How Short-Sighted Management has Seriously Damaged the Industry (and some solutions on how to remedy this).

Editor's Note: I've been a bad blogger lately, and I apologize to my loyal readers. I haven't had a substantive post since May, and now we've reached August. How time flies! While I hope to post more often, the nice weather might prevent me from getting more work done on the computer, so posts may be less frequent than desired for the next few weeks. Also, I hope to post selected pictures of my Ecuador trip soon.

The airline industry has problems that no other industry does. For some reason, the airline industry has difficulty adequately matching capacity with demand, and as a result, business cycles and unexpected turns of events seem to hit the airlines much harder than other sectors. There are many reasons for why this may be true. But first and foremost, airlines offer a product that is both essential to the economy, and is one that is constantly in greater demand. Low-fare carriers have succeeded because they have been able to reduce the cost of air travel for those who otherwise couldn't afford it. Ryanair, which has succeeded in reducing fares more than any other carrier, has seen extraordinary growth, because people simply cannot get enough of air travel. After purchasing one car or cell phone, a consumer may have all he or she needs of those products for several years. It's much harder to increase milk sales by lowering prices than it is for airline tickets.

Consumers have limitless opportunities to fly, and airlines have succeeded in convincing them that it's a good use of money, partly because it's more convenient and comfortable than other forms of transport. Nevertheless, as costs rise, this myth will be shattered. Americans will still want to fly, but it will require more and more money. What airlines will hopefully realize is that they will be more profitable companies by offering fewer flights, targeting business travelers and those who are willing to pay for it. Capacity reductions are already starting to come into place that would help achieve this, but it could be too little, too late. Fuel prices have reached such stratospheric levels that most major US airlines will likely burn through their cash reserves in the next few years.

As legacies are at a substantial cost disadvantage with the hedging Southwest, instead of targeting their core customer base, their most frequent flyers, and improving their service, legacies have eliminated many of the perks that these travelers have come to expect, in the name of revenue generation. Known as "unbundling" it's a strategy that Ryanair has perfected (to the ire of much of Europe's flying public), by charging for many services that airlines offer, aside from the flight itself. Charging for checked bags, food, pillows and blankets, and anything else that isn't bolted to the cabin, seems to be the trend. In fact US Airways' new policy is to charge for all beverages onboard. This will even keep free water out of the hands of passengers, except in cases of medical emergency; bottled water and sodas onboard now cost $2.

Yet the fact of the matter is, some of these charges are overreaching, offering airlines far more in bad press than new revenues. Airlines need to maintain their reputations, and they need to maintain low fares. This is the dilemma that carriers face. Yet if carriers adopted a better yield management system, I suspect it could generate just as much, if not more than some of these extra charges. That means offering more deals at the last-minute to fill seats (but making them restrictive enough to prevent their usage by business travelers, whom the airlines need to pay full fare). If airlines aggressively move to fill seats on less popular flights, targeting flights individually, and ensuring that the plane will be as full as possible, additional revenues can be created. It also means further reducing frequent flyer award seats on popular flights, to allow more room for paying clientele. Moreover, increased overbooking, when possible, should be practiced to better fill seats. All these moves will likely be bad for passengers, but they won't deliver the continuous negative publicity that these fees seem to generate. They also will not interrupt the onboard service experience that passengers demand. Airlines are already working these angles, but let's face it, filling one additional seat on a plane at $100 could cover 50 $2 soda sales; they can do more.

Some might argue that the "unbundled" strategy airlines are adopting is what customers want. I don't buy that. Skybus' demise proved that the completely unbundled model cannot work in the US, at least with the high fixed costs that airlines currently face. Yet that seems to be the model many legacies are now replicating. There are services many airlines used to offer (and that a few still do) that weren't being effectively utilized by customers, and there was a great deal of waste. Some examples were airline meals and restrictions enabling customers to check two or even three pieces of checked luggage free of charge. Everyone was paying hidden costs in their ticket prices for services that a select group of customers was taking full advantage of. These are services that should be charged for. By most accounts, after US carriers started offering buy-on-board meals, fewer people ate onboard, but the food was of a better quality.

However, other services, including one free checked bag, snacks and drinks onboard, and free booking of award tickets (without some of the surcharges that certain carriers have recently imposed) should be things that all US legacies offer. These are basic comfort and service amenities that airlines need to retain loyal customers. Frequent flyer award tickets are hardly free if customers must pay to redeem the miles. Spirit and Allegiant will always be the deep-discounters in their respective markets, and charge for everything, but those carriers that are shooting for higher yields need to offer more services included within the ticket price.

True, airlines have yet to impose many of these charges on their most loyal customers, with high elite status or those paying full-fare. But it's not merely the charges themselves, but rather the impression they create to customers, that may hurt loyalty, even with customers unaffected by the charges. Continental, for instance, has resisted adding fees for a number of services. This is in part because of the company's concerns that they could disrupt operations, both on the ground, and in the air, as those passengers affected by the fees resist the changes, causing potential delays or turmoil in the cabin, affecting everyone's experience.

The ability of airlines to cut costs in this environment is rather minimal, without shrinking the size of their businesses. Instead, airlines need to focus on better yield generation. That does include some of the charges being proposed, but it also includes fare increases, and a concentrated effort to fill planes during less-traveled periods. The unbundled strategy has gone too far, and the reputation damage has been done. Airlines need to be extremely cautious going forward about adding additional charges, because discretionary air travel will decrease if the experience becomes too painful, and business travelers will be more willing to consider other options of transport (or conducting meetings).

Airline Bulletin is Back; Two (Re)emerging issues in the Airline Business

I have returned from Ecuador (and will try to post a few pictures within the next few days). In the coming days and weeks, I hope to shine a wee bit of light on some of the controversial issues in the airline industry. Upcoming posts may include Why Widespread Panicking is a Bad Idea, Why Most Airline Managers are Idiots, and Why Most Airline Managers are Idiots (Part II). Poor business decisions helped get the industry into this mess, but that doesn't mean ingenuity and the right decisions can get us out of it.

But to begin, I want to examine a couple of key issues that may emerge in the public debate over the next few months. The fuel issue has obviously dominated the press headlines lately, and justifiably so. However, the severity of the fuel crisis will spur ancillary difficulties for carriers, and the nation, as carriers run out of fuel savings, and begin to turn to the government for help.

Subsidies
If airlines continue to hemorrhage cash at current rates, many will run out of cash later this year or sometime next year. As a result, one of the most important issues facing the nation with regard to airlines, is not necessarily how to curb rising oil prices, but how to save the vital airline network that binds our nation together. After 9/11, the airline industry was provided with a government cash infusion to help stave off more trouble, as well as loans to specific carriers to help them survive. Once again, the government may have to intervene, and as cash reserves run lower and lower at many of the nation's top airlines, this issue will become increasingly pressing to politicians, not to mention presidential candidates. Even though corporate subsidies are increasingly unpopular, especially in the wake of the unjustifiable tax breaks that continue to be given to big oil companies, even while reaping record profits, another subsidy infusion may be necessary to the nation's airlines. However, what might be better than a cash infusion, is instead a fuel subsidy that helps limit the exposure airlines have to volatile oil market prices. This could be done by setting a ceiling on prices that carriers pay, and having the government cover the remainder, or by offering a government fuel subsidy per passenger mile. This is far from a perfect solution, as it could disadvantage carriers like Southwest who are less exposed to the volatile oil market, but it would help protect the industry as a whole from its number one enemy at the moment.

Re-regulation
Another issue stemming from high fuel costs is the possibility of some sort of re-regulation. One of the things the airline industry has struggled with since deregulation, unlike many other industries, is the constant struggle of price wars. The airline industry has seen a plethora of new entrants in the past 25 years, and most of them use low fares to draw away customers from the large, network carriers. While competition has its advantages, most notably when Southwest starts service from a new city and lowers fares, it can have very adverse effects when a new entrant enters and relentlessly offers loss-leading fares as a way to drum up new business. Skybus was a prime example of this, using it's lowest fare classes as loss-leaders to help fill planes. Some observers have suggested re-regulation as a way to prevent carriers from offering fares that are simply too low.

Robert Crandall, former CEO of American Airlines, has suggested the idea of a minimum fare threshold on routes, that would help prevent destructive fare wars. Other avenues of re-regulation have the potential to benefit carriers, such as limiting the number of carriers on very high-traffic routes, but in exchange for those carriers operating less popular routes to help appease the demands of airports and the business community. But a full re-regulation of the airline industry is less likely. As Northwest Airlines CEO Doug Steenland said at a recent Merrill Lynch conference "Anybody who looked at re-regulation seriously, I think, has concluded that the genie is out of the bottle, and I don't think it can go back in."

As airlines struggle more and more against the tide of rising oil prices, especially in the fall and winter as the busy summer travel season dies down, more and more discussion will take place about increased government involvement in the industry, either through subsidies or through re-regulation. Aviation is a crucial linkage in our nation's fabric, and the government will do what it takes to preserve it, regardless of which party is in power.

Skybus Shutters...

Skybus has become the third LCC this week to fail. The carrier's Board of Directors announced late Friday that due to high fuel costs and a slowing economic environment, the carrier will cease operations effective April 5. The company expects to file for Chapter 11 bankruptcy protection on Monday. While this author isn't surprised at the ultimate fate of Skybus, given that the carrier was predicated on a faulty business model which simply couldn't bring the necessary yields in this type of environment, he is surprised that its collapse happened so soon. Skybus had $160 million in startup capital and burned through much of it rather quickly. However, the carrier still had a fair amount of cash on hand and likely could have continued operating for many months, but its investors probably realized that the company simply couldn't succeed given these market conditions and decided to pull the plug before the losses mounted.

The fact that Skybus decided to stop flying now is a bad sign. The carrier was going to fail, but for it to go under so soon makes me concerned especially about Virgin America, and how willing its investors are to endure the same kinds of initial losses that Skybus, or any new airline for that matter, faced. In this high fuel cost environment, the initial losses any new airline faces will be much greater than under more typical circumstances, and it simply may not be worth it to investors to try and ride out the storm. Virgin America has a much better business plan than Skybus, and is taking the right steps for success, but it's unclear whether the company's yields are sufficient to cover its increasing costs.

What will this mean for customers? Aside from the end of $10 one-way flights, it will mean fewer options to most consumers. The most significant effects may be felt in Skybus's focus city markets, Columbus and Greensboro. These markets will see a reduction in service, and in Greensboro, there is little hope of immediately filling the void. Raleigh and Charlotte have sufficient low-cost service, and the demand simply isn't there for another LCC to step in and replicate Skybus's level of service in Greensboro. It's possible that JetBlue or AirTran could eventually enter the airport, but the service those carriers would offer would be rather limited (service to JFK, Atlanta, and Florida). Columbus, on the other hand, is well-served by Delta and Southwest. While customers may not be able to find the very discounted fares Skybus offered, they will still find cheap fares, relative to other airports in the region, in particular Cincinnati.

But in some cases, fewer flight options may mean no flight options. Skybus's departure will be devastating to airports where the carrier was the only commercial airline serving the airport. Punta Gorda, St. Augustine, Gary, and others are unlikely to see any immediate replacement for Skybus's flights. This isn't a huge problem for most consumers, since low-cost carriers serve larger airports near the minor airports listed above, such as Jacksonville, Fort Myers, or Chicago Midway. But for the airports, some of which offered hundreds of thousands of dollars in incentives to Skybus in order to lure the carrier to their facilities, it will be a major blow.

Customers seeking information on how to obtain refunds or about flight cancellations should consult the Skybus Web site.

In a post tomorrow, I'll discuss some of the potential solutions to this oil mess. These airline failures can't keep happening, because while small carriers may get destroyed, over the long-term, even the legacies with large cash cushions could get in trouble. And the last thing Congress wants to do is offer another giant bailout to the airlines...

Low-Cost Carriers Making Cuts To Deal With Record Fuel Prices

Yesterday, you heard about the steps that legacy carriers may take to reduce fuel costs. Low-cost carriers have a business model that's predicated on growth, and so unlike legacy carriers, which are essentially shifting capacity, but not growing, or even slightly shrinking their respective companies, AirTran, Southwest, and JetBlue are all looking to grow, but at reduced rates. Moreover, all seem to be working on additional revenue sources in order to pay for higher fuel costs. Southwest has added its Business Select fares within the past year, offering business travelers increased flexibility and amenities for a price. JetBlue announced yesterday that it would charge $10 to $20 more for seats with greater legroom. But the larger LCCs in the US aren't looking to add some of the charges that LCCs abroad are offering, including charges for all checked luggage, airport check-in, and assigned seating/priority boarding. Unfortunately, many LCCs in the US don't have the ability to do what they really need to do which is to diversify their operations and make themselves into carriers that can serve more types of passengers on higher-yielding routes.

Of all US LCCs, JetBlue is by far the best positioned to do this. The carrier, with a recent investment from Lufthansa, has access to strategic partnerships with foreign carriers that many other LCCs don't, due in part to JetBlue's dominant position at JFK. While the second phase of the Open Skies treaty may dilute this advantage, as foreign carriers may not need to rely as much on JetBlue to offer feeder services, since they'll be able to offer US domestic service themselves, for the time being, this position allows JetBlue to potentially increase its revenue with interline booking arrangements. Moreover, JetBlue is working on expanding its own international routes, especially in Central and South America. The carrier announced yesterday that Orlando would become a focus city, and this will help facilitate JetBlue's expansion to Colombia, as well as additional Caribbean islands. JetBlue will offer serious competition to American and Spirit in the region, and allow the airline to get a greater share of the growing, and profitable Latin American and Caribbean markets. Southwest and AirTran are also examining the possibility of international flights, but these carriers seem to be less positioned to offer extensive international service right now. Both of these carriers will likely offer international service soon, but probably to a lesser extent than JetBlue or Spirit.

Finally, unlike any other US LCC, except perhaps Frontier, JetBlue can command a small price premium for its product, because the carrier has an attractive brand with many amenities and high-quality service, allowing the company a little wiggle room in terms of costs that other carriers lack because they can't sell their product above the market rate. Even a $5 or $10 premium on tickets can make give JetBlue a tremendous financial advantage over competitors in this market.

While JetBlue may be in an advantageous position, Skybus is not. While Skybus will also be reducing its growth rate, that carrier also plans to shift its capacity and growth to routes with shorter flight times, higher load factors, and higher yields. Skybus has had difficulty of late because high fuel prices and low passenger numbers. As a result, the carrier is delaying its expansion, cutting some loss-making routes like Chattanooga, Tennessee, as well as planning to announce its new focus city next year instead of later this year, and focusing on high-traffic markets such as Florida. While this author disagrees with much of Skybus's strategy, the carrier is making some of the right corrections it needs to. However, this may be too little too late, and Skybus could run out of money to fund its operations if it doesn't change its business model to a system that allows the company to charge higher fares. Skybus lacks any sort of pricing power, and must price its fares below those of other low-cost carriers as well as legacy carriers, because the company offers fewer amenities and a higher level of risk to consumers if their flight is canceled or delayed. With rising fuel costs, the cost discrepancies between a carrier like Skybus and a carrier like Frontier are shrinking, as airport, labor, and amenities costs, all of which Skybus has trimmed, become a smaller portion of a typical airline's cost base. Both Skybus and Frontier have to pay roughly the same price for fuel, but rapidly-rising fuel costs make up a greater portion of Skybus's costs than Frontier's, yet the value that customers receive from one carrier is very different from the value they receive from the other. Skybus will need to remedy this by offering additional amenities if it wants to continue to survive.

However, Skybus is not the only carrier that will need to make changes. In the coming months, additional LCCs will likely add more ancillary revenue programs in order to help offset fuel costs. LCCs are not in the advantageous position they were a few years ago, in many ways, they are currently at a disadvantage to legacy carriers, and as evidenced by some of the changes Southwest has already made, even the stalwarts are feeling pressure to change in order to survive.

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How to Get $10 Seats on Skybus

Several readers have asked me the best way to get $10 seats on Skybus, so here is a quick primer about getting the best deal on Skybus.

The first thing travelers typically think of when they hear the name Skybus are the $10 seats that the carrier sells on each flight. But, the supply of those fares is very limited, and often travelers are unable to find any deeply-discounted seats.

Does Skybus actually offer $10 fares, or is this just a myth?
Yes, in fact Skybus actually offers 10 seats on every flight for $10 each way excluding taxes and all the extra fees the airline charges for services such as checked luggage, food, and priority boarding.

What extra fees, you mean there's a catch to this?
Well in fact, Skybus charges the same fees to passengers regardless of the ticket type they purchase, so a $10 ticket holder would pay the same fees as a $200 ticket holder. Skybus charges passengers for many services that would be complementary on other carriers, such as checked baggage ($5 for the 1st and 2nd bags and $50 for each additional bag) and priority boarding ($10 per one-way flight). Also, if you want any food or beverages on the flight, you'll need to pay for them. However, none of these fees are mandatory. If you only bring carry-on luggage, don't purchase priority boarding, and don't purchase any food on the plane, you can avoid paying those charges.

How does one get $10 seats? I'm sure they sell out fast.
In fact, they sell out very quickly, often within hours of Skybus offering them. The best strategy is to sign up for Skybus's newsletter which alerts travelers with updates when the carrier announces new destinations or extends the period when seats are for sale, therefore adding many $10 seats on existing routes that were previously unbookable. Once you receive this email, you need to book your seats as soon as possible. Once you get to Skybus's Web site, the $10 fares on the best days may have already been snatched up (though typically, there are other low fares, from $25-75 available). Because there are a limited supply of $10 seats, dithering allows other travelers to snatch up those fares. It's as simple as that.

Is Skybus for real? Can I trust this airline?
Skybus is a relatively new carrier, but unlike other deep-discount airlines that have started up in recent years, this one is not a fly-by-night operation. The airline, extremely well capitalized with $160 million in start-up financing, is not disappearing anytime very soon. However, some analysts (including myself) doubt the long-term viability of the carrier, because the company is facing high fuel costs and has had trouble generating strong yields.

What about these alternate airports? How will that add to my travel costs?
In many cities, Skybus uses alternate airports, which are typically farther away from city centers and less well-served by public transit. Examples include Portsmouth, New Hampshire for Boston and St. Augustine, Florida for Jacksonville. There are advantages and disadvantages to using these alternate airports. Because alternate airports are typically underutilized, there is a lower risk of delays than at larger, busier airports, and it requires far less time to check in and walk to the gate. However, if the alternate airport is not in a convenient location, then you could spend a considerable amount of money to drive to the airport and pay for parking, all of which add up and need to be considered when calculating total travel cost.

What if something goes wrong? Will Skybus accommodate me?
Like many ultra-low-cost carriers, Skybus will do very little if your flight is canceled. Because the airline lacks reciprocity agreements with other airlines, you could be stranded if your flight is canceled. Skybus will typically only offer you a ticket on its next available flight, or a refund (which doesn't do much good if you only paid $10 for your ticket in the first place). And since there is little airline service from many of the airports that Skybus services, even if you try to purchase a new ticket on a different airline, you could be out of luck unless you go to a different airport. While Skybus is typically reliable, you should have a backup plan in case something goes wrong.

Are there other carriers like Skybus? Can I get $10 fares elsewhere?
The US carrier most similar to Skybus is Spirit Airlines, which offers most of its service from Fort Lauderdale to points along the Eastern Seaboard, the Caribbean, and Latin America. Unlike with Skybus, Spirit will only offer its very lowest fares on certain days, typically those with lower demand that are unlikely to have full flights. Spirit will sometimes even offer negative fares (where Spirit will pay a small portion of the taxes and fees associated with the trip, but still leaving customers with a bill for the remainder of the taxes and fees). But, there is a catch to this as well. Spirit typically offers these fares exclusively to members of its $9 Fare Club, which for an annual fee permits travelers to purchase deeply-discounted fares from Spirit, including free or virtually free tickets. If you don't want to pay the annual fee, Spirit still offers a range of low fares, as low as $1 in some cases. Like with Skybus, the best way to find out about Spirit's deals is to subscribe to their email newsletter, which alerts you to which routes and days have extra-low fares. Finally, if you see a great fare on Spirit, book it right away before someone else does.

How Low-Cost Carriers Should Approach the Impending Consolidation

While much of the attention surrounding the merger frenzy in the industry right now has centered on legacy carriers and their many possible combinations, low-cost carriers are also very much in the fray, and could be important instigators of consolidation. There are several reasons for this. The first is that many LCCs are seeing their costs rise after years of solid cost containment. Older aircraft, more senior employees, as well as rapidly rising fuel costs are challenging LCCs. At the same time, many of these carriers recognize that there is relatively little "fat" to trim. These carriers have minimized staffing, fuel, airport, and other costs, and unfortunately, unless they were to convert to a Skybus-style business model (which, even then, doesn't yield tremendous cost savings), can't pare their costs much more.

Second, many of these carriers are smaller than the legacy carriers they compete with (with the notable exception of Southwest). Smaller carriers often lack the economies of scale that larger carriers have, and the even larger legacy carriers that could be created after a merger frenzy will have economies of scale that LCCs will simply be unable to match.

Third, many of these LCCs recognize that their business model has limited growth opportunities. Point-to-point domestic routes simply don't cut it anymore. To attract travelers and keep expanding, airlines need to offer connectivity with smaller aircraft (such as with Frontier's Lynx operation, or Alaska's longstanding partner Horizon Air), or they need to offer additional international service (as JetBlue and Spirit are doing in the Caribbean). Legacy carriers will continue to expand the diversity of their networks, and low-cost carriers, with their obvious fleet and cost constraints, will struggle to match them.

At a time when international growth, not domestic growth, will lead to higher profits, many low-cost carriers need to seriously think about how to offer more service options to customers. Spirit and JetBlue are looking towards Central and South America, Frontier towards Canada and Mexico, and Southwest towards unnamed international destinations. But even with this expansion, it misses the big prizes of Europe and Asia, which LCCs, in their current form, will be unable to serve.

The question is, though, whether a low-cost carrier would merely get bought out by a legacy carrier, as is quite possible, given that certain legacy carriers could otherwise get left out of the consolidation frenzy (like American and US Airways), or whether two low-cost carriers would merge together. I would suggest that the latter option is less likely, but possible. Since many LCCs have distinctive cultures and brands that they want to maintain, as well as a low cost base, it would be challenging to find a pairing of low-cost carriers that fit together very nicely. While there are certain scenarios that would be possible in this regard, they are limited in scope.

One brief example: I think Aloha Airlines is good takeover bait for Southwest or even Alaska, since both Southwest and Alaska are interested in Hawaii expansion, all three carriers operate 737-700s, and both Southwest and Alaska offer considerable service to the continental US from the smaller West Coast airports that Aloha serves, such as Sacramento, Oakland, and Orange County. However, Aloha is a relatively small carrier, and the acquisition of it by Southwest or Alaska would do very little to reduce either company's costs and instead be more centered about expansion.

A buyout of a low-cost carrier by a legacy carrier, would, however, be a way to add capacity to the network of a legacy carrier, even though it could destroy the brand of the bought carrier. This scenario is imperfect as well, since legacy carriers are focused mainly on improving efficiencies and yields on international routes, not the domestic ones where LCCs chiefly fly. The acquisition of a low-cost carrier would be to a legacy carriers' minimal advantage, unless that low-cost carrier had a certain degree of market share or pricing power in a key market.

For instance, while neither of these scenarios are in any way likely, a buyout of Frontier by United would give United an even greater degree of pricing power in Denver. The same would be true with a Delta buyout of AirTran, again, an unlikely possibility. Moreover, both these scenarios raise certain regulatory issues, since the Department of Justice is active in trying to prevent significant market power by one airline in any given market. However, I would argue that certain markets are large enough such that this wouldn't be a significant issue. Moreover, the unification of both carriers could create benefits for the customers of both companies by expanding route networks and flight schedules.

But if legacy carriers are focused on international growth, why would they want to expand their domestic networks, which would be inevitable with the takeover of an LCC? The main reason is to increase market share, particularly in critical markets of strategic importance to the company, where there are large concentrations of higher-yield travelers. Is there a merger that would do these things? I know of at least one, between United and JetBlue, which is detailed in this post. This is not to suggest that other merger scenarios are unthinkable, for all low-cost carriers are quietly discussing various merger scenarios and how they want to play a role in the upcoming consolidation, but I would suggest that the most attractive merger scenario involving a low-cost carrier is between United and JetBlue.

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Skybus Plans New Service to Gary, Wilmington, and Niagara Falls

Skybus, the ultra-low-cost carrier based out of Columbus, plans to announce service to Gary, Indiana tomorrow, according to The Times newspaper in Munster, IN. Moreover, there have been strong rumors that the airline may announce service to Wilmington, DE and Niagara Falls as well tomorrow. In any event, it has been confirmed that Skybus executives have visited both of those airports and investigated the possibility of launching flights, though no outside confirmation has been given that that will happen. Like all Skybus routes, tickets typically go on sale the day of announcement or the day after, so if you're interested in a $10 seat, get ready to head to Skybus's Web site at 6 AM EST Wednesday or Thursday in order to be one of the first to book.

Gary, Indiana has been underserved for a long time and I'm glad that it's receiving these new Skybus flights, even if the only route that will be served is to Greensboro, NC (It appears Skybus is bypassing on serving Columbus from Gary, probably because the two cities are so close). The Gary Airport has obviously suffered from the poor image of the city, but its dramatically lower costs (one estimate put Skybus's costs to use Gary at half what it would pay to use one of the two larger Chicagoland airports) should allow it to attract more scheduled service from Skybus and other carriers in the near future. The airport is only a 30-40 minute drive from downtown, much closer than Rockford, another popular Chicagoland alternative, which is over twice that drive from Chicago. With Skybus's very low fares, I expect that this service will be successful. I hope, however, that the service will be able to attract a sufficient number of business travelers, who might prefer instead to use the more convenient Midway and O'Hare airports, leaving Skybus without enough last-minute higher-yield travelers to support service. Skybus will need to market aggressively, but I strongly believe that this service can succeed and that in the future, Skybus may start additional service from Gary to reliever airports for larger metro areas than Raleigh/Charlotte, such as Portsmouth for Boston or Burbank for LA.

Wilmington and Niagara Falls will likely succeed for the simple reason that the standards of success will not be has high if the cities were farther away from Columbus. With fuel costs being the impetus on Skybus to keep flight length short, it's challenging for the carrier to succeed on longer routes when it needs very high load factors and yields to pay the bills. Shorter flights require less fuel and so Skybus requires fewer passengers and lower yields in order to make the routes a success. But, the routes will still not be successful unless Skybus changes other areas of its operation to better reflect the needs of travelers.

After Skybus's Christmas stumble, where the airline canceled 18 flights in a two-day period, leaving over 1000 passengers stranded due to problems with 2 of its 7 planes, Skybus needs to renew its focus on customer service. While this may sound unnecessary for a carrier which attracts passengers primarily on the basis of fares, it's been proven to work (Southwest Airlines has practiced this very successfully for over 35 years, giving the airline unparalleled brand loyalty) and with the growing hassles of air travel in the United States, customer service will become more and more important for passengers. Skybus needs to ensure that passengers receive adequate compensation and treatment for delays and cancellations, and that onboard staff members treat passengers like guests and not potential consumers, berating them with advertisements every few seconds. Even if it doesn't wring every last penny from travelers' wallets, treating customers right will help Skybus survive over the long-term, a fate that is currently in doubt as the airline struggles to maintain yields in the face of increasing fuel costs, but one that the thousands of flyers who have chosen to travel with Skybus over the past 7 months certainly hope for.

Virgin America-An Innovative Role-Model for the Industry: Part II

This post is continued from yesterday's Part I.

VA has also taken a different approach with its frequent flyer program, eleVAte, which will make the airline very attractive for certain types of customers, and not very attractive for others. VA will award points based on how much you spend with the airline. The more you spend, the more you're rewarded, which makes sense since airlines want to reward their best customers, and their best customers are those who spend the most. Leisure travelers, who are lured by the promise of $39 fares, will be rewarded less, and that may hurt VA's competitiveness over Southwest and JetBlue, both of which offer the same number of frequent flyer credits to customers regardless of ticket purchased (with some new exceptions for customers who purchase Business Select tickets on Southwest).

However, eleVAte's other big shtick will be with redemption. Unlike any other frequent flyer program in the US, there will be no blackout dates for all award tickets, and customers can redeem credits for any unsold seats on a flight. Since the number one complaint of business travelers about frequent flyer programs is the inability to redeem miles, this will provide a significant advantage to VA. But, VA won't have any complicated mileage redemption charts either. Instead, the company will customize the amount of points needed for a ticket based on demand. The amount of miles needed to redeem a seat will be aligned with the price of the ticket. In other words, to prevent many travelers from redeeming miles for flights at the last minute, thereby displacing potential passengers who pay pricey last-minute fares, VA will make redemption of points for higher-demand flights prohibitively expensive for many passengers. A very clever idea, and one I'm surprised legacy carriers haven't adopted yet.

However, part of the reason this idea may not have been adopted is because award tickets are the only seats on the plane where all the customers who are traveling on them pay the same rate (or one of two rates on legacy carriers, depending on ticket flexibility). Business travelers hate knowing that they paid five times as much as the person sitting next to them for their seat, and so since business travelers redeem the majority of award tickets, this is one area in which airlines can show business travelers that they are valued, by charging them what they charge everyone else. Often, business travelers will earn miles on business, and then redeem them for vacations. This tactic will benefit those customers who are able to schedule vacations around less busy times of the year. If you're an employee who receives time off during the holidays, or over busy Spring and Summer travel periods, eleVAte may very well not offer a good value. As a result, VA should consider customizing the number of points necessary for redemption to customers with different travel patterns. Customers who have a history with the airline of purchasing expensive flights should be able to redeem the same seat for less than a customer who purchases discount flights. This customized pricing could help offer benefits to business travelers, especially since eleVAte will not offer an elite system to reward their most frequent travelers.

VA also plans to innovate with its culinary options. VA will offer complementary meals to customers in first class, and meals in coach will be sold for a nominal fee. In early November, the airline quadrupled its menu offerings, offering coach customers a range of pricey (over $10 per item in some cases), but high-quality offerings, including such delicacies as a caprese sandwich with canellini bean and herb salad as well as a steak sandwich. While I can confirm the pricey part, I can't confirm the high-quality part, as I haven't tasted it yet, but it sounds quite delicious, and these offerings could be a big selling point for the carrier. Most business travelers can expense meals, but they can't expense what's not there, and a lack of offerings is increasingly becoming the norm on legacy carriers.

While VA has a great brand and wonderful means of attracting customers, the carrier may face increasing pressure on its yields. With consolidation rumors buzzing in the industry, smaller carriers like VA may get swallowed up, or, what is more likely, the airline will just have difficulty making money. Consolidation will help lower rising costs for those carriers that can participate, and since it's unlikely that VA will be part of that, the company needs to find other ways to cut costs. So far, the company seems to have a cost structure very similar to other large LCCs, like Southwest and JetBlue, and unfortunately, the company's costs will only rise in the future, as workers gain seniority (and the higher wages that come with it) and its planes get older (leading to higher maintenance costs).

As ticket prices rise, demand will still exist, especially on the important business routes that VA services. However, travelers and their companies may be more inclined to book on price, and not on value, given rising ticket costs. VA may be unable to maintain a price premium in the market, which may make it difficult for the company to maintain its extra features and amenities, as well as make a profit. I wish VA all the best in expanding their offerings to make travel more comfortable, just as JetBlue did 7 years ago when that carrier pledged to "bring humanity back to air travel". However, given the current market environment, VA will have to tread carefully with its expansion plans, and ensure that their product is garnering the right price. Without that, VA could be simply another failed startup.

Virgin America-An Innovative Role-Model for the Industry: Part I

Editors' Note: Since the following post turned out to be quite lengthy, I have decided to break it up into two pieces. This first part gives some background information on Virgin America, and offers an analysis of some of the challenges the company faces. Part II will focus on Virgin America's frequent flyer program, their culinary options, and the carriers' position in the ever-shifting market.

Virgin America (VA) has been growing in recent months, and ever since its August launch, the company has added additional transcontinental flights, and plans to commence service to San Diego starting February 2008. And while other carriers are aiming to restrain capacity growth or even cut domestic capacity, Virgin America is growing, though at a slower pace than some other relatively recent airline startups, including Skybus and JetBlue. The airline operates brand new A320 aircraft with leather seats in first class and coach. VA has created an niche for itself using innovative technologies to reduce costs and make travel more convenient and comfortable for passengers. VA is the first airline in the US to essentially put a PC at a customer's seat, offering customers (or "guests" in the company's marketing-speak) the choice of over 25 different movies, 3000 MP3s, and other entertainment. Moreover, VA has the first onboard food-ordering system in the US, offering customers the chance to order food right from their seats, and have it delivered to them in a manner of minutes.

But VA hasn't simply been innovative when it comes to technology. The airline announced its frequent flyer program when it launched, eleVAte, which will award points to customers based on the amount of money they spend on tickets, and not on the number of miles traveled. Moreover, the airline offers gourmet food offerings for sale to customers, and plans on making its catering a selling point of the flight. While Virgin America has a lot going for it, it's also facing a very difficult market, like all carriers. The company is competing with some of the toughest carriers around, including United, Southwest, and JetBlue, and facing the same delay-prone, sky-high fuel cost environment as other carriers. I talked with VA spokeswoman Abby Lunardini yesterday about some of the things her company is doing to thrive and survive.

Ultimately, VA faces some of the same constraints as other carriers. VA operates from large airports that are very prone to delays. According to Lunardini, San Francisco will always be the company's home base, and SFO is notorious for weather-related delays. Moreover, New York's JFK Airport, which has several VA flights, is suffering more than its fair share of air traffic control-related delays. As a carrier trying to maximize aircraft utilization, delays can really hurt the bottom line. Unfortunately, since VA plans to target working professionals, serving large, congested airports is a must for the carrier, even if it leads to delays.

Moreover, VA, like all airlines faces challenges with mounting fuel costs. According to Lunardini, the company hasn't yet made any decisions with regard to fuel hedging. Also, the company doesn't plan on changing its growth plan to deal with fuel costs. Many US airlines have been cutting back on transcontinental flights recently because they cost too much money to operate given skyrocketing fuel costs and insufficient yields. VA has several transcontinental routes, and they are an important part of its business. However, VA would be well-advised to slow transcon growth and focus on building a significant presence on the West Coast. There are several additional Western markets that VA could target from San Francisco and Los Angeles, including Vancouver, Seattle/Tacoma, Portland, Phoenix, and Denver. While there is certainly fierce competition on all these routes, they would likely produce better yields for the company, at least in the short term given the fuel environment, than would transcontinental flights.

Check back for Part II tomorrow...

Skybus Launches New Base In Greensboro, North Carolina

Skybus announced a major new expansion in Greensboro, NC today. The airline plans to open a maintenance and crew base in the city, as well as base several aircraft there. In addition to offering two daily flights to Skybus's home base in Columbus as of January 6 of next year, Skybus will offer flights from Greensboro to Portsmouth (for Boston), Chicopee (for Hartford), Punta Gorda (for Fort Myers), St. Augustine (for Jacksonvile), Fort Lauderdale, Gulfport/Biloxi, and Burbank (for Los Angeles) by the end of February 2008. This expansion is very impressive, given that Greensboro is a relatively small area. While I've been skeptical of Skybus' ability to perform from some of its smaller markets, including Greensboro, I think this new expansion will be good for the airline. In all but two cases (Greensboro to Gulfport/Biloxi and Chicopee), I think the flights will be sustainable. There may be some seasonal adjustments in flight scheduling, but overall the base should be able to sustain at the very least six or seven year-round flights. The base will also be ripe for future expansion, particularly if Skybus adds additional flights to major metropolitan areas, such as New York, Chicago, or Washington DC, since these markets lack significant low-fare competition from North Carolina. Given that Raleigh and Charlotte have relatively little low-fare airline service, Greensboro is emerging as a facility for value-conscious travelers, even though it is rather distant from both markets.

Skybus is adopting the right strategy at this stage in its growth. As I've noted in previous posts, the company's adoption of shorter routes to leisure-oriented destinations is the right strategy to fill planes and lower costs. Skybus has done a good job of containing its costs through the use of alternate airports like Greensboro, as well as through short flights that enable the airline to reduce fuel and maintenance costs. The Greensboro base is a natural extension of this strategy. While I'm skeptical that this base can attract as much year-round traffic as Skybus desires, since some of the leisure routes have considerable seasonal travel fluctuations, I do think that the base will prove successful for both the company and the airport. Keep your eyes peeled for Skybus's $10 fares, which go on sale at 6 am EDT on Tuesday. The cheap fares to Burbank will likely sell out the fastest, probably within an hour or two, and if you want to get your hands on $10 fares for desirable travel dates to any destination, you should book them as soon as you can because they will also sell out quickly.

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