Well, That was Fast...

Just a day after announcing that it planned to buy out Frontier, opening the door for a possible exit from bankruptcy, Republic Airways decided to purchase a second carrier, Midwest, from TPG Group for the princely sum of $31 million. This was down just slightly from the roughly $450 million TPG and its partners (including Northwest) paid for Midwest less than two years ago. And then today, Frontier announced that it will make schedule changes, adding mainline frequencies to several mostly leisure markets, as well as frequencies on Lynx to Salt Lake City, Omaha, and Albuquerque. Service to El Paso and Grand Junction, however, will be discontinued in September. This latter move is welcome, and a possible sign that the market may have bottomed or is coming close to bottoming. For an airline to add new flights during the fall months, let alone in the midst of a recession, is impressive. Obviously, it's anyone's best guess as to whether the new flights will be successful, and the stiff competition they will certainly face from Southwest can't help.

But let's examine the first move more closely. Republic essentially bought what has quickly become an airline in name only. Midwest is rapidly retiring its 717s, and plans to continue to do so even after yesterday's announcement. Instead, Midwest will use E-170s and E-190s operated by a little-known carrier called Republic, an arrangement in place well before yesterday's buyout. So why bother buying Midwest? Aside from being able to exert greater control over their lift, and being able to purchase a well-respected brand for a bargain price, there doesn't seem to be as much point to this move as there did with Frontier. At least Frontier is a well-regarded carrier which has managed to hold its own, if not expand (the announcement above notwithstanding), in the face of Southwest. Although it has adopted a more proactive attitude towards charging for services, Frontier hasn't taken away seat pitch, assigned seating, or onboard television, which are its signature amenities. But Midwest, although it has a well-respected brand, has significantly cut back on its amenities and service as a way to compete, adding more seats to its planes and drastically reducing its onboard food service.

At the end of the day, unfortunately, Midwest simply can't cut it against a strong Delta/Northwest and a nimble carrier with extremely low costs, AirTran. Midwest is bleeding money, unlike Frontier which has reported some small, but significant, profits. Republic's purchasing of Midwest will do little to change the situation at that carrier. Republic has not announced any major operational or strategy changes, and I fear that the end could be near as a result. Service will continue to suffer in the wake of cost cuts, and smaller jets will become uncompetitive in the marketplace since they have higher ASM costs than the larger 717s and 737s which AirTran operates. Many of the routes Midwest services have competing AirTran service, which is cheaper for customers and actually makes money. Midwest should have died long ago, absorbed as part of AirTran. But that opportunity has come and gone, and now it's time to recognize that Midwest, no longer what it once was, will end its days as a small, regional operator before eventually being shut down, with the jets likely going to other airlines Republic contracts with.

Using Buses to Transport Passengers Short Distances To/From Hubs

This post discusses an idea I've had for awhile, but been somewhat hesitant to share. After thinking of potential ways for airlines to cut fuel costs, this one struck me as relatively easy with immediate impacts. Throughout our air transport network, dozens of very short routes (less than 150 miles between airports) exist. Most of these routes can be covered by bus with only a modest increase in transport time. While the idea of busing passengers to alternate airports is nothing new, as Ryanair has successfully done at many of its major bases in Europe, busing passengers between destinations in lieu of an aircraft, in order to facilitate connections, it is something untested in the US.

The reason buses are preferable to small aircraft is simple: cost. It's very, very expensive to fuel a small plane traveling such short distances (relative to the amount of revenue generated), in addition to the costs of crewing and maintaining that plane.

There are two different basic types of regional jet contracts that could potentially be affected by a move to buses. One are the contracts, known as at-risk flying, that many companies which operate turboprops on very short routes receive. For a flat fee per flight, the turboprop operator can use the brand of the legacy carrier's regional arm, and the legacy carrier will take care of booking and payment. The company that provides the turboprop takes a risk when providing that flight, and can either make or lose money. Theoretically, if turboprops are not making money with high fuel prices, they would be pulled by operators.

It's unclear whether buses would be effective at replacing turboprops for short flights. Turboprops are designed for use on short routes, and depending on the model, can be significantly more efficient than regional jets. However, because I don't have reliable cost estimates for these aircraft, nor intimate knowledge of the contracts that allow a turboprop provider, like Skywest, to license itself as the affiliate of a legacy carrier, I'm hesitant to say that short turboprop flights should be targeted for replacement by buses. While buses might have advantages over turboprops, particularly for very short flights, buses would arguably provide more advantages over regional jets.

The second kind of contracts, known as fixed-fee flying, typically cover regional jets. The company that provides the regional jet can effectively pass on its cost to its legacy partner. The legacy keeps all the revenue generated from that flight. However, in these difficult times, legacies are eating mountains of red ink, because regional jets are not as fuel efficient per passenger as larger planes, and legacies have faced significantly higher costs in the face of smaller increases in revenues.

As we have seen in the past several months, many legacies, such as Delta, have tried to find any loophole possible in their contracts with regional lift providers in order to cancel them. Delta is simply losing too much money on these deals. Unfortunately for Delta, the company has had difficulty nullifying portions of the agreements. Given these restrictive contracts, the transition to the use of buses on some short services could take awhile, but it is worthwhile from a cost standpoint.

I am not suggesting that buses replace all regional flights. I am not even suggesting that buses replace all flights on a given short route. However, there are flights where it would be far more efficient and cost-effective for carriers if they used buses rather than small aircraft, particularly 50-seat regional jets. The vast majority of passengers on regional aircraft will connect at a hub. Regional aircraft are for getting passengers to and from a hub, not flying passengers point-to-point. Yet regional jets remain a very expensive way to transport passengers to hubs.

Moreover, regional flying, in it of itself, is essential for a legacy carrier, enabling the carrier to differentiate itself from its low-cost competitors, and generate higher yields. In fact, while fuel for regional operations can be rather pricey, labor costs are typically much lower, and this can help offset some of the burden. Airlines are finding that 70-100 seat jets are very efficient for many routes they serve, even to larger cities. Longer regional flights are impractical to target by bus, and 50 and over seat jets will have a place in serving this market.

So hypothetically, if this idea were ever to come to fruition, what would it look like?

The operation:
Ideally, buses would depart from downtowns, or from strategic pickup points in the small city being served, enabling passengers to skip the long drive to the airport. The bus would then travel on the fastest route, nonstop to a gate at the airport terminal. Admittedly, this would require some level of security clearance, and it's unclear whether airlines would be able to obtain this. But ideally passengers could then, at a boarding gate, drop off their luggage into a cart and go through a quick security screening before connecting to their flight. This would require the cooperation of several different parties but if airlines were able to get a bus infrastructure in place, it could enable carriers to make this process very seamless, while preventing passengers from having to wait in long lines at ticket counters.

If the cost savings were not so dramatic, this would not be worth doing, but very loosely estimated costs suggest that if a 55-passenger bus costs $300 an hour to operate and a 50-seat regional jet costs $1500 per hour to operate, the savings generated by using the bus would be very significant. Not only could capacity be added on the route, but at significant savings.

On a hypothetical route, if the bus takes two hours to cover the same distance the regional jet can in one that would still produce a cost savings of well over $500 per trip, not bad when added up over time. It would result in some additional time spent traveling for passengers, but this would be minimal if routes were carefully selected. Whether airlines like it or not, oil prices will continue to increase in the coming years, and this cost burdens regional jet operators far more heavily than it does bus operators, making bus travel increasingly advantageous in the future. 

Consider the Delta route between Columbus, GA and its hub in Atlanta. The route, 83 miles by air and just under 100 miles by road, is serviced most days by 4 flights on CRJ-100 regional jets (50-seaters). To fly the route takes about 50 minutes, to drive, about an hour and 45 minutes. If some of the CRJ flights were replaced with bus service, bus passengers would experience a slightly longer trip, but one that is more comfortable and less prone to delays (mechanical, air traffic control, and weather-related).

Admittedly, a bit of timing would be required; sending a bus out in rush hour would nullify any advantages of this scheme. But given the increase in delays that passengers are experiencing, and the increasing strain on our air traffic control system, exacerbated by more flights on smaller jets, bus service could not only offer airlines cost savings, but passengers a better experience by reducing the propensity for delays.

Like a flight, passengers could board the bus from a boarding gate (on the tarmac), and head nonstop to their destination. And with the lower costs of operating the bus service versus a regional jet, Delta could operate additional services, minimizing connections. Unlike a regional jet, which is extremely cramped and offers very little room for passengers to spread out, a bus, while not extremely spacious, offers more room and comfort for most passengers. Moreover, some bus companies have started to outfit buses with Wi-Fi Internet access, enabling business travelers to be more productive on the road. Like planes, most buses have overhead compartments, and there is ample room in large buses for both carry-on and checked baggage.

And though small regional jets would likely be the clearest targets of this scheme, this does not mean that the markets bus services are used in are necessarily small. Regional jets help provide both capacity, but more importantly frequency. On some high-density, inter-city routes that have a lot of traffic, airlines could offer bus service to replace flights for lower-yielding passengers, adding capacity economically.

American currently flies several times daily between Milwaukee and Chicago O'Hare on 44-seat regional jets. If a passenger needs to travel between Milwaukee and Raleigh-Durham, but purchases a very discounted ticket, then American could bus that passenger to O'Hare, about an hour and 45 minutes away, and then fly him or her to Raleigh, saving the airline a considerable amount of money, and enabling the carrier to offer more reliable service during weather and air traffic control delays.

So this begs the question; why wouldn't a customer merely drive the distance themselves instead of putting themselves in a crowded bus with a bunch of other people? Given the rising cost of airport parking, gasoline, and the hassles driving entails, a strong case can be made for taking the bus. Moreover given the convenience of taking the bus (departing and arriving at a boarding gate in the terminal), and the potential comfort benefits (being able to use the Internet or watch movies instead of driving), many customers would readily take the bus instead of their own vehicles. Does this mean that all passengers will be swayed? No, but as long as most are, then offering bus service seems like a reasonable alternative and can help airlines keep valuable business travelers.

Would buses be an ideal solution? Hardly. They will likely be slower in most cases, and some passengers may find them quite frustrating. Time-crunched business travelers (those who provide airlines with their profits) might choose alternative options if the choice was between a bus and a flight on a different airline, and this is something airlines have to be careful with. If business travelers are strongly against the idea of a bus, then this idea may not fly at all. But, if carriers can demonstrate that the bus would not add a significant amount of time to their trip (this means timing buses with key connections), while enabling them to improve productivity, then some could be swayed.

Given the absolute necessity for airlines to cut costs, short regional flights are a place to start. This will hardly be a solution to the airlines' larger problems with fuel, but if carriers are looking for ways to trim excessive fuel usage, bus service should legitimately be considered.

Aloha Airlines Bids "Aloha" After 60+ Years

Aloha Airlines will suspend its passenger operations tomorrow after 60+ years of service to Hawaii. The airline has been hemorrhaging cash, and declared bankruptcy a week or so ago. Sadly, Aloha failed to find a buyer for its passenger operations, and as a result, that part of the business will likely be liquidated. The reason for Aloha's demise has been the disgusting predatory practices of Mesa's go! carrier, a new airline set up in 2006 to compete in the Hawaiian interisland market. Mesa Air Group, a regional jet contractor that provides jets for several large legacy carriers, was a potential investor in Hawaiian Airlines when that company went bankrupt a few years ago. Hawaiian accused Mesa of using documents they were provided as potential investors to gain data about the Hawaiian interisland market that Mesa used in starting go!. Hawaiian filed an $80 million lawsuit against Mesa, which they won, but Mesa appealed soon after, creating an unresolved legal saga.

Aloha, more reliant on interisland traffic than Hawaiian Airlines (which offers more extensive mainland and international service), could simply not compete when go! undercut fares on interisland routes and forced Aloha and Hawaiian to match them. It has been estimated that Hawaiian and Aloha lost $65 million between them due to these practices, while go! has lost at least $20 million thus far. The end of Aloha will only mean higher prices for Hawaiian consumers in the long run, as well as fewer connections to key mainland airports that relied on Aloha's flights for connections to Hawaii. These airports, such as Orange County and Sacramento, will be left without connections to the islands. Aloha filled a niche that is unlikely to be filled by other carriers anytime soon, because few other carriers operate point-to-point service between the US and Hawaii, and legacy carriers that funnel Hawaii traffic through hubs could have reluctance to divert some of that traffic though secondary locations, as it would be less efficient than the current setup. Moreover, given that Hawaii flights are long with relatively low yields, in an era of high fuel costs, airlines aren't eager to add new Hawaii service these days. While it's the inevitable nature of any business, especially the airline business, to see companies die out, it's tragic when they fail because of the unsustainable, anticompetitive practices of competitors. Farewell Aloha!

Possible 2008 Merger: Northwest and US Airways

From a fleet and route perspective, a merger between Northwest and US Airways could be a big winner. But from other perspectives, and more specifically, a labor perspective, it could be a major problem. However, if the merger were successful, it would create a company that would offer forceful competition in key domestic and international markets to a potentially merged Delta/United. For more information on the current merger frenzy that's sweeping the industry, see this post.

One of the largest potential problems that analysts foresaw in the US Airways/America West merger that occurred a couple years ago was that it was the unification of two carriers which had very strong route networks on opposite ends of the country, but there would be no central hub to join the two ends of the barbell, so to speak. Given the fact that the new carrier would not have many larger, more cost-effective aircraft for transporting flyers long distances, it raised the possibility of two-connection travel for many flyers, which, given all the potential problems of delays as well as the extra time it requires, could dissuade many travelers. While this hasn't proved to be as big a problem as I or other industry-watchers suspected, with rising fuel prices, operating transcontinental flights has become rather expensive, especially with A320-size aircraft which have higher available seat mile costs than 757s or 767s. Having a central hub, particularly one that can draw from traffic bases both East and West for international service, will be critical to the success of a national carrier, and that's what Northwest brings to US Airways in a potential merger.

And while the combined carrier would retain probably two central US hubs, if a merger were to occur, Memphis as a hub for Northwest would almost certainly be dumped, though the combined carrier might retain a focus city operation in the city to capitalize on business traffic. However, Northwest's exit from many markets from Memphis could open the door for a low-cost carrier, such as Southwest to enter the market. Or perhaps, if Northwest makes a major withdrawal, Frontier will make another attempt to set up a focus city in Memphis, though the company denies that it is planning any expansions of point-to-point services outside of Denver.

The combined carrier, with six remaining hubs in Philadelphia, Charlotte, Detroit, Minneapolis, Las Vegas, and Phoenix, will likely keep all those cities as hubs. However, to simplify operations, some hubs could focus more on mainline traffic to destinations that can support narrowbody mainline aircraft, while other hubs may focus more on bringing in a variety of connecting traffic, including regional jets and mainline planes (both narrowbody and widebody). By doing this, the airline is still able to maintain strong market positions in all six cities, but it makes the company's operations more efficient by simplifying where regional jets and international aircraft are needed (and thus the related crew scheduling and maintenance functions associated with the different aircraft types).

Phoenix, Detroit, and Charlotte will all likely remain hubs where regional jets, narrowbody aircraft, and widebody aircraft have a large presence. Phoenix is a fast-growing business center, and offering regional jet service from the city helps US Airways draw traffic to its expanding array of international flights from the city. As Phoenix grows, the combined carrier will want to offer increased international service, and so it will need a large supporting base of regional and mainline services to support that service. Given Northwest's massive infrastructure investments in Detroit, with its practically new terminal and assorted facilities, that city will need to remain an all-aircraft hub. Moreover, since Detroit is very close to the Northeast, where US Airways currently has a strong presence with regional aircraft, it can take over some of the regional jet flights that currently make their way into Philly. Charlotte will also need to remain an all-aircraft hub for the combined carrier because of its proximity to the South (no other hub in the network, save for Northwest's Memphis, which will likely get eliminated in a merger, can serve many small Southern cities, and only one other hub operated by any carrier in the South (Delta in Atlanta) has the range of regional jet flights that US Airways at Charlotte offers.

While Las Vegas, Minneapolis, and Philadelphia could lose some of their regional jet flights, and a select few mainline flights, the core of these operations will not be affected. None of these cities will lose all their regional jet service, and I doubt any will receive even a sizable cut in mainline service. Minneapolis and Philadelphia generate high yields for their respective hub operators, and airlines focused on increasing revenue will want to keep these with a considerable amount of service. Las Vegas is an important market for volume and market share reasons. Even though yields are lower to and from Vegas, it can absorb a lot of excess capacity in these carriers' fleets, and even though it's not the most profitable way to use that capacity, it does get utilized and make some money.

The carrier, like all of the consolidated legacy carriers, will need to have a large emphasis on international routes. And it's likely that Northwest gateway cities along the West Coast will maintain their service to Tokyo. Moreover, many large markets also have nonstop Northwest service to Amsterdam, which will also likely be maintained. US Airways, meanwhile, will likely continue with expansion plans from its Phoenix hub, even if it merges with Northwest, and will add additional flights to Latin America and Asia. Even though some hub flights could get realigned, most international flights in the two carriers' networks will not get shifted. There will be some small adjustments, but most of the hubs, even if they lose some of their regional service, will likely maintain many of their international flights because they offer convenience to business travelers.

This also speaks to the question of alliances. Northwest is part of the SkyTeam alliance, while US Airways is part of Star Alliance. It appears that if the two carriers merged, they would probably join SkyTeam. The main reason for this is the very close marketing and codeshare alliance between Northwest and KLM, two large SkyTeam members. Through this partnership, Northwest passengers gain terrific connectivity to destinations across Europe through KLM's Amsterdam hub, allowing customers to reach destinations they couldn't easily reach with other carriers. Northwest and KLM have received antitrust exemptions on certain transatlantic routes through their partnership, and both seem eager to continue the deal, which has resulted in higher yields due to less competition. If Northwest were to discontinue its SkyTeam membership, it could be very difficult for Northwest to continue its KLM alliance, and instead KLM could choose to partner with one of Northwest's competitors, such as Delta or Continental, both of which are also part of SkyTeam. Since Air France, which is under the same corporate umbrella as KLM, is a major Delta partner, a Northwest/US Airways deal could threaten these precious alliances, and force Air France/KLM to choose whether to maintain close relationships with either Delta or Northwest. Even if the combined Northwest/US Airways were to remain a member of SkyTeam, it could lose the close affiliation it has with KLM and only have the looser frequent flyer affiliations that SkyTeam affords. But, those affiliations are still important, and probably better than those offered by Star Alliance.

Another advantageous asset for the combined company are US Airways' slots at LaGuardia and Washington National. Having slots at these airports will allow the combined carrier to offer a greater frequency of flights than other carriers to critical business destinations, and better serve high-yield travelers. With higher fares imminent, especially for business travelers, this will bode very well for the carrier.

Fleetwise, the big focus with all mergers, and this one is no exception, is about removing regional jets (particularly 50-seaters and below) from aircraft fleets, as well as older, less fuel-efficient mainline aircraft. Like I've mentioned before, Northwest's DC-9s will probably see some sort of accelerated retirement in a cost-cutting deal, but given the size of Northwest's DC-9 fleet, that clearly won't happen for at least several years. Regional jet flying, from Mesaba, Mesa, and other contractors could be reduced. On the chopping block are some of Northwest's CRJ-200s, as well as some of the contracted flying done for US Airways. Turboprops will probably be kept in most cases, since they're more fuel efficient, though turboprop (and especially 19-seater flying) could be reduced by some regional partners, who often operate these flights at a higher risk than their regional jet contracted flying. The reductions in this kind of service will likely depend on what sorts of hub route realignments take place.

Northwest may continue to take delivery of its 787 planes, even though it means the combined carrier could have unnecessary redundancies. In the depth's of US Airways' financial hell several years ago, the carrier received a $250 million loan from Airbus, in exchange for the company agreeing to purchase new A330 and A350 (the competitor to Boeing's 787) aircraft. When the combined carrier receives delivery of these planes, they could become a burden because the two fleets overlap and will generate extra costs. However, depending on Airbus's delivery timetable for the A350, this could be seen as an advantage. While many US carriers wait several years to receive their 787s from Boeing (even more so given the recent production delay announced by Boeing yesterday), which has tightened its production capacity to minimize cost, a Northwest/US Airways combined company could be receiving aircraft from two streams, increasing its ability to provide international service quickly at a lower cost and get a jump on the competition. While this advantage may be short-lived, it could be significant, depending on when the company receives these aircraft, when its competitors receive their planes, and what happens to oil prices in the coming years.

The one major area of difficulty that this merger has is what will be done about the labor situations at both carriers. Employees at both Northwest and US Airways have just cause to be angry at their management due to past failings, and unfortunately, a merger will lead to additional job cuts. What cannot be done, however, is treat employees in such a manner that hurts them more than what is inevitable. For instance, after the US Airways/America West merger, many US Air pilots were very upset by the way the two seniority systems at the companies were integrated, partly due to the questionable decision of an arbitrator. It left the pilots angry, and a similar incident cannot happen again if this merger occurs. Management at both companies need to ensure that the two sets of employees reach amicable conclusions.

But more importantly, they need to do a better job of showing that job cuts are necessary and will not be for temporary financial gain. Job cuts need to be justified, and management needs to make sure that they recognize the importance of providing solid customer service as well as supporting the bottom line. When US Airways had a major fiasco a couple years ago with an inability to process bags at Philadelphia due to a staff shortage, the airline quickly added several hundred additional staff. Those kinds of things can't happen, especially when customers are so irate at the service they're receiving and employees are worried about job security. Quick spurts of hiring and firing need to be smoothed out to give greater consistency and predictability to customers and employees.

Fortunately, if this merger is proposed, it will likely encounter far fewer regulatory hurdles than other potential deals. US Airways and Northwest are both smaller carriers than Delta, making the merger more palatable to regulators. A merger would give the combined carrier a market share not much larger than the current largest carrier, American, instead of a potential Delta/Northwest deal which could make the combined carrier substantially larger than any unmerged competitor. If Congress plans to put up hurdles to merger deals, then a Northwest/US Airways deal may be one of the few deals that can be approved. The merger would offer tremendous benefits particularly for US Airways, which is at risk of losing out in the current merger frenzy, since it's the smallest of the legacy carriers, by linking it to a carrier which can cover the service gaps it has in the Midwest, as well as internationally. Meanwhile, Northwest would get a carrier with a lot of capacity in attractive markets, particularly on the East Coast, as well as additional aircraft to help the company grow. While this deal is less talked-about than a potential Delta/Northwest deal, it would probably be a better matchup for both Northwest and US Airways than a Delta/Northwest deal, but whether it will ever get proposed, given the increasingly advanced state of Delta/Northwest merger talks, is up in the air.

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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.

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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How Changing Airline Demands Will Transform Regional Jet Utility

Now that Midwest Airlines and ExpressJet have made new commitments with regional jets which differ from traditional hub-small market routes, other airlines may have to be more creative with how they deploy their regional jets (or those of the regional lift providers they contract with). Airlines have been cutting regional jets from their fleets, specifically 50-seat and below jets, in an effort to cut costs. 70-seat regional jets, however, are still popular with airlines because they have better economics than 50-seaters, and it's unlikely many will be redeployed in the next couple years. Many of the 50-seat and below regional jets which remain will be used to fly traditional hub-small market routes which are still profitable, even with high fuel prices. However, some of the jets may also be used to start new point-to-point routes, similar to what ExpressJet is doing. Regional jets are well-suited for a couple of applications which will become more important to revenue-conscious airlines in the coming years.

First, regional jets offer a good way to deliver small amounts of capacity to in order to facilitate connections at focus cities. For example, Delta is building their Los Angeles operations, and has been adding an increasing number of flights to Latin America. And while Delta has a sizable operation in Los Angeles, and nonstop flights from LAX to many cities, particularly on the East Coast, Delta has stayed away from competing with the three big boys on the West Coast routes, Alaska, United, and Southwest. But Delta announced new regional jet service to begin June 7 from Seattle and Portland to Los Angeles. The new service will be operated by the former Delta subsidiary ASA (now part of SkyWest Airlines). Both flights depart early in the morning and return in the evening, timed perfectly for connections. Why did Delta add these flights on a regional jet which is far more inefficient to operate than a 737 which Alaska, United, and Southwest all operate? Primarily in order to facilitate connections at LAX for Latin America flights. Delta recognizes that in order to be successful on any route, it needs to maximize the amount of potential traffic that can utilize it. And while LAX has a lot of origin and destination traffic which will help sell tickets, O+D traffic alone won't fill planes. But LAX is a poor connection location, particularly on Delta's route network, since most of Delta's services from LAX are to the East Coast. With Delta's large Atlanta hub, passengers on the East Coast can easily connect to most of the same Latin American destinations they serve from Los Angeles nonstop from Atlanta. These passengers don't need to travel to Los Angeles. And so as a result, Delta needed to find ways to get passengers onto their LAX-Latin America flights, and connections to the Pacific Northwest made perfect sense. Delta isn't trying to compete for market share with Alaska, United, and Southwest on the Seattle/Portland-LAX route, that would be lunacy with a 50-seat regional jet. Delta is simply using some regional jets which would otherwise sit empty on the ground to expand their route network and to gain market share on routes to Latin America. The regional jet flights themselves may not be profitable, but Delta should make money because most of those passengers who travel from Seattle or Portland will continue on to Latin America, enabling Delta to charge a higher fare and make a profit overall. Finding niche applications for regional jets can be tough, but Delta's idea to use the aircraft to add capacity between large markets in order to facilitate connections should work well, provided there is sufficient demand for travel to Latin America, especially during the upcoming hurricane season.

Secondly, regional jets can also be used for starting point-to-point service, in the spirit of ExpressJet, to build up service from various markets. The excellent characteristic about regional jets is that they can be used to quickly build up service in a market to gain market share, and can be used to operate nonstop flights to many different cities, although its costly to do so, especially when competing against an airline using mainline aircraft. For example, in a city such as Omaha, regional jets could be used effectively by a lift provider contracting with a major airline to add service to a variety of cities unserved by mainline carriers. Service from Omaha to cities such as Seattle, Portland, San Jose, Austin, Raleigh-Durham, Indianapolis, and Richmond could enable an airline such as Northwest to build market share in Omaha without using precious mainline aircraft. Granted, Northwest would probably sell tickets at a premium to other airlines offering connecting service, but it would offer loyal customers more options for point-to-point service. And since those who are most likely to need nonstop service are business travelers, who already pay a premium for tickets, it could be a win-win situation, provided routes are carefully selected, and flights are timed to the needs of business travelers. This kind of service wouldn't facilitate many connections, it would simply offer nonstop service where none currently exists. Actually, Northwest has tried something similar to this in Milwaukee and Indianapolis, with mixed results. Both of those cities lacked nonstop service to many major business markets, and Northwest filled some of the gaps with mainline aircraft (mainly 100-seat DC-9 planes), and other gaps with 50-seat regional jets. Northwest has continued some of the routes, but had to cancel some as well. Unfortunately, Northwest tried to do to much in both markets. Northwest has had to pull most of its point-to-point flights out of Milwaukee because Midwest Airlines offered competing service with a better product than Northwest at a competitive price. Consequently, Midwest was able to dominate many of the point-to-point markets Northwest entered. Northwest's Indianapolis operations have been more successful, and the airline has retained many of its point-to-point flights from that city. If Northwest or any other airline wants to use regional jets to build market share, they need to do it in a location which is relatively free of competition on nonstop routes, and which offers the traffic levels to sustain point-to-point flights to multiple destinations. There are markets out there which fit this description. Omaha is only one example; Colorado Springs, Lexington, and Buffalo are all examples of markets which could benefit from the introduction of regional jet point-to-point service.

These are only two examples of how airlines can try to redeploy 50-seat and below regional jets. If airlines can find the right niches for these planes, then they will find a new life, because while their economics may be poor, there are still markets and routes where a regional jet is required and where that level of capacity isn't a competitive disadvantage (as many airlines with bloated regional jet fleets are now finding), but rather a competitive advantage. Airlines may find that because regional jets enable them to closely tailor capacity to market demands and to grow focus cities and other markets slowly, they will become assets. But, airlines must ensure that the routes they do start will be able to sustain themselves with higher fares, so airlines won't have to have sell seats at fire sale prices like Independence Air, an expedient way to failure. Airlines that fail to find ways to effectively redeploy their regional jets will find them increasingly costly and burdensome.

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Is Midwest’s 50-Seat Plan Really Aimed to Stabilize the Airline?

Midwest Airlines launched new flights today on 50-seat regional jets, operated by SkyWest Airlines. Midwest decided to launch the new service supposedly in response to demands from customers for new and expanded service from Milwaukee. However, Midwest's launch of 50-seater service comes at a time when no other American airline wants to even contemplate new 50-seat regional jet service; the planes are simply too inefficient for their needs. However, Midwest is an airline that is not only expanding, it's also one that's in the midst of a turnaround to profitability, and the company has demonstrated that it can turn itself around, as Midwest reported profits of $5.4 million last year. The 50-seat regional jets will supplement (but not replace) regional aircraft already flying for Midwest, making some routes cheaper to operate, since a 50-seat aircraft is cheaper to operate per passenger than the 19- or 32-seat aircraft which are currently flying for Midwest. However, regional jet flying, especially on 50-seat and below aircraft, seems to be a threat to any airline's profitability, even with trimmed costs. Midwest is one of the few US carriers that can command a price premium for its services, and its new regional jet service will offer convenience to business travelers who now won't have to connect to fly between certain markets. However, even with that price premium, regional jet flying is still a very risky, low-yield business, and Midwest is gambling that regional flying isn't dead. They may be right, and the shift in how airlines view regional jets may help Midwest. More and more regional jets are being placed on routes, not to small markets, but between intermediate and large markets which lack significant or any nonstop service. ExpressJet is testing whether this model will work, and whether business travelers are willing to pay a premium to fly nonstop. Midwest seems to be doing the same thing too, after all, Midwest's first routes with the jets will be service to large markets. Midwest's 50-seat planes will fly first from Milwaukee to Columbus, Ohio, as well as supplement existing service between Milwaukee and Minneapolis/St. Paul as well as Philadelphia. With the recent rise in airfares, this makes perfect sense, as regional jets are a convenient and flexible, albeit expensive, way for airlines to add capacity in small doses. This way, Midwest can slowly gain market share on routes to and from Milwaukee and become a more significant airline in the Midwest and East Coast.

However, there may be ulterior motives to Midwest's recent regional jet expansion. The expansion may be geared in part to stave off a takeover bid from AirTran Airways. Even though activity surrounding AirTran's takeover bid has died down in recent weeks, AirTran is trying to keep the bid very much alive, even if the takeover takes years to accomplish. AirTran has been mum about what exactly it would do with Midwest's regional operations if it were to take over the airline, however, it's likely that AirTran would eliminate certain, more costly, parts of Midwest which deviate from AirTran's core business model. Midwest's baked-onboard chocolate chip cookies may stay, but some of Midwest's regional routes and some of their older aircraft will likely be eliminated. But by adding new service that Milwaukee travelers will use, even if it's not very profitable service, Midwest can attempt to diversify itself enough such that AirTran will either lose interest in Midwest, because the compatible synergies between the two companies will not be sufficient to necessitate a takeover, or, if AirTran is still interested in a takeover, it will be more difficult for them to eliminate elements of Midwest they don't find suitable. It remains to be seen whether Midwest's 50-seater service will succeed, but Midwest's definition of a successful regional jet operation may be very different from ExpressJet's. For Midwest, successful service won't necessarily make money, but it will likely delay AirTran's takeover efforts.

Midwest's 50-seat regional jet operation raises some important questions about the future of third-party regional jet contractors, including SkyWest and Mesa, and whether their planes may have new missions, now that higher fares and growing demand from business travelers for nonstop service may necessitate expanded 50-seat regional jet service from some airlines. This industry is facing consolidation, and it's possible that further consolidation could ensue if Delta spins off its regional subsidiary Comair, whose fleet is primarily composed of 50-seat jets, before Delta's April 30 date to exit Chapter 11 bankruptcy protection. But I plan to discuss more about this next week, so stay tuned.

There are two interesting articles related to this post, one article about AirTran's plans to nominate three candidates for Midwest's Board of Directors at their upcoming annual meeting in order to gain influence over Midwest's business decisions, and another article about AirTran's attempts to purchase a strip club near the Milwaukee Airport from Midwest. (I lack the creativity to write a funny April Fools article on Airline Bulletin, but these writers do a good job).

ExpressJet Announces New Service Under an Independent Banner

Yesterday, ExpressJet announced that they plan on commencing service under an independent banner to cities in the West, Midwest, and Southeast that lack sufficient point-to-point service. This is something I believed would happen for a long time now, because ExpressJet can't commit all of the 69 regional jets they released from Continental to corporate charters, the business that 15 of these jets are currently dedicated to. While ExpressJet hasn't released details of new routes, they did announce that the 50-seat ERJ-145 regional jets would be equipped with XM Satellite Radio and the new airline would offer advanced seat assignment as well as complementary snacks and meals on longer flights. Customers can start booking tickets on ExpressJet's Web site starting February 1. I predict that many of these jets will be allocated to markets that need nonstop point-to-point service to cities on either coast. For example, Omaha, Nebraska is a large enough market to be a Southwest city, but they lack nonstop service to some important markets. Omaha, like many smaller or midsize cities in the middle of the country only has service to hubs and lacks nonstop service to many large cities on the coasts which are popular destinations. For example, Omaha lacks nonstop service to Seattle/Tacoma, San Francisco (or nearby Oakland or San Jose), Los Angeles, San Diego, Miami/Ft. Lauderdale, Orlando, Tampa, and Boston. Customers who want to access those cities must connect through a hub. If ExpressJet's new airline opened service to Omaha, they would certainly face stiff fare competition from Southwest and others in the city. The regional jets that ExpressJet operates are more expensive than 737s to operate per passenger, so ExpressJet will need to charge more than other airlines in order to profit from point-to-point service. ExpressJet seems to understand that reality, and is creating a premium product on their small aircraft with entertainment, assigned seats, and free food, amenities that top what most carriers offer these days. Business travelers and others who want to save time would be willing to pay a reasonable fare premium for nonstop service to major business cities. However, ExpressJet's new airline isn't going to offer point-to-point service to every unserved market because many leisure markets can't sustain airlines that charge fare premiums. Boston or Los Angeles are more likely candidates for new service than Orlando. However, ExpressJet may also try to start point-to-point service between markets that have enough traffic to sustain a nonstop flight, but don't have much low-fare competition. Omaha may not be an ideal market for ExpressJet's new carrier to start service in because it's large enough to have significant low-fare competition which could be too more competition than a small airline can handle, however, it is attractive if ExpressJet can tap into a pool of customers who will pay more to fly nonstop. If ExpressJet can do that successfully in Omaha, they will make a lot of money there.

There is one market that ExpressJet's new airline will eventually serve that has been craving for any new service whatsoever for years and years. Wichita has tried to lure new carriers to the city, offering incentives to low-cost carriers such as AirTran to commence new service to the city. However, ExpressJet's new airline could serve major markets on both coasts nonstop from Wichita. Wichita lacks nonstop service to some major business markets, including New York, Washington DC, and Los Angeles. ExpressJet could fill this void in Wichita's service, provided that there exists a sizable contingent of travelers in Wichita and elsewhere who are willing to pay a small premium for nonstop service. Omaha and Wichita aren't the only markets that could support nonstop ExpressJet service. Other potential markets that are the right size and in the right location for ExpressJet's new service include Oklahoma City, Tulsa, Colorado Springs, Huntsville, Mobile, El Paso, Des Moines, Lexington, and others. Currently, ExpressJet is hiring station managers in some of these cities as well as others like Boise, Fresno, Bakersfield, Monterey, Jacksonville, New Orleans, Spokane, and Tuscon. Look at ExpressJet's recruitment Web site for an idea of where the company is hiring people. Many of the jobs listed on the recruitment site are in cities the company already serves with their Continental lift contract, but many of the cities are new, including some of those listed above, suggesting those are markets that ExpressJet's new airline will expand to. ExpressJet's focus may not be larger business markets, or these markets listed above may simply be focus cities like Omaha or Wichita that ExpressJet will expand from to larger cities. ExpressJet will not be able to serve cities on the West Coast from focus cities in the East, or cities on the East Coast from focus cities in the West due to range restrictions with their regional jets, but ExpressJet will still be able to fill a much needed void in service from their focus cities, even if they can't serve all the major unserved point-to-point markets from a given focus city.

ExpressJet is taking a very bold step with their new service. Like Atlantic Coast Airlines, the former parent of the now defunct Independence Air, ExpressJet has seen that there is a shakeout coming in the regional lift business. ExpressJet, with their higher-than-average lift rates charged to carriers such as Continental, was one of the first major victims of this new reality. But instead of diminishing the size of their business by returning their subleased jets to Continental, they decided to continue leasing the 69 jets that would no longer be under the Continental capacity purchase arrangement at higher rates. This is a very bold step, and must be commended by the company's shareholders. Unlike Atlantic Coast, however, ExpressJet isn't betting the farm on one new venture, most of their jets are still flying for Continental at profitable rates, and ExpressJet has also started a corporate charter business that has been successful thus far. ExpressJet is trying to diversify itself in order to survive a shakeout in the regional lift business, just like Atlantic Coast tried to. But, we can only hope that ExpressJet has learned from the mistakes of Independence Air. Independence Air tried to be a low-fare airline with high-cost aircraft, a sure way to lose money quickly. ExpressJet needs to charge higher fares because they operate aircraft more costly to operate, so they must justify to customers that they should be paying higher fares with upscale amenities and point-to-point service. ExpressJet should be able to succeed but if and only if it can charge a fare premium. ExpressJet's new carrier will not be a low-fare airline, it simply can't be if it wants to make money, which means that ExpressJet will need to choose its markets carefully. A market like Omaha may be too big with too much low-fare competition, but a market like nearby Lincoln may lack sufficient business travelers. There is a fine balance in what markets will be appropriate for the new carrier, but if it finds successful markets, then the new airline could develop customer loyalty in small markets and make plenty of money. ExpressJet has experience working with one of America's most business-friendly airlines, Continental, and has experience offering excellent service and amenities to passengers. This experience will be valuable for ExpressJet's new carrier in implementing their product successfully. ExpressJet's new carrier should be looked upon by other regional lift providers, because it's an experience that they could learn from, should they ever need to diversify their businesses and redeploy a sizable portion of their fleets.