although better utilization of the ones currently operating would be a better, cheaper solution. However, given constant complaints from nearby residents about noise and pollution, better utilization doesn't seem to be a solution to the LA Basin's airport woes anytime soon. If you think this is a bad situation, consider the situation in San Diego, where the single-runway airport there is trying to accommodate growing traffic levels with no relief airport planned. But more on that tomorrow.

United Airlines Toys With "Bare Fare" Concept

Fortunately, United's "bare fare" concept won't involve passengers flying nude (although less weight in clothes means less fuel used by the aircraft). Instead, United is considering offering more amenities a la carte, where passengers would pay extra for seat assignments, frequent flyer miles, and possibly checked luggage. United's management believes that there is a market for customers who desire basic transportation, and nothing more, and that United is losing this market because it offers a higher level of service aimed at business travelers. Customers who would utilize bare fares would likely be leisure travelers who plan travel well in advance and don't want to pay for checked luggage, seat assignments, or frequent flyer miles. United is struggling against low-cost competitors, particularly Southwest and Frontier that routinely offer lower fares than United's. Because United offers a higher level of service than most legacy airlines, let alone most low-cost airlines, United typically offers higher fares and has struggled recently to maintain load factors on routes where United directly competes with low-cost airlines. United has struggled in part because their fares appear higher on United's reservation system, and customers who use sites such as Kayak or Sidestep that check most airline Web sites see United's fare as higher than fares at other airlines. So in order to keep United's fares competitive with other airlines, United wants to offer low bare fares online, and offer options (such as accruing frequent flyer miles, assigned seats, and checked luggage) for customers to "upgrade" their travel. That way, United can advertise low fares, and allow customers to pay for what they use.

One interesting aspect of the bare fare concept is that it demonstrates how unsuccessful United's Ted experiment has been. Ted is United's "airline within an airline" that supposedly offers lower costs and fewer amenities for leisure travelers. Ted augments United service to some leisure destinations in the United States and Mexico such as Las Vegas, Fort Lauderdale, or Puerto Vallarta. Ted has a dedicated fleet of A-320 aircraft that offer 156 seats and sparse amenities, but enough to appear hip, a la JetBlue or Delta's failed airline within an airline, Song. Ted makes no sense from a cost perspective; having a fleet of aircraft separate from United's mainline fleet increases costs, since these fleets are essentially mutually exclusive, and can't be used on flights that are operated by the other brand. Moreover, United offers a configuration of 156 seats on Ted's A320s, which forces the airline to add a fourth flight attendant, United should either add more seats to increase revenues and offset the cost of an additional flight attendant, or remove a row of seats to give Ted aircraft 150 seats, the maximum they could have while only using three flight attendants. This move appears to make sense from a cost perspective, as JetBlue, which currently has 156 seats on their A-320s plans to reduce the number of seats to 150 in order to cut the number of flight attendants onboard. From a branding perspective, Ted also makes no sense for United as United has a more upscale brand targeting business travelers that Ted detracts from. Many of United's loyal customers are confused about the relationship between United and Ted. From a cost perspective, Ted makes no sense; it adds cost by having an exclusive fleet of aircraft that are configured in such a way that maximizes cost due to additional flight attendants. United's bare fare concept will try to capture the same market that Ted tried to, leisure travelers, but hopefully in a more cost-effective and flexible manner.

While United's bare fare concept is a good idea, United may not be the best carrier to implement it. United already has a strong brand and doesn't need to denigrate it with a Ryanair-like product that treats travelers like impulsive cattle. A carrier that has already chosen to cut service and amenities more than United, one that has already taken significant cost-cutting measures would be a better carrier to implement the bare fare strategy. The most logical choice out of the six major legacy carriers in the United States would be Northwest. For years, Northwest has offered mediocre service and amenities, nothing spectacular, but certainly not the worst in the industry. However, after entering bankruptcy, Northwest began cutting costs wildly, making flight attendants and pilots unhappier by cutting wages and making passengers unhappier by cutting free snacks, even peanuts. Northwest has already taken steps that would allow it to transition to bare fares more easily than other carriers. For example, Northwest doesn't have any inflight entertainment on domestic flights which adds cost for the airline and Northwest already charges for some seat assignments through their Coach Choice program. Charging for other things like frequent flyer mile accrual or checked baggage wouldn't denigrate Northwest's brand significantly, since many passengers expect Northwest to head this route. United still has a reputation that would suffer tremendously if a bare fare program was implemented. Other airlines that have less of a business traveler bent such as Delta and US Airways that are trying to cut costs may find bare fares attractive because they allow passengers to pay for services that cost both airlines a lot of money and bare fares allow both carriers to compete with rabid low-cost competitors on the East Coast.

While the bare fare concept makes sense for domestic flights, there are further complications for intercontinental travel. On most intercontinental fights, meals are served free of charge to all passengers. Will bare fare passengers still need to pay for meals on intercontinental flights? Moreover, on domestic flights it's easy for many passengers to fit all of his or her belongings into a carry-on bag, but on an international flight where travelers are typically gone for longer periods of time, it's harder to avoid checking bags, especially in light of the latest security hysteria. Will bare fare passengers on intercontinental flights receive a free checked luggage allowance? United may compromise and offer a smaller checked luggage allowance than regular economy passengers receive for bare fare passengers. Also, on longer flights, many travelers find it necessary to be seated next to any traveling companions. On shorter flights it typically makes less of a difference for couples or families. If they purchase a bare fare and don't receive seats next to each other, they could be very upset at the airline for seating them apart and make them think twice about purchasing another bare fare.

Another question that might be raised by United's bare fare plan is whether it would be adopted by low-cost airlines in the United States. Ryanair and EasyJet in Europe already have adopted all of the bare fare amenity cuts and more in a bid to cut costs, but low-cost airlines in the United States have been hesitant to cut costs drastically. Most low-cost airlines in this country take their cues from Southwest, and try to avoid offering a standard of service that is no lower than what most customers are accustomed to from the world's oldest low-cost airline. Some airlines (JetBlue and Frontier, for example) have even tried to best Southwest in their amenity offerings and service. However, given a renewed effort by airlines to cut costs, some airlines may be willing to offer even lower fares if passengers don't use certain services. AirTran has something close to bare fares for standby travel. If you're between 18 and 22 years old, you can fly standby using AirTran's X-fares program. X-fares passengers aren't guaranteed a seat (since it's standby travel, so AirTran will assign an available seat to an X-Fares customer just prior to boarding), aren't permitted to check luggage, or earn AirTran A+ Reward credits. But while there are those restrictions, the fares are also very attractive for those 18-22 years of age, at $69 per segment or $89 for long-haul segments (excluding taxes and fees). If AirTran were to offer a product similar to X-fares for travelers of any age and for travel booked in advance, it could be a big hit and help AirTran raise its dismal load factors. The fares probably wouldn't be as low as X-fares, since AirTran is simply trying to fill seats with X-fares that would otherwise go empty, but a ticket with benefits similar to X-fares could take up a seat by a more expensive fare-paying customer if booked well in advance, so AirTran would have to limit the number of seats with an X-fares-like product. AirTran would likely sell these seats at a significant discount compared to regular fares with full amenities since checked luggage, frequent flyer miles, and even seat assignments cost the airline more money than you might think. An AirTran bare fares-like product could seat customers in coach with passengers who paid regular fares and not in a separate section, though most customers would likely be seated towards the rear of the aircraft where the noise is greatest on AirTran's 717s. AirTran bare fares customers could still receive free soda, snacks, and XM Satellite Radio. AirTran is trying to become the lowest-cost provider of air travel in the industry, and to do that AirTran needs to raise load factors. The X-fares program is one way to do that, but an expanded bare fares-like product would allow the airline to fill seats, but allow customers who want to pay for checked luggage and other amenities to pay a nominal fee for them. A bare fares-like product that required a 14- or 21-day advance purchase would also allow AirTran to maintain seats at the last minute for full-fare business travelers while still allowing 18-22 year olds to travel standby at the last minute on X-fares.

Right now, the airline industry in the United States is undergoing a period of great change. Airlines are feeling pressure to join the merger bandwagon in order to consolidate seats, lower costs, and hopefully raise fares. However in the interim, airlines need to start finding ways of cutting costs, and a bare fares-like product at certain airlines that already have lower service standards would allow those airlines to cut costs, give the appearance of lowering fares, and increase load factors. While many customers may hesitate jumping for bare fares, it will allow many customers to pay less and only use what they paid for, which is transportation, nothing more. Some airlines that have more dignified brands including United, Continental, and JetBlue should steer clear of these types of products, because a bare fares-like product doesn't target their core customer base. But at other airlines, introducing bare fares-like products could be a way to grow their companies, particularly in leisure markets and add much-needed revenue to their bottom lines.

The Merits of a Midwest Airlines/AirTran Merger

AirTran Airways made headlines today by proposing to buy Midwest Air Group, the parent company of Midwest Airlines, for $11.25 per share, causing Midwest shares to rise over 22% in Wednesday's trading. Late today, Midwest released a statement rebuffing the merger proposal, however, AirTran vows to keep up pressure to merge. Many in Milwaukee, where Midwest is headquartered, aren't happy about the announcement. This merger has been speculated on for years as AirTran and Midwest have better synergies than almost any two airlines in the United States, and a merger could benefit both carriers tremendously. That's not to say there aren't problems with a merger, but they are much smaller given the size and scope of the carriers involved than a Delta/US Airways merger or even this wacky United/Continental merger. (A United/Continental merger is so nutty and nonsensical that I don't have time to talk about it tonight, but there are simply too few synergies and too many costs to make it worthwhile.) There are two primary synergies with the AirTran/Midwest merger that would help both carriers out. First, both airlines operate sizable fleets of Boeing 717-200 aircraft, a rare occurrence given that just over 150 717 aircraft were ever made. Merging the two airlines' 717 fleets will allow the new airline to save money on maintenance, training, and other costs. Second, AirTran is looking to expand further into the Midwestern United States where Midwest Airlines has significant market share, and Midwest Airlines wants to make further inroads on the East Coast where AirTran has an extensive presence. The routes that each airline operates complement each other nicely, and would allow the new company to be strong in both regions.

While the synergies associated with the 717 help reduce costs with this merger, there are a number of other fleet-related factors that complicate matters. First, Midwest Airlines also has a fleet of 11 MD-80 aircraft, that they plan on expanding to 13 by mid-2007. These aircraft aren't compatible with AirTran's 717s, and would likely be tossed from the fleet if a merger occurred. MD-80s can be acquired cheaply by Midwest, but they are also very expensive to operate and aren't compatible with AirTran's business model, since AirTran seeks to be the lowest-cost provider of air travel in the industry by embracing newer, cheaper-to-operate aircraft such as Boeing 717s and 737s. Another issue is the compatibility of AirTran's 737s. AirTran is receiving new 737-700 aircraft from Boeing on a regular basis, but they still have a relatively small fleet of 22 aircraft. Midwest currently has no 737s and has shunned them because Midwest operates from smaller markets in the Midwest that don't require an aircraft as large as the 737. A merged airline would likely concentrate 737s on AirTran's Atlanta and Orlando hubs until the new airline received enough aircraft to start basing 737s in Midwestern cities like Milwaukee or Kansas City. This would eliminate the cost of basing the planes in Kansas City or Milwaukee, which would lead to additional personnel and maintenance costs and given that the new airline couldn't likely fill those 737s from Kansas City or Milwaukee, it makes sense to keep them in safer hubs like Atlanta and Orlando. But the main difference in fleets between the two airlines is Midwest's wholly-owned regional operation, Skyway Airlines. Skyway uses small 19- and 32-seat planes to serve smaller cities in the Midwest. Midwest has also announced interest in purchasing 50-seat aircraft to expand Skyway's operations. Ever since their failed JetExpress experiment, AirTran has been adamant about not having a regional aircraft operation. If a merger occurred, AirTran would likely phase out Skyway Airlines because it doesn't fit into AirTran's core business model of providing simplified service at affordable prices. Regional aircraft like the ones Midwest owns are too expensive, and full of reliability issues that AirTran doesn't want to get involved in. It's hard to see AirTran finding room for Skyway, but perhaps if Midwest could prove that it made fiscal sense, AirTran would be receptive to retaining at least some regional operations. But while there appear to be many dissimilarities between the two carriers' fleets, remember that the 717 makes up the bulk of their fleets. AirTran operates approximately 85 717 aircraft (compared with 22 737s) and Midwest operates 25 717 aircraft (compared with 11 MD-80s and 18 regional aircraft). Because the 717 makes up a sizable chunk of both airlines' fleets, there are significant cost synergies such as reduced maintenance, crew training, and dispatch and operational costs (such as the increased likelihood of being able to find a spare compatible aircraft if there is a mechanical breakdown) that would be very real in a merged airline.

The other major synergy in a merged AirTran/Midwest Airlines would be combined routes. AirTran already serves Milwaukee and Kansas City, Midwest's two primary hubs, and Midwest serves Atlanta and Orlando, AirTran's primary hubs. However, AirTran has struggled to grow in the Midwest. AirTran has succeeded on the East Coast in part due to Southwest's relative lack of service in that region. But Southwest has long been established in the Midwest, and has substantial market share in cities such as Chicago, Kansas City, Omaha, and Dallas. While Midwest Airlines doesn't serve Chicago, it does serve all the other listed markets, and has significant market share in both Kansas City and Omaha. In fact, Midwest used to have even greater market share in Omaha, but substantially reduced service to the city in part due to competition from Southwest and in order to reduce costs. Kansas City and Omaha are two important Southwest markets, and AirTran would love to battle Southwest in these cities given that AirTran lost a major market share battle in Chicago against Southwest a couple years ago. Midwest Airlines has struggled against Southwest, and has tried to use its more upscale brand in order to win over customers. However, with AirTran's lower costs, a merged airline could offer customers more options to the East Coast from Kansas City and Omaha. Southwest still might retain considerable market share on flights to the West Coast, but a merged AirTran/Midwest could give Southwest a run for its money in Kansas City, where Southwest offers daily nonstop flights to several cities on the East Coast, as well as Omaha, where Southwest offers convenient connecting service to many East Coast cities. AirTran would also get improved access to markets such as Minneapolis where Midwest has already made a strong push for market share. AirTran would also get its first Canadian market, albeit one operated by Skyway Airlines, Toronto. Even if AirTran scrapped Skyway, they might use the merger as an opportunity to expand into Canada, including Eastern cities such as Toronto, Montreal, and Ottawa. Through a merger, Midwest customers would receive access to a wide-ranging AirTran network on the East Coast and beyond. Midwest customers would be able to fly to many cities that aren't currently served by Midwest such as Raleigh-Durham, Charlotte, Detroit, Chicago, and dozens more. It would enable Midwest to expand Eastward and provide extensive service for its customers, something that Midwest has tried to do in vain for years. The route networks for both airlines would complement each other nicely and allow each airline's customers to fly to previously unserved cities at a lower cost.

One wild card in the merger is what kind of amenities the new airline would offer. Midwest has suffered with a split identity for several years now, offering its Signature Service with 2x2 seating on flights to business destinations while offering Saver Service with 2x3 seating on flights to leisure destinations. The airline used to offer far more amenities than it currently does, post-9/11 economics forced Midwest to cut many aspects of its product that customers weren't willing to pay extra for, such as gourmet meals served on china. But the mixed products does create a problem for AirTran, which has a standard, low-cost product. AirTran offers minimal seat pitch to most customers, even less than most legacy carriers with an average seat pitch of between 30 and 32 inches. AirTran also offers business class with several more inches of seat pitch to those who will pay for it. AirTran also offers free XM Satellite Radio on most flights, something Midwest lacks. With this simple philosophy, AirTran has one of the lowest seat mile costs in the industry. If AirTran wants to lower costs, they must reconfigure Midwest's 717s with a typical AirTran seating configuration of 12 business class seats and 105 in coach and standardize the onboard product with XM Satellite Radio and a standard array of free snacks and beverages. While AirTran may lose some Midwest Airlines customers who fly Midwest because it offers a superior product, AirTran will likely win over more customers who will fly the airline because it offers lower fares and because AirTran's product is better than Southwest's. This sounds like a challenge, but rebranding the new carrier will be much easier than reconciling some of the other differences between the two carriers.

While Midwest rejected a merger today, in the future, if AirTran sees value in pursuing Midwest, a merger will occur. This merger will be much easier to complete and makes far more sense because of the demonstrated synergies of both carriers than either the Delta/US Airways or United/Continental mergers. It's worrisome to hear that the media has now picked up on the news of merger talks at several airlines as a sign of merger frenzy occurring in the industry. While there will likely be consolidation, particularly from smaller carriers such as AirTran, Midwest, or Spirit (which appears to be a realistic takeover target by JetBlue or Frontier), consolidation will not sweep through the big six legacy carriers, and merger combinations such as Delta/US Airways or United/Continental don't make sense from a business standpoint for many reasons unless there are significant labor, operational, route, brand, and fleet changes at those companies. Simply because a merged airline can raise fares doesn't mean that there are sufficient synergies, particularly in the areas of fleets, routes, and labor agreements, between the airlines to warrant a merger. With AirTran and Midwest these synergies exist to a far greater degree than between any of the six major legacy carriers. Hopefully, if airline executives do their job and try to protect shareholder value, and not protect investment bankers who want to conduct mergers and make large commissions in the process, then the US Airways/Delta and United/Continental mergers won't occur. But mergers between smaller airlines that have simpler route networks, fleets, and labor agreements are more realistic, and allow both airlines to grow substantially in the process. If AirTran merges with Midwest and uses the merger to create an optimized airline with an extensive low-cost route network to the East of the Mississippi, then both airlines will benefit tremendously, and it will pose a major competitive threat to Southwest in certain markets. I can guarantee that we haven't seen the last of AirTran's bids, but further information on the merger might not come until after the holidays. A release of more information or a revised bid by AirTran will certainly be something to watch for over the next few weeks.

November 2006 Traffic Analysis-The Real Growth is in Latin America

Most airlines have released traffic figures for November and there are very defined patterns in these numbers that indicate some interesting trends about which airlines are succeeding. One interesting trend is the increase in passengers traveling to Latin America. Part of the increase is due to a rebound in traffic this year after the destruction caused in Mexico after Hurricane Wilma. But some of the increases are due to increased capacity to certain destinations, especially those in Brazil which saw new flights and expanded capacity from United and Continental Airlines this year. United, by no means the largest US carrier to Latin America, flying primarily to strategic business cities in the region, increased its overall number of seat miles to Latin America by 7.7% compared to November 2005, but the number of seat miles flown by passengers (revenue passenger miles) rose 15.8%, contributing to a load factor of 79.2%. Continental, which has extensive service to Latin America increased its seat miles flown by 17.4%, but the number of seat miles flown by passengers increased 23.7% compared to November 2005, contributing to a Latin American load factor of 78.6%. But some airlines have seen substantial increases in the number of passengers flying to Latin America, even as they have cut capacity. The largest carrier to Latin America, American Airlines, actually cut the number of seat miles it flew to Latin America compared to November of last year by 3%, but the number of seat miles flown by passengers was up 8%, contributing to a significant increase in American's Latin American load factor, up to 75.9% in November.

What does this mean for airlines? It is a clear indication that demand to Latin America is strong, even as some speculate that the political situation in countries such as Venezuela may soften demand for business travel to those countries. Economies like Brazil are growing very quickly, and the demand for air travel to the United States will continue to grow. But while we have seen increased capacity to Latin America lately, it will be increasingly difficult for some airlines to increase service to Latin America, possibly raising fares, load factors, or the possibility that foreign carriers could take some market share away from US carriers. Some airlines such as Continental and Delta are short on widebody aircraft used for operating services to South America. Continental and Delta both use 767 aircraft for these flights, and Continental is using most of its 767s on current Latin American routes as well as on some European routes. Delta is using its widebody planes on current international routes as well as on domestic transcontinental flights. Most flights to Central America are operated with 737-type aircraft, and those Continental and Delta can spare more easily, and perhaps add capacity on, but for longer routes to South America, both Continental and Delta may have reached the limits of their expansion until they receive new widebody aircraft.

The airline that seems to be able to take the most advantage of growth Latin America is United. United is expanding rapidly to the region, and has sufficient widebody aircraft for the job. Earlier this year, for example, United added a second daily flight between Washington D.C. and Sao Paulo, Brazil which took awhile to make money, but has finally caught on with passengers. But where United really has the potential to shine is in its ability to facilitate connections between the Asia-Pacific region and Latin America. This market will grow rapidly in the coming years as countries such as China continue to build ties with Latin America. It could also be a very profitable business for United. Some have speculated that with a convenient hub in Dallas-Fort Worth and flights to and from Asia as well as Latin America, American Airlines would be the best candidate to market flights between Asia and Latin America, however that's simply untrue. United's hub in Los Angeles currently offers dozens of daily Latin American flights, and allows the airline to move business travelers between Asia and South America. United's primary disadvantage is an extensive set of flights to Latin America, but compensates with reliable service from convenient gateway cities such as Los Angeles to most major business markets in Latin America. What American lacks that United has is a solid set of flights to Asia. American Airlines is extremely weak in the Pacific, with flights to Japan, China and India primarily serving Chicago O'Hare instead of American's primary Latin American hubs in Dallas-Fort Worth or Miami. United, meanwhile, serves many countries in Asia including several cities in China as well as cities across Asia and Australia. Most United flights to/from Asia go through Tokyo and then onward to hubs including Los Angeles that offer sufficient connections to Latin America. United may not have the highest volume of flights to or from Latin America, but they do have a much more extensive operation in Asia with a lot of market share to/from the United States. The one area internationally where Untied is the weakest is in Latin America, and United has a desire to go after its archrival American in the international region where American is the strongest. United can use its presence with business travelers in Asia to market convenient flights to South America, as long as United continues to expand services to Latin America. It would be a brilliant strategy that would step right on American's toes, and give United a strong foothold in an underpublicized emerging market, Latin America. If United continues to increase available seat miles, they will gain the requisite market share in order to be a competitive carrier in Latin America.

But the traffic figures released these past few days reveal more than just Latin American expansion, they also show an alarming decline in load factors at certain low-cost airlines, most notably AirTran. Last month, most legacy carriers received load factors of around 78%, an increase of 1-4 percentage points for most carriers. But low-cost carriers saw some of the weaker numbers, in part due to rapid overexpansion leading to emptier planes. AirTran reported that the number of available seat miles for November grew 19.1%, but because seat miles flown by passengers only grew by 15.4%, the load factor fell by 2.2 percentage points. AirTran has been struggling lately, as the airline has slowed expansion from its Atlanta hub and instead expanded from focus cities elsewhere. Because AirTran's presence in these markets isn't necessarily strong enough to yield considerable market share, and AirTran doesn't have the benefit of connecting traffic like in Atlanta, the airline has struggled to attract customers, especially from very competitive airports such as Chicago Midway. While AirTran is cutting some of these point-to-point routes, the airline continues to struggle, and these traffic figures indicate that the airline may have to lower fares in order to fill seats and may report sluggish profits. But beware, a decline in load factor alone isn't cause for alarm, at AirTran it happens to be indicative of larger problems the airline faces. But JetBlue also reported a decline in load factor to 80.8%, still high for any airline. Moreover, JetBlue has announced that it is trimming future growth and has a plan to turn itself around. AirTran hasn't clearly identified what they need to do to succeed, but if they don't decide to turn themselves around soon, they could be in big trouble just like American is on Latin American routes.

Airlines are Lining up to Buy Assets from a Merged US Airways/Delta

Ever since US Airways made a bid for Delta two weeks ago, several low-cost airlines have come forward and announced that they would be interested in purchasing select assets if the two airlines merge. Southwest, JetBlue, Frontier, and AirTran have all expressed interest in various assets from the new company, including gates, planes, and landing slots at certain airports. New assets would allow these carriers to expand their East Coast operations especially from airports that have been closed to new airlines due to landing restrictions, including New York's LaGuardia and Washington D.C.'s Reagan National. Low-cost airlines that purchase some of the assets will likely have a competitive advantage over others. However, the assets that low-cost airlines will most likely buy will not lower costs but will increase revenue. Many of the assets that would be sold are older aircraft (and typically more expensive to fly), gates at high-rent airports, and other various assets that would likely increase costs because they don't fit as well with the very defined low-cost systems that these airlines operate. But, the revenue gains that would come from the new equipment would offset the additional cost.

The merger would force US Airways and Delta to do several things that may be attractive to low-cost carriers interested in assets. First, the merger plan calls for the new company to reduce the number of seats it flies by 10% overall. This would mean that the combined company would likely shed older, more costly aircraft, particularly narrowbody aircraft that are used by low-cost carriers in the United States. Aircraft like 737-300s or A319/A320s could be attractive to low-cost carriers looking to pick up cheap used aircraft. Low-cost airlines might also be interested in gates at airports that are currently dominated by one airline, such as Cincinnati or Charlotte. These have been traditionally high-cost airports that haven't received many low-cost carriers. Also, US Airways and Delta have a large amount of market share in high-cost airports on the East Coast such as Boston Logan, New York LaGuardia, and Washington D.C. Reagan. While Southwest isn't as interested in those airports, JetBlue, AirTran, and even Frontier could all be looking to purchase gates and landing slots in order to compete with lower fares at those airports. If a merger occurs, there is bound to be some consolidation in terms of the hubs of each carrier, and one example of that is in Charlotte and Atlanta. It doesn't make fiscal sense to have hubs in relatively close geographic areas, and that is very true in this case given that the cities are less than 250 miles apart. The new company could save money by consolidating most of its hub operations into one airport. Atlanta is Delta's largest hub, and it's extremely unlikely that a merger would force Delta to dismantle that hub. Charlotte, on the other hand, is a major hub for US Airways, but secondary to Philadelphia. US Airways may downsize the Charlotte hub by dropping regional flights, but maintaining point-to-point service to major cities across the country in order to maintain market share. Charlotte already has limited service from AirTran and JetBlue, but if US Airways reduces flights to the city, then that could make way for an expansion of service from those two airlines or it could open the door for Southwest to commence service.

Southwest Chairman Herb Kelleher has called Delta CEO Gerald Grinstein and US Airways CEO Scott Kirby to express Southwest's interest in assets from a merged company. Southwest is interested in planes and gates, especially on the East Coast, where Southwest is weakest competitively, and has had trouble expanding. Southwest is very interested in obtaining additional aircraft for their rapidly-expanding fleet. Southwest might be interested in Delta or US Airways 737-300 aircraft, which is an older variant of the 737, but one that makes up nearly half of current Southwest's fleet. Recently, Southwest placed an order for 80 737s and when they asked Boeing to add two aircraft to the order, Boeing turned Southwest down, even though Southwest is arguably Boeing's best customer. Boeing has received a surge of orders recently, and didn't have the production capacity to accommodate Southwest's additional orders. Boeing instead suggested to Southwest that it buy used aircraft that were being dumped by the Ford Motor Company. If Southwest is unable to receive new aircraft in addition to the ones they have already ordered, they will likely want to purchase used aircraft, even if the used aircraft are older 737 variants like those at US Airways and Delta. Southwest might also be interested in gates at certain airports. Charlotte and Cincinnati are two hub cities that could see reductions in service, and if that occurs, Southwest might decide to add service. Southwest currently serves neither city, though is interested in serving both. Because both airports have been fortress hubs with high airport costs that make it very difficult for a low-cost carrier to succeed, Southwest hasn't dared to enter. But if there are service reductions, there will likely be more available gates and the airports may lower fees, at least for a limited amount of time, in order to woo new carriers. Southwest could get a lot out of a merger, but they need to be careful what they buy, and not take on too many assets that don't fit in well with Southwest's low-cost model.

On the other side of the spectrum, AirTran has a different set of interests than Southwest from this merger. AirTran wouldn't likely be looking for aircraft, as US Airways nor Delta has the type of aircraft AirTran uses, 717-200s and 737-700s. But AirTran is looking to add point-to-point service from some of the restricted airports that US Airways and Delta serves in Boston, New York, and Washington D.C., and AirTran is willing to pay for gates and landing slots at Boston Logan, New York LaGuardia, and Washington D.C. Reagan National. AirTran would likely add service to cities up and down the East Coast, especially to Florida where the airline is looking to increase its market share. AirTran's next phase of expansion involves adding point-to-point service from higher-cost airports so AirTran can build a market with business travelers and charge a premium for flights. If AirTran receives additional slots, they must expand from these higher-cost airports methodically. Only then will they be successful against Delta and US Airways, but sadly, AirTran may be forced to retreat in some of these markets like they have in Chicago Midway if there is too much competition.

JetBlue and Frontier could get aircraft from the merger as US Airways operates both A319 and A320 aircraft, but it's unlikely given how the new the aircraft are. US Airways would rather get rid of older 737-300s and -400s than the newer, and cheaper to operate A319s and A320s. JetBlue may be interested in the airport slots like AirTran is, as JetBlue is also interested in expanding point-to-point services from these cities. In this regard, JetBlue's interests are quite similar to AirTran's. One additional benefit David Neeleman sees to a merger is that Delta may reduce operations at JFK, instead consolidating New York City operations at LaGuardia or simply downsizing Delta's New York City focus city, enabling JetBlue to expand further from JFK. Frontier may want to expand to cities like Cincinnati and Charlotte that could use Frontier's low-cost service but are currently dominated by Delta or US Airways. Frontier might also interested in expanding service to Phoenix and Las Vegas. These are both big Frontier destination cities, and if US Airways consolidates capacity in these cities, and reduces available seats by 10%, then Frontier could take advantage of those cuts to expand service. But for both JetBlue and Frontier, service cuts by US Airways and Delta means potential service expansions that allows the respective carriers to strengthen their market share in key cities. The potential merger of US Airways and Delta will enable several low-cost carriers to expand by leasing gates formerly leased by US Airways or Delta and by expanding on routes that US Airways and Delta will cut frequency on. However, looking at the possibility of a merger, Delta is opposing it and currently a merger seems unlikely. But, the environment may change in the new year, and the merger may move ahead, enabling US Airways and Delta to cut costs and low-cost airlines to capitalize and expand in the void left by service cuts.

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.

JetBlue's Future in Chicago

On Thursday, JetBlue announced their new schedules and fares from Chicago's O'Hare Airport. There were a few surprises. First, JetBlue was able to obtain three O'Hare slots from another airline, allowing for a total of seven daily flights at O'Hare. JetBlue will operate five of those flights to and from New York City, and the other two from Long Beach. The other surprise was that JetBlue decided to fly from Chicago to Long Beach instead of Boston. JetBlue hasn't done much expanding from Long Beach lately because of the slot restrictions the airline faces at Long Beach, but the Chicago route was lucrative enough for JetBlue to use two of their 27 slots. But now that JetBlue has announced their first two routes, will be interesting to see how JetBlue expands from Chicago. JetBlue may have trouble obtaining slots in the future to expand. It's likely that JetBlue will want to expand to Boston and Washington D.C. first, to complement service to the business markets of New York and Los Angeles from Chicago. Remember, JetBlue has shifted their strategy in recent months, slowing down expansion and targeting expansion on key business markets. That's why JetBlue made a renewed push to get slots in Chicago, and it's why JetBlue will want to continue to expand from the Windy City. But sadly, if JetBlue is unable to obtain many more slots at O'Hare, their current slots may be re-allocated to allow for a daily flight to/from Boston and/or Washington D.C., or JetBlue may delay expanding from Chicago. JetBlue has pretty much ruled out Midway, with Southwest and AirTran offering nonstop flights to JetBlue's target markets and the location of the airport being further away from the growth areas in the North and West suburbs of Chicago. But there is another option, and it's Gary, Indiana. Gary officials have commented that they have been in discussion with JetBlue about commencing service from the airport, but at least publicly, they have made no firm agreements. Gary is, in some regards, an airport very much like one JetBlue plans to serve in the future, Stewart/Newburgh, North of New York City. Stewart has suffered for years, begging for new service, and recently their patience has paid off, with the agreement of both AirTran and JetBlue to serve the airport. While the new service is not perfect, because it is almost exclusively to Florida (AirTran's flight to Atlanta is the exception), if the new service is popular, it may encourage other airlines to serve the airport, making Stewart New York City's fourth airport. With overcrowding at both O'Hare and Midway, there has been much talk in recent years about what would make a good third airport in Chicago. Some advocate building a brand new airport in Peotone, while others see Rockford or Gary as attractive solutions. Even though Gary isn't in Illinois, isn't in the growth areas in Chicago, and isn't a very attractive city to visit, the airport is ready for commercial service and is very underutilized at the moment. If JetBlue wants to grow in the Chicago market, they need to accept an imperfect situation and if JetBlue decides to expand at Gary, they will likely receive substantial incentives from the airport. If JetBlue can make Stewart work, they can probably make Gary work.

But even before JetBlue worries about expanding, how well will JetBlue's flights into O'Hare do? It's hard to say, but JetBlue seems to be very serious about gaining market share between New York and Chicago, and they know that they can only do that by offering many daily flights, so even with five flights a day, JetBlue still might not be as convenient for some travelers as American or United. But, JetBlue is serious about attracting customers, and if some flyers have to sacrifice an extra hour or two in order to fly JetBlue, many would choose JetBlue. The Long Beach flights seem riskier to me because for many travelers, Long Beach isn't very attractive, given the absurd amounts of traffic on the surrounding roads. Since JetBlue doesn't serve LAX, which many business travelers find more convenient, it could be a tough sell. But if JetBlue offers fares competitive with United and Southwest, they will win over plenty of customers. However, given the recent troubles JetBlue has been having, it seems difficult for JetBlue to really keep fares down. Even if JetBlue is selling tickets at a $10 premium over other airlines each way, that still may not allow JetBlue to make money.

JetBlue will probably get great load factors into Chicago, both routes to and from Chicago will likely be winners, even with the concerns above, and JetBlue will be wishing for more slots, though JetBlue will likely be forced to expand outside of O'Hare. But, if JetBlue isn't able to get high load factors with $100 or $150 fares each way, then there may be pressure to offer more promotional money-losing fares, fares that could easily turn a profitable route into a money-loser. Even with a limited number of flights, JetBlue can make Chicago work, but they need to market the routes well, and offer fares that will encourage business travelers to switch from American and United, but that will allow JetBlue to be profitable.

Skybus Orders 65 A319s: Really Ambitious, or Extremely Ambitious?

Skybus Airlines announced early Thursday that they have ordered 65 A319 aircraft for delivery starting in late 2008. Order terms weren't disclosed, but the large number of aircraft ordered signals that Skybus is extremely ambitious about their expansion plans. After today's order, I am much more concerned about the long-term future of this airline than I was prior to the order. 65 airplanes is quite a lot, especially given that the airline plans to base their operations in Columbus, not exactly America's number one market. Skybus plans on offering ultra-low fares in a single-class configuration, a la EasyJet, which operates A319s with 156 seats. With fares already quite low in Columbus and in other major cities, it's unclear how Skybus will be able to considerably lower fares to attract customers. Moreover, even with efficiencies like high aircraft utilization, online booking, a single aircraft type, and a high number of seats on the planes, Skybus might still have trouble lowering costs. While Skybus' chosen seating configuration wasn't disclosed today, it will likely either be 150 seats, a better choice since that would only require three flight attendants, or 156 seats, which is what EasyJet offers, and what brings many complications into the process, since EasyJet needs a fourth flight attendant to staff the plane and the planes have to have additional window emergency exits to be considered safe. In any case, Skybus has contacted lessors about leasing aircraft so they can launch on time in Spring 2007.

What is also unclear is whether Skybus will be a primarily point-to-point or hub-and-spoke carrier. While it appears that Skybus would take the former choice like low-cost airlines in Europe, 65 airplanes is way too many simply for point-to-point routes to and from Columbus. Skybus may have other focus cities that they plan to launch after Columbus, but they probably won't find as many as Columbus with relatively little competition and a willing airport authority to assist them. To put some perspective on this, Virgin America ordered only 34 A320 aircraft and they plan to launch transcontinental flights with bases initially at San Francisco, but later at Newark, and perhaps Washington D.C. Even though the A320 is slightly larger, Virgin America's A320s will probably hold about as many passengers as Skybus' cramped A319s. Columbus is a very small market compared to San Francisco, and 65 airplanes is way too many, especially for an operation that isn't as well-capitalized as Virgin America. Before today I thought both Virgin America and Skybus were serious about being long-term players in the aviation business, now I know that Virgin America is the only airline in it for the long-haul (no pun intended). Even if Skybus plans to launch as a hub-and-spoke carrier, Skybus would still face immense competition from other legacy and low-cost carriers. Although Skybus may be able to connect some markets in the Midwest as ones without much low-fare service, if Skybus plans to expand beyond the Midwest, they need to target larger markets including New York City, Boston, Florida, and California, and they will run into stiff competition from low-fare carriers in all of them. Southwest already serves Columbus, and has already put immense fare pressure on flights in and out of the city, and if Skybus wants to attract customers with low fares, they need to undercut Southwest. What concerns me is that Skybus is overestimating their ability to lower fares and their ability to grow quickly. Remember that JetBlue did lower fares for a time, but with higher costs (and it's not just fuel costs), fares on many JetBlue routes haven't stayed at their low levels, they have increased, and instead of expanding like wildfire, JetBlue has had to delay their expansion. If Skybus is biting off more than it can chew in a relatively small market, they may have to offer artificially low money-losing fares to get people on their planes. It will be interesting to see what destination cities Skybus expands to because that will clue us in onto what strategy Skybus plans to use to make money, but I am extremely concerned about the future viability of this operation, and if they don't expand slowly, methodically, and in other focus cities, Skybus will fail quickly. As the airline gets closer to launch, they will make more announcements, and this site will commentate on them. Stay tuned...

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.

Odds & Ends

Once or twice a week, this blog looks at pressing issues affecting low-cost airlines and aviation in the United States and around the World. But I felt it would be appropriate today to do some shameless promotion. If you've been to this site before, you've certainly noticed the many links that line the sides of the page. You might have asked, "Why are they important?" I hope to talk in this post a bit more about how the site serves to be not just a hitching post for lengthy commentary, but as a reference that links to many useful aviation-themed sites.

First, I released an ebook recently entitled: Take Control of Booking a Cheap Airline Ticket. This is a must have if you are confused or hung up when searching for airline tickets. With the advent of the Internet, the number of Web sites that promise to help you find the cheapest fare have madly proliferated, consumers are left with more questions than answers. The ebook cuts through the hype about certain sites and guides confused shoppers through the process with step-by-step instructions to buying a cheap ticket for flights within the United States and beyond. Also, the ebook includes information on maximizing the value of your frequent flyer miles, finding the best last-minute travel deals, and credit cards that save you money on tickets. Even though the United States is the pinnacle of global consumption, many Americans simply aren't good consumers, and the ebook lists Web sites and credit cards that not only save you money on airline tickets, but other items as well. For those of you who don't know, let me explain what an ebook is. An ebook is formatted like a regular book, but instead of reading it in your hand, you read it on your computer screen. This offers numerous advantages when trying to book a cheap airline ticket, as the ebook offers links to all sites used in the process, and you can easily go back and forth between the ebook and your Web browser as you book your seat. But if you prefer, the ebook can be printed in black-and-white like a normal book and shipped to you for an extra $13. The downloadable version can be purchased here for only $10 (after reading the ebook, you will likely save more than the purchase price after purchasing your first ticket). Happy reading!

Second, in the coming days the Public Transportation to/from Major US Airports page will be updated with new information. You may have noticed the link on the right side of the page. Public transit is the best, and sometimes the fastest way to get from the airport to downtown. In many cities, public transit is underutilized, but it's available to knowledgeable travelers. Public transit is always cheaper than a taxi, and a reliable way to get where you need to go quickly. The updated page lists public transit options for virtually every major airport in America, making your next visit a bit easier.

Third, on the right side of the page I list several aviation-related books that you should consider reading. Blue Streak and Flying High are both about JetBlue, and its rise from relative obscurity to dominance of the Northeast-to-Florida corridor. The Southwest Airlines Way and Nuts! are both about Southwest Airlines. But I need to give special consideration to The Southwest Airlines Way. The book deals not with the operational elements that make Southwest a force to be reckoned with, but with the emphasis that Southwest places on human resources. Southwest's employees are the happiest in the industry, and perhaps the happiest in any airline worldwide, because Southwest pays them fairly and cares about the development of their employees and their advancement through the company ranks. Southwest's methods of making it's employees more productive and happier make a great story. From Worst to First deals with Gordon Bethune's remarkable turnaround of Continental Airlines in the 1990's. The other books listed are all important to understanding how various airlines (Air Canada, WestJet, Virgin Atlantic, and others) made it through tough times and succeeded in the long haul.

On the lower left side of the page, you can find various categories that categorize the various posts on Airline Bulletin. If you desire information on a particular airline, then this is the best way to access it. Below that you can see recent comments fellow readers have made about various posts. If you want to post a comment, simply click the Comments link below each post and speak your mind.

If you have any further queries about the site, please email me and I will try to reply promptly.

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.

Is JetBlue's E-190 Strategy Working?

JetBlue's announcement three years ago that they would be the launch customer for Embraer's E-190 aircraft came as a major surprise to most industry observers. JetBlue announced orders for 100 aircraft, and options for an additional 100. Back then, JetBlue dazzled customers and was predicted by every analyst to "one-up" Southwest with JetBlue's superior product including leather seats, television, and low fares. But the E-190 announcement that JetBlue would expand into smaller and mid-sized cities, the markets Southwest avoided in most cases made these analysts rethink their predictions. There were two camps of analysts that this move created. One camp believed that the move would hurt the airline, while the other believed that the aircraft would help the airline in the long run. Pessimistic analysts believed that JetBlue deviated too much from Southwest's strategy to avoid small and mid-sized markets with limited potential for new service. Not only that, but the E-190 was viewed by many analysts as a regional jet, a preposterous claim in the first place as the plane seats just as many passengers as the DC-9, a mainline aircraft by anybody's standards and held nearly as many passengers as the 717, the newer, updated version of the DC-9. But at that time, regional jets were beginning to fall out of favor as higher fuel prices and high operating costs began to eat into previously high margins. These analysts feared that it could increase JetBlue's costs too much. Southwest has pioneered the one aircraft type model, and uses it today (although they have different variants which adds costs to some degree) and if JetBlue decided to deviate from it, that could hurt the airline in the long run. However, optimists argued that with JetBlue having attained a near-cult following among its flyers, many analysts believed that JetBlue could make the E-190s work. After all, the planes would still have LiveTV, leather seats, and those scrumptious blue potato chips and JetBlue could target markets with high fares. These analysts made the bold prediction that the E-190s could be an advantage to JetBlue, though that wasn't too popular at the time.

Before JetBlue introduced the E-190 senior officials at JetBlue indicated that the aircraft would be used to fly to new cities from New York and Boston, two JetBlue strongholds and two very popular destinations from any market. JetBlue would use the new aircraft to operate a shuttle service between NYC and Boston, and to fly to smaller markets. But because of the geographic location of the two cities and the relative size of JetBlue's route network compared to other airlines, most passengers traveling from a new market, such as Richmond, VA would travel to New York or Boston; few passengers would connect to other JetBlue cities like those in New England. This severely limited the potential for success for a new route and made JetBlue's entry into these markets all the more risky. Since JetBlue is the only real point-to-point low-cost airline (AirTran and Frontier certainly aren't and Southwest's route network is becoming increasingly defined by large hubs in Phoenix, Las Vegas, Chicago, and Baltimore) this made the E-190 strategy very risky, on the one hand, point-to point service can be very successful and the two destination markets, Boston and New York, are very strong and could support point-to-point service to most of the cities JetBlue chose. But, hubs are efficient, and without strong hubs in New York and Boston, JetBlue might be singing the blues over its new service. So with this info on hand, how has JetBlue done nearly a year into E-190 service?

Not as well as many had hoped is my answer, but other industry watchers likely have different responses. The Northeast shuttle service, which now forms a triangle between Boston, New York, and Washington D.C. has been pretty successful, but JetBlue has felt the need to stimulate the market with extremely low introductory fares, not a bad strategy at first, when fares were at $25 in order to gain publicity and market share, but JetBlue has still kept fares at relatively low levels, not good news for an airline which has formed a habit of disappointing investors. Right now the cheapest seats are going for $50 each way, and even though most seats on the plane are sold for far more than that, $50 fares aren't a good sign. Also, the two big airlines that compete with JetBlue on the route, US Airways and Delta operate larger (and in this case more efficient) aircraft with more frequent schedules, similar amenities as JetBlue (aside from television), and something business travelers (which make up the bulk of travelers on the route) demand: a generous frequent flyer program. Since many business travelers carry loyalty to either Delta or US Airways, many are hesitant to switch to JetBlue, even with low fares. JetBlue has made their flyers happy and has gained some market share, but still has a long way to go on the ultra-competitive routes. With JetBlue losing money right now, it may not be the best place to be focusing capital and aircraft.

Meanwhile, JetBlue has inaugurated service to several new markets with their E-190 aircraft including Nashville, Columbus, and Pittsburgh. Many of these markets have suffered with high fares, but JetBlue's service has changed that, at least for select markets in the Northeast. What's interesting is that these markets are larger than many analysts predicted for the E-190 service. While some new markets, such as Richmond or Sarasota are smaller, most of the new markets JetBlue inaugurated have been larger, and many could support A320 service in the future to New York, Boston, or other destinations, depending on how well JetBlue builds the market. Another thing that JetBlue wasn't able to do as much as they wanted was to lower fares. Because of increased low-cost competition in some of these markets, such as Southwest in Pittsburgh, Columbus, and Nashville or AirTran in Charlotte combined with higher fuel prices that forced airlines to raise fares, JetBlue was unable to lower fares to the degree it envisioned years back.

What does the future hold for JetBlue's E-190 service? For one thing, JetBlue will continue to expand to new cities, particularly in the South and Midwest. But, JetBlue is already putting the breaks on some of its expansion with its A320 aircraft. The airline is planning to sell up to 5 of its older A320s that have higher maintenance costs, which would force JetBlue to slow expansion while newer aircraft take over routes previously operated by older planes. JetBlue may decide that it should slow E-190 expansion as well if the airline isn't finding clear opportunities for these aircraft to make money. Also, JetBlue hasn't rolled out the E-190 on the West Coast yet, but future expansion may include E-190 routes from Oakland, San Jose, Las Vegas, Salt Lake City, Phoenix, San Diego, or even slot-controlled Long Beach. The Western United States would be tough for the E-190s since much of the competition would come from Alaska, Southwest, and United, all of which operate larger planes than the E-190 on these routes, and all of which have greater market share. The airline business is all about market share, and even for an airline like JetBlue which has great brand recognition across America, JetBlue would need to lower fares to gain market share, and that's unfeasible on most routes with the E-190s. But, if JetBlue uses its brand to woo weary flyers then JetBlue can win the market share battle in markets all across the country, even if the airline needs to charge a $10-20 premium each way. Most flyers will pay a little extra to fly on JetBlue, and if JetBlue capitalizes on that in high-fare markets across the country, from Houston to Charlotte to Denver, then JetBlue can make the E-190 work.

JetBlue May Soon Rejoin Select Global Distribution Systems

Reports are circulating that JetBlue is negotiating with several global distribution systems (GDS) about JetBlue listing their fares through these channels. In fact, according to CEO David Neeleman, the New York low-cost carrier is in the "final stages of negotiations" with several GDS networks. JetBlue was driven away from all GDS systems in late 2004, when they withdrew from Sabre, which accounted for around 2% of JetBlue's bookings. JetBlue had withdrawn from Worldspan and Galileo in previous years. JetBlue is coming back after many GDS systems have lowered their cost structure to make it competitive for JetBlue's needs.
GDS systems may be making a comeback, now that airlines have reigned in costs from other areas of their operation and GDS systems have made their packages more cost-effective for airlines as well. As airlines have cut capacity in recent years, they are getting better and better at filling every last seat. If you've flown like I have this summer, you know what I mean. Because of this, airlines are willing to go to greater lengths to reach customers, even if it costs airlines a few extra dollars. Remember, fares have increased in the past year, and while much of that is due to fuel, some of that increase is used by airlines for other purposes, including marketing or increased use of GDS to target certain customers.
Recently Southwest made their Ding! offers more personal, and with that began conducting an even larger exercise in revenue management.
Southwest's Ding! tool isn't a conventional GDS, since it's only accessible on the desktops of customers who have downloaded the application, but it's designed to fill every last seat on Southwest's planes. In the past, Southwest has used the tool almost exclusively for flights departing more than two weeks from the offer date, trying to fill planes up in advance and leaving a paucity of seats available for last minute flyers. Now Southwest is doing a better job with their yield management, targeting flights at the last minute, just days before they depart. Many of these flights depart on the weekend, allowing Southwest to use Ding! to sell weekend specials like most airlines do, in addition to filling seats on flights longer in advance. Before recently, Southwest rarely used Ding! to target specific flights, rather allocating a quota of seats to be sold at Ding! fares for all or most flights between point A and B on a given day. Now Southwest is offering even lower prices to

customers who fly on select flights early in the morning or late at night with certain offers.
But for other airlines like Alaska and AirTran, which pride themselves on low costs but struggle to secure high load factors, broader use of GDS systems has proved successful. In fact, both airlines have signed agreements within the past year with select GDS systems that allow both carriers to continue selling through channels that GDS systems enable, such as conventional travel agents, online travel agencies, and corporate booking tools.
JetBlue's probable use of GDS networks won't signal a seismic shift in the way airlines sell tickets. After all, JetBlue sells more tickets through their Web site than any other carrier, but with only a few passengers on every flight representing profit, JetBlue wants to go after those customers who don't book on jetblue.com, because snagging even one or two on a flight could add up to a whole lot of profit, since JetBlue's costs (insurance, snacks, added fuel due to increased weight) only increase marginally for those passengers, and most of their fare is profit, profit, profit.

How Can Leisure Airlines Cope With Fuel?

With fuel prices so high and Americans across the country struggling just to fill up at the gas pump, how will price-sensitive leisure traffic be affected by this? Obviously not well, but even though traffic may take a dive, it won't be as significant as some may predict, since a fair amount of capacity is being removed right now by certain carriers and the net capacity being added is less than projected traffic increases. Load factors this summer will be very high, in some cases at record levels, but unfortunately that doesn't answer the revenue side of the picture.

While airlines have been able to raise fares somewhat, they haven't been able to get the increases necessary for sustained profitability, and furthermore airfares at low-fare airlines such as AirTran haven't risen as much. In fact, AirTran stock has been hammered because revenue per available seat mile was only up 12-14%, which hurt the carrier's chances at profitability. But AirTran has skilled management and very low non-fuel ASM costs so it won't be hurt as much, but airlines such as Spirit, Aloha, Hawaiian, and Allegiant may all have a tougher time. All these carriers rely primarily on leisure traffic, Spirit to the Caribbean, Aloha and Hawaiian to Hawaii, and Allegiant to Las Vegas and Orlando. All these carriers have smart management and relatively low costs, but unfortunately they serve price-sensitive markets. Traffic to destinations such as Las Vegas, Orlando, Hawaii, and elsewhere should be up, but as families plan their vacations, fuel may become too much of an issue at home, preventing vacations that are too far away. So, what can any of these carriers do to prevent traffic shortfalls?

All need to realign capacity, and that may mean cutting back capacity more than usual after this summer, depending on how fuel prices fare. But all need to further cut costs, and in fact any of these carriers could become innovators in cutting costs further. Three ways to increase revenues these carriers should consider are charging for checked baggage, airport check-in, and seat assignments. Now if you're Spirit, charging for seat assignments when your competing with JetBlue isn't so smart, but if you're flying from San Francisco to Maui, many passengers would gladly pay $5 or $10 to be in an exit row seat, or to be in another preferred seating location. Charging for check-in may be a hard sell, but if passengers can use online check-in and kiosks at the airport instead, even if they are checking bags, most passengers should have no problem with this. At the same time, most vacationers bring a fair amount of baggage. Attitudes about free baggage allowance need to change, because 50lbs of extra weight per passenger without extra compensation is simply too much for many airlines these days. Airlines will be able to charge reasonable fees for checked baggage if they clearly spell out that checked luggage is very expensive for the airline to carry, and that aircraft have plenty of overhead bins that can be used at no charge. Leisure airlines need to consider these concepts now, because if they don't , Skybus could introduce them next year, and if fuel stays where it's at, these extra charges may be necessary. These airlines can begin to educate passengers now about the costs of providing free airport check-in and checked baggage. Passengers may complain about the seats, but if most airlines follow suit, passengers may just have to put up with it. Airlines need to implement these charges after the peak summer travel season and see how they fare during the fall before the winter rush. Leisure airlines have costs low enough, but can't get the revenue, so these extra charges are essential for their survival.

Southwest Decides to Enter Northern Virginia

Southwest Airlines announced Tuesday it plans to expand to Dulles Airport in Northern Virginia in Fall 2006. The airline plans to obtain two gates at first, and will likely obtain more in later months as it expands. This move continues a push by Southwest to expand revenues, even if it means incurring higher airport costs. With the departure of Independence Air, Dulles fares have increased and Southwest can capitalize and lower fares at the airport.

What's especially interesting about this move is that Southwest already serves the Washington D.C. metro area through its very large operation in Baltimore. Southwest's Baltimore operation is posed to become its largest city in the coming years, but with the Dulles announcement some of that potential growth may diminish. Dulles helps Southwest cover the entire D.C. metro area while capturing traffic from Virginia, a state plagued with high fares and only beginning to see real relief in the case of JetBlue. (Southwest does have a limited operation out of Norfolk, but the number of flights is minimal considering the potential traffic). This move also means that Southwest will likely not enter a new city until next year, though things change and perhaps Charlotte, New York, Atlanta, Minneapolis, or another city will be put on the Southwest map in late 2006. Look for Southwest to begin service initially to Chicago for sure, Nashville, Fort Lauderdale, Las Vegas, and Orlando show up on the probably list, Long Island, Tampa, and Phoenix all are likely as well.

The airlines that will be most hurt by this move are JetBlue, United, and US Airways. JetBlue had been planning to expand from Dulles to Florida before fuel skyrocketed. Currently JetBlue flies from Dulles to Fort Lauderdale, but service from Dulles to Orlando was likely, and Tampa probable. With the yields low on these routes JetBlue chose not to expand, and now will not likely fly those routes for awhile. This move effectively limits JetBlue's operation since JetBlue seems to be hinting strongly that its E-190s will be used at JFK and Boston, but not D.C. This means that if JetBlue were to expand from D.C. they would have to do so to upstate New York, a tough sell with the A320s, the Caribbean, a possibility but perhaps not so smart against United, Florida, out of the question with low yields, or transcon, and with fuel prices the way they are, JetBlue wants to avoid them. Southwest can lower fares to cities such as Fort Lauderdale or Las Vegas, and with Southwest's hedges, can do so with less pain. United has enjoyed a high fare monopoly at Dulles for years, and with Southwest competition rampant in Chicago, Los Angeles, the San Francisco Bay Region, and more recently Denver, United will have to bow to Southwest's lower fares. Southwest wasn't able to affect United's business enough from its Baltimore low-fare operation to force United to lower fares on many of its flights, now United must match Southwest fares on routes where they compete. United is in for a serious beating, but with a loyal business following in D.C. and elsewhere, United will be able to maintain full aircraft, but at what cost? There is no question that United will be most affected by this move, as United competes with nearly every probable Southwest route and often United maintains a fare premium on that route from other airlines that fly on the same route from another airport. US Airways will also feel the pinch, since they operate a bustling D.C. to Florida business from National Airport even with high fuel prices and the assimilation of America West. But, since US Airways has already lowered its costs significantly to below Southwest levels in most areas (fuel and maintenance being notable exceptions), US Airways may not feel the squeeze as badly as United, but then again, many travelers would rather fly United than either US Airways or Southwest (they essentially have the same product) since United offers more and has a loyal base of frequent fliers in Northern Virginia. When you take the kids to one of those theme parks that makes parents vomit, would you rather get there on an airline you've flown on and trust, even if they don't have the best product anymore (United) or would you rather fly bare-bones air where you don't know if you'll be able to see your kids during the flight. Then again, on the flight coming back, you may not want to hear anything more about Micky, Shamu, and other awful things. US Airways may not suffer when prices are lowered, but they will suffer when Southwest steals market share from them, and that's something they must worry about because it will likely occur with few differences between Southwest and US Airways.

Another airline that may add another airport to an already served destination: JetBlue in Miami. If JetBlue wants to add revenue, Miami is the place to do it, and what better way to cement your market share in the New York/Boston to Florida market than to add Miami. But that's a story for another day.

Southwest Raises Fares- It's About Darn Time

On Monday Southwest Airlines decided to raise fares $2 to $10 each way in an effort to help offset the $600 million in extra fuel costs the airline expects to face this year. This increase is necessary for Southwest profitability now, and in the future. This signals the increase in the $299 cap for a maximum one-way fare that Southwest has had in place for several years. Other carriers followed suit soon thereafter. This increase may be the beginning of profits for airlines such as AirTran, JetBlue, and Frontier which all are on the edge of profitability. But, if fuel prices continue to climb higher, more fare increases may be needed. However, at least for one day, both oil stocks and airline stocks were up. Some might call that a miracle considering the current climate for airline stocks, but that's another topic altogether.

What this increase should tell you is that Southwest is hurting from these high fuel prices. While the airline has a considerable amount of its fuel hedged, it has successively less amounts hedged through 2010. Southwest makes money only because of its dwindling hedges, and so is working on cutting costs and expanding revenues. Southwest will continue to make money in the near term, but unless they cut costs, including labor costs, or increase revenues, either through new cities such as Charlotte or Miami (both likely candidates for a likely JetBlue expansion to be announced on Friday by the way), or through fees or charges such as charging for seat assignment, checked baggage, or onboard food and drink. In any case, this increase is only the continuation of a process Southwest started several years ago to increase revenues and cut costs. Expect further fare increases particularly if the unpredictable leaders of Iran or Venezuela cut or trim oil supplies to OPEC. That would not only increase costs, but might cause a recession in the States and could cause traffic declines. Fuel will continue to pose a major challenge to aviation globally, but particularly to low-cost carriers such as Southwest. Remember that Southwest's biggest city is Las Vegas, a very popular destination, but one heavily reliant on leisure traffic and full of price-sensitive customers. A recession could hurt Las Vegas, and therefore Southwest, just like it could hurt families living in NYC who visit grandma in West Palm Beach on JetBlue. Expect more fare increases, but airlines will likely get more creative with surcharges before they raise fares. Northwest is already doing this, see Tuesday's Wall Street Journal for more info on Northwest's new surcharges and how they could affect the rest of the industry.

AirTran, Alaska, and Frontier, the Real Catalysts for Growth:

AirTran, Alaska, and Frontier are all currently accepting new aircraft on order, and are expanding their route maps. Also, these three operate hubs, or in Alaska’s case, several large focus city operations. These airlines will be the real key for domestic traffic growth in the coming years. Why? Because all of these carriers can exploit mid-size markets that don’t have enough service and direct traffic flows through hubs to destinations across America. Small and mid-size markets will be the real sources of growth and profit in the coming years, since they can be selectively picked by the low-cost airlines that can connect them to hub and spoke networks. Until now, no low-cost airline had a hub network that could effectively distribute passengers between larger markets and smaller markets using different aircraft. Frontier is making this happen with A319, A318, and Horizon’s JetExpress CRJ 700s that connect to Frontier’s network through Denver. AirTran is doing this through its Atlanta hub, and has a thorough network on the East Coast that links smaller markets such as Pensacola with larger markets such as Chicago. This service to both local and national markets was the advantage of larger, legacy airlines up until now. Sure, Southwest effectively operates hubs in Las Vegas, Phoenix, Chicago, and Baltimore/Washington, but because Southwest operates 737 aircraft and has a requirement of at least 9- 10 daily flights for every city it serves (this is the threshold for new cities), Southwest can’t get everywhere, especially in smaller, growing markets such as Akron/Canton, Fresno, Savannah, and others.

AirTran can work the small market to large market magic on the East Coast, as can Alaska and Frontier on the West Coast. Even JetBlue, which will expand to smaller markets with its new E-190s, will not be able to tap the growth and revenue streams that AirTran can since E-190 flights will likely be to New York and Boston, with limited connection opportunities to Upstate New York. AirTran’s Atlanta hub and secondary Orlando hub demonstrate the power of a hub-and-spoke system. Frontier will likely continue its international expansion, likely to Canada and Latin America before it opens a new focus city or hub. Alaska will likely continue transcontinental expansion from Portland, Oregon, and some California cities, but may pick off certain markets in the West. For example, in the past couple of years, Alaska has begun Denver service, but perhaps other Colorado service is in order, to Colorado Springs or even Fort Collins, a city which deserves more service, but lacks it due to its proximity to Denver. Passengers would pay a premium to travel from Fort Collins, even if it were on a Horizon regional jet or turboprop. Horizon is a major asset to Alaska, it has efficient turboprops, which allow the operation to contain its costs. I’ve repeated many times the great economics of the Q400 turboprop, and Horizon eventually may be the world’s largest operator of these planes after they receive aircraft from their latest order. AirTran, Alaska, and Frontier are in the best position to capture customers from these markets, but will expansion focus on increasing competition on over-served routes both domestic and abroad, or will it utilize the assets these three carriers have to make money? Alaska was the only carrier besides Southwest to make real money last year. AirTran and Frontier are both close, both airlines have costs under control and know there is revenue to be found close by. Frontier may still be hurt because of competition from Southwest in Denver, it’s inconclusive who is taking Denver passengers, United, Frontier, or Southwest, but Frontier can find revenue outside Denver, such as its Cancun focus city operation, which should be stronger than ever after Cancun gets rebuilt and back up to full strength as a resort. That could take awhile, but tourists are already flocking back, the question remains on which airline are they traveling. Finally, AirTran can make money, but it depends on where fuel prices go, the airline has already identified routes, such as Akron/Canton to Las Vegas, that were short on revenue and have consequently been cut. But, in the coming months as AirTran decides where to expand, they will search for new streams of revenue, and they will come from larger high-fare cities such as Charlotte or Boston, but they will also come from smaller cities such as White Plains, which are attractive for the airline on the revenue side, and the competition side, since AirTran will land in White Plains before JetBlue ever does.

JetBlue Expansion Predictions

David Neeleman, the CEO of JetBlue has been quoted as saying that the airline plans to expand to 8-10 new cities in 2006. The E-190 aircraft that are being delivered to the airline will fuel much of that expansion. But let's not forget the A320 aircraft that are continuing to be delivered to the airline.

It appears that the expansion that will come with the new A320 aircraft will primarily be between existing cities. JetBlue will continue to monitor New Orleans, and add additional flights as necessary. JetBlue will likely expand transcontinental service from Newark to Long Beach, San Diego and Oakland. New service to the Caribbean is also likely. Service from Orlando to San Juan and Aguadilla in Puerto Rico was also announced recently and will likely be operated with A320 aircraft. Aside from Bermuda, one to two other A320 cities will likely be announced. At the front of the line is Charlotte. A city with very high fares, JetBlue can capitalize on that to increase revenues and make money. Miami is also a distinct possibility, since the Miami airport is able to command a premium fare, and it would supplement JetBlue's Fort Lauderdale service. Since the Fort Lauderdale airport is currently a mess right now, with only one runway and a significant shortage of gate space, expansion there may only be possible on paper. JetBlue may also cut certain flights from NYC-Florida especially on the heavily traveled Fort Lauderdale and Orlando routes to better meet demand, particularly on Tuesdays and Wednesdays. JetBlue will be very careful with A320 expansion since they need to increase revenues and aircraft utilization. That means that trans-con expansion may be put on hold since yields are lower for these routes.

E-190 Expansion will most likely be to new cities, but depending on incentives from airports, JetBlue’s new E-190 service may provide additional service to smaller points in the same geographic areas JetBlue currently operates. For example, Albany, New York is a potential destination, and senators Schumer and Clinton are both active in recruiting new air service to Albany. If that service were to launch, it would complement JetBlue’s existing service to upstate New York and Vermont. Other service in the Northeast is possible, Portland, Maine is a potential destination, so is Manchester, New Hampshire. New E-190 service to Florida is also likely. Destinations such as Melbourne, Daytona Beach, and Jacksonville are all candidates. However, Neeleman has mentioned that the Midwest is full of likely cities. Markets in Ohio such as Dayton or Akron/Canton are possible. Flint, Indianapolis, Milwaukee, Omaha, and Des Moines are all possible, but it will depend on what the fares are like in these markets, and what incentives the respective airports offer JetBlue to come to town. Most, if not all E-190 expansion will come from New York and Boston only. Perhaps next year, new service to Florida from Dulles is possible with the E-190s. What is important in all this is that JetBlue will be searching for more markets like Richmond, markets that have high fares which JetBlue can lower, but perhaps not nearly as much as Southwest would. This allows JetBlue to attract customers with lower fares, but necessarily low fares. Revenues are the main concern this upcoming year for JetBlue, and if fuel starts to stay in the $55-60 range for the upcoming year, JetBlue has a chance of making a small profit, but that is contingent on increasing revenues, which this year of expansion must be focused on.

The Battle for Atlanta...

This week there was much news concerning the two Atlanta-hubbed carriers, Delta and AirTran in regards to their futures as viable airlines. AirTran continued its expansion and announced new service to White Plains, NY, an airport which has been desperate to attract low-fare service, especially after the demise of Independence Air. AirTran also recently announced service to Seattle/Tacoma, and another West Coast city, Portland, may also be on the horizon. However, AirTran isn't finding success wherever it goes. AirTran recently canceled plans, on Friday the 13th oddly enough, to start service to Harrisburg, PA (the state capital of Pennsylvania for those who don't know) for reasons which are unclear, although AirTran is blaming high oil prices. What is clear is that going into a big market with large jets (even AirTran's 717s are considered large for Harrisburg) is extremely risky. That's the beauty about regional jets. They may be uncomfortable to fly on, but are very comfortable for airlines when entering small markets that can generate high fares. AirTran is very good about breaking even when it comes to making money, and would have taken a huge risk in a market such as Harrisburg. In Boston, the airline wants to expand and have all its gates at one terminal (currently they have 3 in D and 1 in C, but is fighting with Massport, the Logan Airport operator about gate space. JetBlue is renovating a terminal for itself, Terminal C, and AirTran's fellow Atlanta carrier, Delta recently moved into Terminal A, a wonderful new facility, but Delta isn't required to lease unused gate space (which is has plenty of) until 2010. Boston would be a terrific market for AirTran. Boston would allow AirTran to check JetBlue and make sure JetBlue's fares stay low. At the same time, AirTran could use its power to siphon travelers who are diverting to Manchester and Providence, Southwest cities when it comes to traveling to Boston. Boston would also allow AirTran to build on its base of business travelers. Atlanta provides a wonderful market for business travelers (especially considering you don't have to try very hard in terms of fares or amenities to beat Delta) and Boston is a big Delta market. AirTran already has Boston service, but a serious expansion, such as the one JetBlue is contemplating would do to Boston what Southwest did to Baltimore and create a glut of seats which lowered fares in the market permanently. Let the games begin!

Delta meanwhile has been dutifully working to leave bankruptcy this week, and announced that it will save $200 million a year in aircraft leasing costs by renegotiating leases on many of its aircraft. Delta has been consolidating its operations, letting go of 16 out of 24 gates in Orlando, another AirTran stronghold, and has been dumping other facilities such as hangars. While AirTran would love more gate space in Atlanta, especially in Concourse C, Delta operations are preventing that. But if AirTran needs a new hangar, Delta does have one available. Delta has just canceled its first lease at Atlanta, a maintenance hangar, which will save the company $3.4 million, pending bankruptcy court approval. However, in the coming months and years, it will be seen if AirTran places as much importance on Atlanta as Delta does. Delta has committed to Atlanta, with the recent closing of DFW and the realignment of Cincinnati, Delta needs Atlanta. AirTran announced new service from Chicago recently. As mentioned earlier, it wants to expand Boston service, and AirTran is currently a powerhouse in Orlando. Baltimore/Washington has AirTran expansion capability, and other cities such as Minneapolis may be next. Atlanta is certainly an important part of the AirTran network, but in the coming months and years AirTran will likely de-emphasize Atlanta, certainly not de-hub it, however. AirTran needs a hub like Atlanta to serve such small and mid-sized markets as Pensacola, Gulfport/Biloxi, and Savannah. But in near future it should be clear which direction AirTran expansion is taking, and perhaps more importantly, where.

New Routes...New Competition

While AirTran finally announced new seasonal service to Seattle/Tacoma, (and it's about darn time) JetBlue launched some of its new routes this week between Austin and NYC/Boston as well as Fort Lauderdale to Oakland. However, they have more to announce, as it's been strongly hinted that the airline will use the three slots it gained at Long Beach Airport to start non-stop to Newark. JetBlue just gained another gate at Newark from United, and plans to get another soon which will allow the airline to launch the new service. Newark is suffering from a lack in gate space and that won't be helped by new competition from Virgin America. Virgin America in filings with the DOT plans (and these plans can change at any time) says that while it will commence operations initially at San Francisco, it will also focus on Newark and Dulles. The planned routes will all be transcontinental, no surprise since Branson has repeatedly hinted at that fact. Transcon service to Seattle/Tacoma, Boston, Miami, and Los Angeles is planned, and while some of those markets make perfect sense, others don't. As said previously, San Francisco makes sense, since the airport is a virtual United monopoly and is more convenient for most business travelers than Oakland and San Jose which have the low-fare carriers. However, New York City is too crowded, and gate space is a very serious issue which could hamper Virgin America operations. While Virgin America may not be serving Long Beach, they will be competition with JetBlue and other low-fare carriers from NYC, the SFO Bay Area, and Washington D.C. The real question is whether Virgin America will be able to attract business travelers from legacies like United and Continental and low-fare carriers such as JetBlue which offer a great product.

Clearly with the kind of capital the airline has attracted and a business plan that makes some sense, this will not be Independence Air II. However, with transcon fares at such lows this plan could be cause for concern. The Virgin America product will have to be darn good as well, since they will be competing against arguably the two best airlines for business travelers in the U.S. If the product is JetBlue or above quality, then it’s very possible that Virgin America could snag higher-fare business travelers from United and Continental. If that happens, then Virgin America could easily make money. But, if Virgin America decides to engage in stupid fare wars with JetBlue, Southwest, and others, then they could easily lose money. The airline could find success if it has the right fares, less than United and Continental (who will likely match Virgin America’s fares) but more than JetBlue and Southwest. Another potential problem the airline could face is the delay-prone nature of the San Francisco Airport. It’s a primary reason why JetBlue stayed away from SFO, and if Virgin America suffers too many delays, they could develop a bad reputation quickly. Another pitfall could be flight attendants. Many Virgin Atlantic flight attendants are young and sometimes apathetic. However, many Continental and United flight attendants who fly the transcon routes are senior and sometimes surly. Virgin America must find flight attendants which are young, enthusiastic, and professional. Virgin America has potential, but needs to exercise every opportunity it has to survive in the cutthroat world of aviation.

Virgin America Prepares For Takeoff

Virgin America sent out a press release yesterday discussing its plans for launch in early 2006. They have filed for an operating certificate, a process which can take 3-6 months. The airline plans to launch from its base in San Francisco with two to four A320 aircraft. The airline plans to first fly between San Francisco and New York with other routes to follow. However, it's likely the airline will initially focus on ultra-competitive transcontinental routes. The airline also plans to headquarter in the San Francisco Bay region, adding much needed jobs to that area.

This is absolutely the last thing the industry needs, as airlines such as JetBlue are reducing capacity on transcontinental routes, even while they are growing rapidly elsewhere. Other carriers are also reducing capacity, and not just on transcon routes. Virgin America plans to enter a nation full of overcapacity in the markets it plans to serve. In many smaller and medium-sized markets capacity remains balanced; but Virgin America probably won't serve these markets due to the size of the A320 aircraft. Fares remain very, very low on the transcon routes, and low in general to the San Francisco area becuase of the presence of low-fare carriers in nearby Oakland and San Jose. Even if the Virgin America product builds on the success of the Virgin Atlantic brand, the airline will still have to compete against United which has a very loyal contingent of business travelers, as well as Continental and Delta which both have a large presence in NYC. Even with a great deal of start-up capital, Virgin America will be taking off into very stormy skies.

Battle Of The Shuttles

On Friday, JetBlue announced new E-190 service from Boston to Washington D.C. for 6 weekday round-trips and 5 weekend round-trips. The new flights will begin on January 17, 2006. With this announcement, Jet Blue has done a couple of things. First, they have expanded their presence on the ultra-competitive East Coast shuttle routes. Second, this announcement also signals a further shift in focus from NYC. It's been clear for a couple of years that JetBlue will be ramping up Boston operations in 2006, and has already made a major commitment with Massport to expand terminal C at Boston Logan Airport so JetBlue can add more flights. NYC will still be a major part of JetBlue's operations, but next year, it's all about Boston. They will be competing for the most part against Delta and U.S. Airways, however, American, Continental, and United are all competing on these routes. These routes, formerly cash cows for the majors will soon be just as competitive as flights to Florida. While they will struggle, they have advantages that JetBlue doesn't, and it won't be a decisive JetBlowout. JetBlue will be able to attract customers, as they have the right kind of product business travelers are looking for. TV, low prices, and friendly service will win many skeptics.

However, there are certain disadvantages for JetBlue, and these will make things difficult for them. First of all, JetBlue is missing two very, very important things to business travelers. At least one of them can be solved easily, but the other will take a lot of planning and thought. The first, and harder problem to solve is the relatively poor frequent flier program, known as TrueBlue, that JetBlue offers. TrueBlue is a cross between a Southwest-style program which gives customers credits irregardless of the length or cost of a flight, and a conventional program used by most major airlines which awards credit based on the length of a flight. TrueBlue groups JetBlue flights into three groups, based on the distance of a flight, they are: short, medium, and long, and awards TrueBlue credit based on the group the flight is put into. However, many business travelers will not only take longer to reach a free flight with this program, but JetBlue doesn't serve enough destinations for them to have much choice (in comparison to legacy carriers) for a free ticket. Furthermore, TrueBlue doesn't offer enough of an incentive for business travelers to switch from their current program, where many road warriors have accumulated hundreds of thousands of miles. For JetBlue to win over a substantial portion of business travelers, which make up the vast majority of customers on shuttle routes, they must make TrueBlue more attractive. Business travelers will do the math, and they won't mind paying $5-10 more to get the frequent flier miles. And plus, when JetBlue enters anybody's turf, what's the first thing airlines do to respond? They give away millions of bonus miles to loyal customers who fly the legacy airline when they are competing with JetBlue. With that, why should business travelers switch?

The second problem JetBlue must overcome is its lack of punctuality. JetBlue has had one of the lowest on-time performance ratings of any airline in the nation, a stark contrast to it's early years when they were close to the top. The primary reason for that JetBlue's operations were levered quite strongly to NYC, and with a series of storms hitting the city, particularly last winter, JetBlue's on-time performance has struggled. Delta and U.S. Airways, which have very serious shuttle operations, dedicate certain aircraft with special amenities simply for the Boston-New York City-Washington D.C. shuttle routes. If one aircraft needs repair, there is usually a spare at one of the three cities. Because the operation is relatively simple and small, yet so important, that sacrifice can be made. Since JetBlue is using an aircraft that's relatively new, they don't necessarily have those spares. Furthermore, since the aircraft are new, they may experience problems that mechanics may not have had experience dealing with before. Conversely, aircraft that are new do generally have fewer problems and require less maintenance than the older aircraft Delta and U.S. Airways use for these routes. If JetBlue does have punctuality problems, they will probably come from bad weather, which would affect the other two airlines. But, if JetBlue mismanages the use of the new aircraft, it could result in serious delays.

There are a couple of other minor issues that are disadvantages for JetBlue as well. First of all, Delta is transitioning to new shuttle aircraft, MD-88s which are a mainstay of Delta's mainline fleet. The aircraft will be refurbished and new seats will be put in to make it appealing to business travelers. While JetBlue usually has the top product with leather seats and free TV, this will provide some healthy competition for JetBlue. Furthermore, JetBlue will use Dulles Airport in D.C. for the new flights, where it currently has operations. This will be a major disadvantage for JetBlue as both Delta and U.S. Airways use Regan National Airport, closer and more accessible to the city. Also, both of those airlines operate dedicated security lines just for shuttle passengers which lessens the amount of time they need at the airport, allowing them more time to conduct business. JetBlue can overcome all these problems, with the award-winning service they offer. But, business travelers may be much harder than families to win over.

With All The Confusion Of the E-190 Announcements, JetBlue Forgot One...

JetBlue has planned to start a new route between Oakland and Fort Lauderdale, even though the airline hasn't officially announced it. However, tomorrow, Thursday, is a likely day for the press release. The airline has already entered the route into its reservations system, and about a day ago accidentally posted the route on its cluttered website route map. This flight may become very popular, as the non-stop traffic on the route has been controlled by United and American, and so has been expensive. Many from the Bay Area can now head to Florida, especially the Miami area for less. This move will allow JetBlue to compete with United-American monopoly, something they excel at. I fully expect traffic to grow and daytime flights to be added within 6-12 months, assuming JetBlue doesn't have more pressing needs for the new aircraft entering its fleet. The new flight will leave FLL at 7:30 p.m local time, and arrive OAK at 10:55 p.m. turning around and flying back at 11:55 p.m., and arrving back in FLL at 8:15 a.m the next day.

Today's JetBlue Announcement - And It's Not Charlotte...

Today, as expected, JetBlue announced the Boston-New York route using E-190 aircraft. The service will start November 8, 2005. And two cities, that have been speculated as being ripe for service from JetBlue were announced: Austin, TX and Richmond, VA. Austin service will start January 19, 2006 with three daily E-190 flights. Richmond will get four daily E-190 flights from JFK. However, both cities will also be serviced from Boston Logan, where JetBlue plans to significantly ramp up their operations at the airport. This new level of activity will include Richmond with two flights daily, and Austin with one. Boston will also get new service to Nassau in the Bahamas, starting February 2. And, if you thought JetBlue was ignoring Florida with this move, think again. West Palm Beach will get three new flights from Boston with the expansion.

Charlotte doesn't get service for now, however, but with all the new planes coming on-line for the airline, it would be absolutely no surprise if Charlotte is the next "Blue" city.

JetBlue Making Charlotte E-190 Town!

Sources close to jetBlue have rumored that next week on Tuesday the airline will make a formal announcement to start service from Charlotte-Douglas International Airport. Sources claim that all the new flights will be operated with the new E-190 aircraft that jetBlue is taking delivery of. Six daily round-trips would be made to the Big Apple, while four round-trips are planned to Boston.

This is, however, not the first time that a low-fare airline has thought about moving into Charlotte. U.S. Air has long dominated the city, America's number two banking center, and has kept fares in the city high. With the recent devastation caused by hurricane Katrina, it's likely that service to New Orleans will not be restored for awhile, and many airlines which have dedicated aircraft to the city, most importantly Southwest, have had to reschedule them. There was some buzz about Southwest taking those planes and moving them into Charlotte, which has desperately needed a low-fare carrier which will make a major presence in the city. (AirTran does have a presence there, but one that's not big enough for the city). Charlotte has probably been one of the top cities that JetBlue has wanted to enter for years, and this may be the reason Southwest didn't bite. U.S. Airways has long provided varied customer service and high fares to the city, but the one thing that they also provided was convenient flights. Since CLT was, and still is a hub in the new U.S. Airways, that has long been the way to travel for many in the banking industry. The bankers were willing to put up with high fares, as long as they got to their destination quickly and with decent service. Things in that biz move quite quickly. If JetBlue can compete on schedule, plus add friendly service that has only been seen occasionally from U.S. Airways. And yes, a deal-breaker could be that bankers can watch CNBC (financial network) or other cable news during the flight. That can help them stay up to speed. That's certainly not something you'll find on U.S. Airways.

Finally, also expect on Tuesday an announcement on new shuttle service between Boston and New York City. The service will also be operated by the E-190 aircraft as well. One of the initial plans that JetBlue was tinkering with when they were planning the first routes a year or two ago (not a typo) was making at least the lowest fares $50 each way on the shuttle, but provide fare caps that undercut the other players on the route, U.S. Airways, Delta, and American Eagle. Unsure of how many frequencies will take place on the route, but expect at least the same numbers as Charlotte. Look for the announcement Tuesday!

AirTran Plans New Service To Detroit-Signal Of Something Coming...

AirTran recently announced new service to Detroit, just another thorn in the back of "legacy" carriers as the airline is starting low-fare service in Northwest Airline's largest hub. Northwest has already been suffering from labor problems, and this service doesn't help as AirTran has non-fuel costs which are second-lowest in the industry, after JetBlue, and that will allow the airline to lower fares even further in the Detroit market. This move is just the latest in a series by low-fare airlines trying to invade the home turfs of major airlines. AirTran is doing it in Detroit, where Northwest Airlines will fight back hard, and JetBlue will duke it out with Continental in Newark. AirTran, however is no stranger to competition from major airlines. AirTran's main hub is in Atlanta, situated at the same airport as Delta's fortress hub in Atlanta with service to nearly 200 destinations. Delta has fought hard against AirTran but AirTran has battled back and has won loyalty up and down the East Coast. While the number of flights isn't too significant, it shows that AirTran is fighting hard to find new markets, which it needs to do to survive. Frontier Airlines, with its main hub in Denver hasn't significantly expanded outside of its comfort zone, it's current point-to-point (non-Denver) flights being only to Cancun from various cities. That airline has been looking to expand, but is having trouble, as Frontier has just undergone a costly fleet transition, and some operational issues. Frontier should be expanding, particularly on the East Coast, with a hub in a city such as Charlotte, Cincinnati, Minneapolis, St. Louis, or Raleigh-Durham which can better serve the markets east of the Mississippi. Frontier should be invading another carrier's territory, such as Delta's in Cincinnati where Frontier's low fares, customer-friendly frequent flier program, and in-flight entertainment. Frontier has an opportunity, one that's essential to gain market share and stay afloat. Good luck, because Frontier will need it.

Spirit Airlines Is Movin' And Shakin'

Spirit Airlines is on the move today. The airline has applied for service from Fort Lauderdale to Providenciales in the Turks and Caicos. The airlines plans to start the service in time for the Winter 2005-2006 season, which probably would be sometime in December. This is just the latest in a series of moves by the airline to develop a strong Caribbean and Latin American presence. The airline has service to Cancun from Detroit and Fort Lauderdale and plans to start service from Tampa to Cancun in November. Spirit also has service from Fort Lauderdale to Nassau in the Bahamas, Santo Domingo in the Dominican Republic, San Juan in Puerto Rico, and plans to start service from Fort Lauderdale to Kingston and Montego Bay in Jamaica in November. The airline is actually replicating an idea by U.S. Airways for a Fort Lauderdale mini-hub that would serve Central America and the Caribbean, but that idea only somewhat materialized, and U.S. Airways actually applied for this very route to the Turks and Caicos, but never started service. It will be interesting to see if JetBlue expands its Caribbean service which is currently Aguadilla, Nassau, San Juan, and Santiago in the Dominican Republic. 

Spirit Airlines also ordered three move Airbus A321 aircraft today which should be delivered in the fourth quarter of 2008. The aircraft will be used to facilitate the airline's increased rate of growth especially to higher capacity destinations such as Cancun, New York, and Orlando.

Like many airlines, Spirit has launched its fall sale by littering the internet with banner ads advertising $34 fares each way between Fort Lauderdale and Nassau. JetBlue has also launched its clearance sale for the fall season. Planes will certainly not be as full during the fall months as during the summer, but both airlines compete on many routes, especially in the New York to Florida and Boston to Florida markets and both airlines have things going for them. JetBlue has generally higher fares than Spirit, but a very large customer following, terrific service, leather seats, and of course the DirectTv. Spirit generally has lower fares and offers more services from La Guardia airport which is considered more convenient for many in the NYC metro area. Both airlines should do fine though since it's such a hot market. If you want to book, the cheapest place to do so is at www.jetblue.com and at www.spiritair.com. Happy travels!

Second Quarter Profits And Losses

Four different airlines reported numbers for the second quarter, 2005. The results for some were promising, and for others, worrisome. Some carriers have been able to cope better with the higher fuel prices, and others are just struggling to get to December. Here's the scoop:

Alaska reported, in my view, a mixed quarter even though it's an improvement on last year, which was a $1.7 million loss. Alaska reported a net income of $17.4 million in the quarter, which, granted was marred by ludicrously high fuel prices, is paltry compared to Southwest's profit. The reason that this isn't all good is that Alaska had by far, some of the worst on-time and completion numbers in that quarter. In addition, on today’s news about Southwest's move to Boeing Field, Alaska is calling for equal access to the airport, where Alaska is hoping to start as many as 100 daily departures from the airport. Alaska should be worried about its future, since Southwest is here for the long haul, and even though load factors at mainline Alaska (not Horizon) were 77.9%, passengers will not tolerate late flights. Not at all.

America West is doing a terrific job before of its upcoming merger with U.S. Airways. America West reported $13.9 million versus $10.7 million last year. America West, which doesn't exactly operate the world's most fuel-efficient fleet, was able to cope with the higher prices and still improve their profits, without significantly cutting their labor costs, like Alaska did with its baggage handlers, pilots, flight attendants, etc. Clearly, America West has been able to pass at least some of the cost of fuel onto its customers with an increase in revenue over last year of 20%! America West is looking good, and should have a successful merger with U.S. Airways. America West is getting better at making money, but they still need to cost-cut significantly, or else America West will lose its edge.

Thestreet.com was right on when it titled a piece on its website "Delta and the Red Ink Factory". However, I must congratulate Delta for reducing its quarterly loss in the second quarter 2005 by $1.6 billion. Not bad but that still leaves nearly $400 million, $382 million to be exact in losses. Delta's Fuel expense was up 57.5%, but even with that, Delta was still able to get cost cuts, and got its mainline unit costs, as in what it costs to fly one seat one mile, down 3.9% including the higher fuel costs. However, if they are losing money now, there will be bigger losses, significantly bigger losses in the third quarter. No wonder Delta's stock DAL was one of the biggest percentage losers on the market today.

Finally, we come to JetBlue, which has been warning recently that it will make a smaller-than projected profit, and that its margins will decrease to single digits because of high fuel costs. That's just what happened, as JetBlue's profit decreased $6 million to $39.1 million in the second quarter. Its operating margin, decreased 5% to 9.1%. This quarter, JetBlue will take delivery of its first Embraer 190 aircraft, which is bound to begin a new wave of growth for the airline. The aircraft should start service in October or November, and it will probably help JetBlue's earnings, as JetBlue will be flying to smaller cities with less service and higher fares, so although they will be lowered when JetBlue arrives, JetBlue can really set anything it wants to, as long as it's not exorbitant, so JetBlue might be able to find higher margins on those routes. This will be exciting, and will trigger moves by other U.S. carriers, as they might spring for the plane. It will be a fun third quarter ahead, full of losses, and new beginnings.

Continental Rises To The Challenge-This Will Get Interesting...

With JetBlue's earlier announcement regarding new service at Newark, it was obvious that Continental would respond, most likely with lower fares if they weren't at JetBlue's levels already since they compete already in roughly the same markets. However, Continental decided to go head-on versus JetBlue and add additional flights. As of October 1, 2005, Continental will add one additional daily flight from Newark to Fort Myers, Tampa, and West Palm Beach. Continental will add two additional flights to Orlando, and three additional flights to Fort Lauderdale.

The subheading on the press release is funny: "Due to an expected increase in demand with its new low fares, Continental will add eight daily round-trip flights on Newark-Florida routes beginning Oct. 1." Nothing else prompted this?  Perhaps a competitive response to a competitor you fear, maybe?

Keep in mind that Continental has already competed against JetBlue fairly directly, but this will be a test for the discount carrier. Continental will continue to serve Florida throughout, and can't be forced out by JetBlue since much of Continental's traffic is connections, including lucrative connections from international destinations. Continental will fight hard for traffic, don't get me wrong, but they have bigger battles, and if they can't evict JetBlue from Newark, it's not going to be the end of the world for them, since Continental already serves many other cities that are more lucrative than those in Florida. This is going to be a good fight, but don't expect JetBlue to flight from its fight.

JetBlue Comes To Continental Country- Watch Out American You May Be Next!

JetBlue Airways announced new service to Newark, NJ, which should help the discount carrier better serve their customers from across the NYC Metro Region. However, unlike JetBlue's venture into LaGuardia, Newark will have service to all of JetBlue's 5 Florida destinations, as well as San Juan, Puerto Rico, versus service to just Fort Lauderdale from LaGuardia. Service to Fort Lauderdale and Orlando will start October 5, 2005, Tampa, Ft. Myers, and West Palm Beach on October 19, 2005 while San Juan service will start November 17, 2005.

However, JetBlue is venturing into Continental country, as Newark is one of Continental's largest hubs. Continental already serves all of those destinations from Newark and offers the highest quality product out of the "legacy" carriers. Continental offers some in-flight entertainment, free meals on many flights (although like JetBlue snacks are served on the Florida flights) and has brand loyalty in Newark. Although it's going to be difficult for JetBlue at Newark, Continental has already had to adjust as they have competed with JetBlue in the New York market, now JetBlue is just on their home turf. Thus, JetBlue probably won't be forced out like they were in Atlanta. A couple of years back, JetBlue announced Atlanta in an effort to end the near monopoly Delta had on the Los Angeles/San Francisco- Atlanta market which meant Delta fought back with everything they had, by offering frequent flier bonuses, more flights, and by matching JetBlue's fares. JetBlue had to pull out in shame, and hasn't touched Atlanta ever since.

Is an attack on American next?

Another interesting thing that should be noted at this time is how JetBlue is trying to give customers convenient choices by serving multiple airports in certain metro areas. For example, in New York: LaGuardia, JFK, and Newark while in San Francisco: Oakland and San Jose, and in Los Angeles: Long Beach, Ontario, and Burbank. This appears like it might be happening again in probably JetBlue's 3rd most important market after New York and Long Beach, which is Fort Lauderdale. Many, if not most, of JetBlue's passengers to FLL fly to the airport because it offers lower fares than nearby Miami. But that might soon change, as there are rumors coming from knowledgeable sources saying that JetBlue plans to announce service to Miami from terminal F in September, with service to start in January. Keep in mind, while these are rumors, this idea has been passed around for a while, but very high fees at Miami have kept any low-cost carriers (except AirTran, which has limited service there) from starting operations. American has a stronghold on Miami and uses it as its Latin American gateway, and American is the largest airline operating in that market, and uses it as a profit center. Although JetBlue will probably start service to NYC (unsure which airports, certainly JFK), Long Beach, Oakland, Washington D.C. Dulles, and Boston Logan, JetBlue might get into the Caribbean more, where they will face brutal competition, especially in Puerto Rico. JetBlue should stay away from there for now, but adding Miami for domestic routes is a smart way to go, hopefully there won't be so much driving.

US Airways/America West-They've Made A Committment, Now What?

America West and US Airways have now officially agreed to merge, however, there is still much work, and one of the most important pieces of which is creating a nationwide route system to create a competitive airline.

United is liked by many business travelers since it has hubs in many major cities, especially business centers. In addition, United has hubs across the country geographically, San Francisco and Los Angeles on the West Coast, with Denver and Chicago in the Midwest, and Washington D.C. Dulles on the East Coast. In addition, United has a comprehensive international network, especially in the Asia-Pacific region, which is helping retain business travelers to the airline. These travelers are declining and are paying for convenience over cost. With a shift in the business community towards finding lower-cost alternatives to the major airlines, the new America West/US Airways carrier plans to be a "nationwide, full-service, low-cost carrier". That sounds pretty attractive for businesses and business travelers. The convenience will be there, however, since they will have hubs in major leisure markets and be operating in markets with persistent overcapacity, they will have low fares.

What the point is here, is that the US Airways/America West carrier can be very attractive for both leisure travelers, like the carriers are now separated (serving Las Vegas, Florida, Mexico, and the Caribbean heavily), they can also become the next United, very attractive for business travelers. However, the route systems as they stand currently are disjointed, and to be successful, they need to be integrated. For example, with the current route structures of America West and US Airways if you want to go from Portland, Oregon to Portland, Maine you would have to fly to Las Vegas or Phoenix, connect on US Airways or America West to Philly, then connect to Portland, Maine, that's tedious, especially flying all the way down to Las Vegas or Phoenix then make a double connection to get to your final destination. If the carrier is to be truly nationwide, then it needs to eliminate the possibilities for many double connections, which are very time consuming and unattractive, their focus must be on midsize markets, which are the future. In mid-sized markets, where growth and pricing power is (not the large markets such as Phoenix or Las Vegas who are very sick with overcapacity), US Air/America West can make it work, and Portland-Portland is a good example. Here's the other problem, the route structure of both US Airways and America West is more or less North-South (Boston/NYC/Washington D.C.-Florida for US Airways) and (Seattle/Tacoma, Portland, San Francisco Bay region, Los Angeles-Mexico or elsewhere in the Southwest for America West, however America West is better at providing east-west connections). Two parallel lines don't create a nationwide route system, and that's what's needed to woo over business travelers.

Southwest and AirTran also might get into the fray here. They might try bidding on some of US Airway's assets to make the deal unattractive for America West. Keep in mind, America West made money last quarter, US Airways was flooded in red ink, thus America West can keep doing what it's doing, US Airways can't. Southwest might be interested in some of the 737-300 jets owned by US Airways as a way to grow their fleet quickly and effectively, while AirTran may be looking at slots in LaGuardia, Logan, and Regan. The bankruptcy judge that has to approve this merger is looking for the best deal for the creditors. Southwest might decide to do a similar play to what it did with ATA, outbid the competitor, but in this case, for much fewer assets. It's not out of the ballpark to think that.

Finally, if this carrier is going to be truly nationwide and low-cost, then it will need to serve midsize markets, however, it remains to be seen whether they can do this effectively without too many regional jets. Midsize markets without the presence of Southwest, JetBlue, or AirTran can give America West/US Air pricing power, which it desperately needs in this volatile industry, however, many of the larger markets, including hub cities such as Philly, Las Vegas, Pittsburgh, and especially Phoenix, are infected with Southwest syndrome, a disease that has been cured in only a few cases, and the prospects for curing it in these markets looks doubtful. Thus, the carrier must, must keep its costs down to a minimum if it wishes to survive. Now, what about the regional systems in smaller markets? Are they needed to bring in customers, and will they make money? Although many major carriers use regional jets like crazy, there will have to be a serious reduction in the number used in the merger. The 200+ that were proposed to be used in the merged airline is crazy and will result in many higher costs. Many people in these markets served by RJ's are now driving to bigger cities, not necessarily the biggest markets, but mid-sized markets to get lower fares. This is really a win-win situation, since US Airways can afford offer lower fares in these markets than in tiny markets with RJ's, and customers are benefiting from lower fares. Regional jets will not disappear from the system, absolutely not since the management is taking a different direction. However, there will be a reduction, especially 5 or 10 years down the road. New jets, such as the Embraer 170, which is now in service for US Airways by one of its vendors, Republic Airways will be the wave of the future, and they can serve these markets. These mid-sized markets are the future now that the age of the regional jet has ended. JetBlue has realized it with its order of 100+ 100-seat Embraer 190 jets, and US Airways/America West have the potential to profit from it hugely too, but do they have the foresight to do that? Personally, I think not, but I challenge them to prove me wrong!

The Business of Flying The Dead

Today's Wall Street Journal contained a front-page article about the business of carrying the dead. In particular it highlighted the operations of JetBlue and US Airways, which both do big business in Florida and many of those have family and funerals in the New York and Boston metro areas. The article mentions that 18% of JetBlue's cargo revenue is dead bodies, up from 10% a year ago. However, something else is driving the operation. In Florida, 14% of bodies are shipped to another state, compared with 5% in Texas and just 1% in Michigan.

The article, which requires a paid subscription, also notes that many of these airlines offer loyalty programs to funeral directors who ship with their carrier. For JetBlue, directors can earn a free flight after about 15 shipments. Other carriers and certain airports offer various programs. Daytona Beach Airport offers funeral directors 500 Delta SkyMiles for every shipment they make from Daytona Beach.

Can Independence Air Survive?

The answer is most likely no, considering the first quarter results the company released Thursday. Independence Air said that they expect a net loss of $105 million for the first quarter of 2005. Although the company is returning some regional jets and recieving new A319 aircraft, the company still has costs that are double what they are of their competitors with an adjusted cost of 18.2 cents per available seat mile excluding restructuring charges. Independence Air is increasing its load factors, but unfortionately that's not enough to make money. When competitors such as JetBlue, which is barely making money, with costs that are 1/2 of what Independence Air has, Independence Air has a couple of choices. One is to double its fares, which is not going to work, since passengers are very resistant to a $5 per direction increase.  The other is to double the number of passengers it carries, also not an option, since their planes would be over 135% full at a 68.6% load factor, which is what they had in April. Independence Air, in its current form, is a disaster. Although it was smart thinking by the former Atlantic Coast Airlines to get out of the United Express system, because they didn't have a future there, the result has been a disaster, and Independence Air should be long gone in a year or so.

If Independence Air decides to make a complete turnaround and dump most or all of its regional jets and keep just the A319's, then they might make it. However, it would significantly reduce their operation, and in addition, it's quite likely that a stragedy with just A319's wouldn't work because of all the competition on the East Coast, but in particular from JetBlue out of Washington Dulles, Independence Air's hub, and from Southwest out of nearby Baltimore. At this point, however, FlyI will go bye-bye, and fares will slowly go back up.

New JetBlue Service To Ponce, Puerto Rico!

According to rumors on the Internet, which appear to be confirmed by insiders, JetBlue will start daily red-eye service to Ponce in Puerto Rico. Although San Juan is well served by the major airlines, as well as JetBlue, Ponce is a full 1.5-2 hours away, and JetBlue is hoping that people will pay a premium to avoid the drive. After all, Ponce is a relatively wealthy city for Puerto Rico, with 200,000 people, a great potential market for JetBlue. The airport is currently not served by any major airlines, and JetBlue is hoping that the large potential market for these flights in the New York City area will allow JetBlue to add a daytime flight. This strategy is the one they took with Aguadilla, also in Puerto Rico when they started service there. If the service is successful (like Aguadilla) then JetBlue might add a daytime flight. The service is to be announced next week, and start at the end of June.

UPDATE- Today, May 11, 2005 JetBlue has announced the new service to Ponce with daily red-eye service starting June 17.

JetBlue's Profit Declines, Northwest and Delta's Nosedive!

JetBlue announced a reduced profit today as it spent considerably more on maintenance costs due to its aging fleet, and of course high fuel costs. JetBlue made $7 million in the first quarter compared with $15.2 million in the first quarter of 2004. JetBlue expects to make money in 2005, but has reduced its forecast for the remainder of the year.

Alaska Airlines posted a loss for the first quarter of $80 million due to competitive pressures and higher-than-expected fuel prices. A fare war with Southwest Airlines on the west coast between Seattle/Tacoma and Portland to California has not been good for Alaska. However, this loss increased mainly due to certain special charges. Otherwise, the loss would have been about $41.5 million, about what it was first quarter 2004.

Northwest Airlines posted a surprisingly large loss of $458 million for the first quarter, nearly double that of first quarter 2004 which was $230 million. Northwest (in addition to fuel) blames its "increasingly noncompetitive labor costs" as well as excess capacity. Although Northwest is trying to get labor concessions, that might not be enough for the carrier.

Last on today's hit parade is Delta, which lost $1.1 billion in the first quarter 2005. Delta has been struggling trying to compete effectively on the east coast corridor where it has most of its operations. It has introduced its low-fare brand Song, as well as the Simplifares program, which really hasn't done that much except boost sales on www.delta.com for a day or so and lower the last minute fares that nobody pays. Yes, there are those who buy tickets at the last minute, but most of those didn't pay the $1000+ that Delta was lowering.

Will New Jets Help Spirit Compete With JetBlue?

The low-cost carrier Spirit Airlines, which was founded as a charter carrier in the early 1980's and eventually began scheduled service has used MD-80 aircraft for many years but as they age and get more expensive to maintain Spirit decided to purchase new aircraft, and a couple days ago, the first A319 arrived for the carrier. A few months earlier Spirit had celebrated the arrival of the first A321, a larger aircraft, for the company. JetBlue, one of the main competitors for Spirit uses A320 aircraft, which size-wise are in-between the A319 and an A321.

And that's not all folks, Spirit planes will be getting a state-of-the-art entertainment system that's according to Spirit Airlines CEO Jacob Schorr "more modern than JetBlue because it will be the latest and not like the one designed in 1999." The systems will be on all of Spirit's new Airbus jets within a year.

JetBlue, though has a terrific brand, especially in the NYC metro area, and Spirit has a mediocre brand in the Detroit Metro Area. It will be very difficult to compete against JetBlue, and for Spirit, fares have been successful in the past, ensuring high load factors, and even with all the perks, it might be what will set them apart from JetBlue which might charge $10-$20 more for a one-way flight. JetBlue might defeat Spirit on the NYC/Boston (Spirit uses Providence, RI for Boston, JetBlue uses Logan) to Florida corridor, but JetBlue might have trouble if they wish to enter Detroit, assuming Spirit's new moves help its brand reputation in the Detroit Metro Area.

Even the LCC's Are Raising Fares Due to Fuel...

Southwest Airlines announced recently that it will raise fares $1 to $3 each way on its regular fares, while JetBlue raised fares $4 to $5 each way due to higher fuel costs. This comes days after Northwest Airlines raised fares, and other carriers matched that increase. It's quite clear that all carriers will face difficulties due to the new fuel reality and these new fare increases will help even the profitable carriers avoid future losses due to higher fuel costs. But, for how long with the increases last...

JetBlue to Burbank

JetBlue announced today that it will start service to Burbank, CA in late May. JetBlue already serves Long Beach Airport in the Los Angeles Basin as it's west coast focus city, and Ontario airport with two daily flights, as well as San Diego. Three daily flights will start in late may, and a fourth will start in mid-July. Now, JetBlue will have the most non-stop flights between the Los Angeles area and New York City...

JetBlue to the Beautiful Pacific Northwest

JetBlue announced today that it will start daily red-eye service to Portland, OR effective May 17. JetBlue also annouced that it will add a second daily flight to Seattle/Tacoma effective June, 17. Over the summer, Seattle/Tacoma will have a surfeit of flights to the New York City metro area, and some are starting to worry about low load factors and very low yields for the carriers on this route. Not only will JetBlue have two daily flights to JFK but Delta's Song will have three daily flights to JFK(on 199-seat 757 aircraft compared with JetBlue's 156-seat A320's), American will have two daily flights to JFK. In addition, Continental will have five daily flights to Newark, and Alaska Airlines will have two daily flights to Newark. This large amount of flights is in addition to other airlines which offer conecting flights. JetBlue might find Portland, OR to be a much better market for their JFK flights than Seattle/Tacoma...

JetBlue Modifies Service to Carribean

JetBlue Airways announced that it's adding another daily flight to San Juan and Aguadilla, Puerto Rico and Nassau, Bahamas. In addition, it is removing its service to Santo Domingo in the Dominican Republic. JetBlue is keeping its daily service, however, to Santiago, in the northern region of the Dominican Republic.

JetBlue Posts Higher-Than Expected Profit!

Considering the record hurricane season, combined with higher-than-projected fuel prices, profits in the industry were down, if non-existant this quarter, with Delta losing over $2 billion, and the rest of the majors losing hundreds of millions more. United Airlines today posted a $663 million net loss for the quarter, wider than many had expected. However, JetBlue Airways today announced a profit of $2.4 million, down sharply from last year's of nearly $20 million in the fourth quarter.

JetBlue Is Expanding Coast-Coast

Today JetBlue Airways announced that it will add daily flights between Dulles Airport in Washintgon D.C. and San Diego. In addition, they announced the addition of other flights from California to Dulles, New York, and Boston. These flights will help increase capacity on existing routes, including from Long Beach, Oakland, San Jose, San Diego, and Ontario.

Boeing Announces That the 717 is No More!

Boeing announced today that the 717, the newest version of the classic MD-80 and DC-9 aircraft is going out of production at the end of filling the orders that have been placed, mainly by AirTran Airways. With the small number of orders due to the 737 being more economical for most carriers, and the Embraer 190/195 series about to enter service in the U.S. in the fall with JetBlue Airways ordering 100. That series is more economical and carriers around 20-30 less people than the 717 did. Really, the next step in the industry is the 190/195 because it has the range turboprops don't but economics that are a boon to airlines everywhere and are advancing into a new market segment not touched, between a 737 and a regional jet, 70-110 seats, and the Embraer 190/195 is an aircraft most airlines need at this time. That is the future of the 717's domain, and is perfect for an airline like JetBlue, which has A320's, an aircraft much like a Boeing 737-700/-800, which is used for the routes with more traffic. The 190 will supplement JetBlue's operations and allow them to get into medium-sized markets. 2006, when JetBlue will have the Embraer 190 in service for sure, assuming everything goes to plan, will be an interesting and truely historic year for aviation.

JetBlue 1 Year In Boston-Just the Beginning!

Today, JetBlue announced, on its one-year anniversary in Boston's Logan International Airport, that it will soon serve San Jose (In addition to Oakland) and Las Vegas from Boston. The routes mark a continuing expansion from Boston, as the airline already serves Long Beach and Oakland California, as well as Denver and Tampa, Orlando, and Fort Lauderdale, from Logan.

JetBlue Posts Profit

JetBlue JBLU reported a net profit in the third quarter of $8.4 million.