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

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

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

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

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

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

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

Will Skybus's Launch Provoke Other Airlines to Add Fees?

Skybus's launch has been getting a lot of attention in the past few days by a range of national media (such as this column in USA Today). But much of the coverage has not centered on Skybus's new routes or the opportunities it presents for smaller, underutilized airports. Rather, many news outlets have focused on what Skybus is not providing, at least, not for free. Skybus plans to charge for virtually any extra passengers need, short of using the restroom. And since this is a revolutionary idea in the States, it is picking up a lot of media coverage. But it begs the question: Will other carriers consider adding more a la carte amenities in a bid to raise revenues? If fares continue to remain relatively low, LCCs will need to find more ways to make money, and ancillary revenue streams are the easiest, cheapest, least risky way to accomplish that goal. Low-cost carriers have seen their costs rise in recent years. Many of them have new fleets which are now getting older and which require more costly maintenance. Also, many LCCs have labor agreements that are becoming more expensive to maintain, since many employee groups are looking for higher wages and more profit-sharing. When airlines first start out, employees typically get paid quite little relative to their counterparts at other airlines. But as they gain experience and seniority in the company, many employees receive pay increases, and that costs LCCs more and more money each year.

And with fares increasing very little, airlines are trying to figure out how to raise more revenues. Food and beverage sales is one idea that hasn't been fully exploited by LCCs, something Skybus will try. It's probable that other LCCs will start cracking down on some of the free snacks they are handing to customers, and may charge customers for the treats. Also, some LCCs may start charging customers for beverages, a move that could be very profitable, since beverages typically can be sold at high profit margins and many passengers find themselves dehydrated inflight. Moreover, most US LCCs have excess baggage fees that are similar to legacy carriers. Only Spirit has taken steps to remedy that, but even that carrier still allows customers to check one bag for free (although this will soon change, and customers will need to pay for all checked bags for reservations made after June 19). LCCs, especially those aiming to have a tighter grip on their costs, including Southwest and AirTran, may crack down on their checked baggage policies. While most US LCCs offer hotel and car rental reservations on their Web sites, and collect commissions from sales, they don't advertise these outlets very well on their sites and airlines don't appear to be focused on offering customers a good value for all their travel needs. Airlines typically make it difficult to purchase a flight, hotel, and car rental in one search, since hotel and car rental reservations are often kept on separate pages on US LCC sites. And many of the hotel and car rental partners airlines contract with offer lower rates at their respective Web sites, and if airlines want customers to book hotels and car rentals through them, they need to ensure that customers are receiving the best deal. Also, Allegiant and Skybus are the only two LCCs to charge for the privilege of boarding early. Allegiant offers advance seat assignments for an additional fee, and Skybus offers early boarding with no seat assignments. The revenue from these services costs very little to obtain, and if it improves a customer's comfort level on a given flight, people will pay it. Other LCCs, including Southwest and AirTran may charge for early boarding in the future. It's an extremely profitable and easy-to-implement revenue stream, more so than any other ancillary revenue stream, and LCCs would be foolish not to utilize it with LCCs so desperate to raise revenues. LCCs may also add fees for the use of their in-flight entertainment systems. AirTran, for example, offers customers satellite radio at every seat, and customers can hook up to it for free (assuming they have their own headset). However, AirTran would be an ideal airline to charge customers for the use of that entertainment because it doesn't market itself primarily based on entertainment like JetBlue and Frontier do. Even if customers were only charged $2 or $3 on a flight, that could still raise hundreds in revenue that AirTran otherwise wouldn't receive.

Even though customers prefer airlines that provide free amenities, it simply doesn't make sense for LCCs to do that in a stagnant revenue environment where legacy carriers are much more cost-competitive than they were several years ago. LCCs need to find ways to raise additional revenue, and in the wake of Skybus charging for many of these previously free services, the airline has paved the way for many other LCCs to start doing the same. As customers get used to paying for checked luggage, seat assignments, or in-flight sodas on Skybus, then other airlines will have fewer difficulties getting customers to accept these new fees. LCCs that market themselves primarily on the basis of low fares, such as Southwest, AirTran, Spirit, and Alaska (which, to be quite honest, is hard to classify as either an LCC or a legacy carrier), are the most likely candidates to implement these new fees. LCCs that attract customers less on the basis of fares, and more on the basis of their amenities, including JetBlue and Frontier, will be less likely to adopt some of these ancillary revenue streams because they could hurt their brand and discourage airline loyalty. While more fees may be one more hassle customers will need to deal with when flying, greater adoption of more ancillary revenue streams, including fees as well as commissions, may enable many LCCs to continue making money in the face of higher costs and marginally increasing fares.

More Questions Raised About Skybus's Viability

As Skybus prepares to launch service tomorrow, many questions linger about the long-term viability of the airline. While the company is well-capitalized and well-aware of the competitive landscape it faces, it seems to be headed for trouble. History is littered with airlines that have overestimated the viability of certain markets, and I think Skybus will soon be one of them as I doubt that Greensboro, Richmond, Kansas City, and Bellingham have the traffic necessary to support profitable service. Skybus is trying to avoid markets with a lot of competition with its expansion. Fair enough, but in an extremely competitive marketplace, there are very few viable markets where there is little competition, especially since Skybus is launching services from a city – Columbus, Ohio - served by Southwest Airlines. The markets left with little competition carry greater risks, and may not have enough traffic to support a daily flight on a 150-seat plane. Skybus may be able to sell all the $10 tickets it wants to on these routes, but the measure of a successful airline isn't by the number of loss-leading tickets sold, but by the number of profitable tickets sold. And I suspect that Skybus will fail to impress on this measure.

Unfortunately for Skybus, Columbus is simply too small a market to fly from, especially given the amount of service already supplied by Southwest and Delta. Perhaps Skybus will be able to lower fares enough so customers from other markets will find Columbus attractive, but given the distance between Columbus and other markets, that might be a bit of a stretch. Cincinnati is one of the closest major markets to Columbus, and it's 110 miles away. Granted, Cincinnati has some of the highest airfares in the nation, so some customers might find a switch to low-cost Columbus attractive, but how many business travelers or others with time-sensitive plans will be willing to make that trek? If Skybus were to open new bases of operation in Burbank and Portsmouth, which may occur in the not-too-distant future, then those might be more successful because those airports have more populous catchment areas. Until then, I have serious questions about the viability of the Skybus business plan.

Much of what the plan is based on is this notion that people will fly to anywhere if it's cheap enough. According to CEO Bill Diffenderffer, people will fly from "nowhere to nowhere" for the right price (taken from this Columbus Dispatch article about Skybus's launch). Ryanair has been able to market dozens of smaller cities as attractive destinations because the flights are so cheap. That may make sense in Europe, where many of these destinations are popular vacation spots, but most of Skybus's cities, especially its weaker markets, aren't. Moreover, Ryanair has a huge base of people in London to support its flights; Columbus has far fewer people to support flights with similar-size aircraft. Yes, low fares will help stimulate traffic: For example, many people plan on using Skybus's low fares to visit family members. But families visiting each other don't fill planes. Vacationers do, and on most of its flights, Skybus won't be transporting primarily vacationers. Another element of Skybus's dilemma is the number of tickets that it plans to sell as the last minute. Typically, tickets purchased at the last minute are bought by business travelers who need to fly quickly. Business travelers have historically been averse to Ryanair, and I suspect that they will be to Skybus as well, especially given Skybus's menu of far-flung alternate airports. If Skybus offers punctual, friendly service, then I suspect some business travelers will fly the airline and purchase pricey last minute tickets, even with the drawbacks surrounding alternate airports. But if Skybus offers the American service equivalent of Ryanair, all bets are off. Without a good base of business travelers, it's unclear whether Skybus will have the necessary load factors and yields to make money.

But another issue stems from Skybus's use of ancillary revenues to subsidize the cost of flights. Skybus doesn't plan to generate as much of its total revenues from ancillary sources as Ryanair does. Skybus has the challenge of being the only US airline to charge for all checked bags. While Spirit has tightened their policies in recent months, the carrier still allows customers to check one free bag. Not Skybus, which will charge $5 for the first two bags, and $50 for each one thereafter. It sounds like extortion to me, and I think customers who aren't used to the idea will be turned off. Moreover, Skybus may have difficulty enforcing its policy on food. The airline prohibits customers from bringing outside food or drink onto aircraft in a bid to force more customers to pay for pricey onboard refreshments. However, if that policy is enforced, the airline could be faced with a mob of incredulous customers; even Ryanair doesn't prohibit onboard food or drink just yet.

Skybus has started advertising on planes through a partnership with Nationwide Financial, but Skybus's aircraft advertising program will need further development in order to make it a more important and viable component of the airline's ancillary revenues. However, Skybus's biggest ancillary revenue problem is that the airline hasn't promoted its outside hotel and car rental vendors on its Web site as much as it should. Ryanair has demonstrated that hotel and car rental commissions can add a meaningful amount to the bottom line. But many Ryanair travelers fly to vacation getaways and need hotel rooms and car rentals for their vacations. Skybus doesn't have many vacation destinations on its route map, and consequently won't be able to collect the commissions Ryanair does.

If Skybus wants to succeed, the airline needs to focus on marketing itself. For a new airline, marketing is key, especially given the competitive nature of the business. Skybus is adding a lot of capacity to an already crowded market, and if it can't fill planes, it can't make money. I'm not so concerned about Skybus's fares, since the airline seems to have their fare structure well thought out for profitability, but that strategy will mean nothing unless those tickets are sold. Also, Skybus needs to rethink how it is targeting its ancillary revenue streams, and focus more on hotel and car rental commissions. But that may not come until Skybus's route map is restructured with more leisure destinations. Finally, Skybus needs to diversify its routes away from Columbus. Not in a year, because it may be too late by then. Skybus needs to open new bases in some of its secondary airports (such as Burbank, Portsmouth, Oakland, or Fort Lauderdale) very quickly. If Skybus can do those things, it might have a chance. But otherwise, it will be stormy skies ahead for the startup.

David Neeleman Ousted as JetBlue CEO

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

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

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

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

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

More About Intra-California Competition

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

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

How will airlines compete in this market?

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

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

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

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

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

JetBlue Considers Bolstering Intra-California Service

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

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

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

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

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

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

Frontier Announces Termination of San Francisco to Los Angeles Service

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

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

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

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

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

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

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

AirTran Struggles to Deploy New Planes as the Airline is Surrounded by Competitors on All Sides

Although AirTran has slowed the pace of their new aircraft deliveries, new planes are still headed AirTran's way. And AirTran is having difficulty figuring out what to do with them all. While the airline hopes that a merger with Midwest Airlines will give the company more leverage in two key markets, Milwaukee and Kansas City, enabling the airline to expand, that deal seems to be unlikely in the short term. AirTran is trying other expansion tactics, but its strategies have had mixed results, and given the intense competition on the East Coast, AirTran is finding it difficult to expand with the presence of so many competitors in the region. Some examples of AirTran's expansion difficulties follow.

AirTran recently announced new routes between small markets in the Midwest and New York State to Las Vegas, mirroring the tactics of Allegiant Air. Even though AirTran has tried this once before without success, the airline feels it's worth another shot, given the pressing need to deploy additional aircraft, and the recent success Allegiant has mustered. I see this strategy as having mixed results depending on the origin city. If AirTran can tap into a viable market, it will be successful, but time and time again, AirTran has expanded to markets too small to accommodate AirTran's flights.

But AirTran is also trying other tactics its competitor Southwest Airlines has tried. For example, AirTran plans on launching two transcon routes soon, one between Baltimore and Seattle and the other between Orlando and San Diego. AirTran is serving these two routes in part because Southwest doesn't serve them. AirTran has avoided serving some transcon routes already operated by Southwest, such as Baltimore or Philadelphia to Oakland or Los Angeles, but this has left AirTran with routes that may have too little traffic to accommodate its presence. If AirTran's two attempts at point-to-point transcons succeed this summer, it could lead to further transcon flights from markets other than Baltimore or Orlando in the future. Even though AirTran has the capability to launch more routes, and needs transcons to increase aircraft utilization, these routes are risky. Given that AirTran is virtually unknown on the West Coast, new transcon routes have a high probability of failure. If AirTran wants to succeed with transcons, it needs to expand its services from a couple East Coast focus cities and focus on attracting customers in these markets. If AirTran offers every transcon that Southwest doesn't, then AirTran will easily lose money; instead the airline needs to focus on building a couple focus cities such as Boston, Philadelphia, Charlotte, Baltimore, or Orlando, for transcon markets even if it means competing directly with Southwest.

However, in its expansion, AirTran has ignored Caribbean routes even more than transcon routes. This is in part due to Spirit Airlines, which has adopted an ultra-low cost carrier model on flights between the US and the Caribbean. As a consequence, AirTran has avoided many Spirit routes, since AirTran simply cannot compete on price with Spirit. AirTran's only Caribbean route is to Grand Bahama Island, which works well for AirTran, since the aircraft that operates that route can turn around quickly and return to Atlanta; the aircraft can still operate several other flights during the day. AirTran is hesitant about further expansion in the Caribbean, which may hurt the airline, since the Caribbean offers many opportunities for expansion, even with Spirit's competition. AirTran has so much excess capacity, it could strike lucrative deals with tour operators for flights to big tourist destinations in places such as Puerto Rico or the Dominican Republic that would give tour operators a cheap means of transporting vacationers to paradise, and AirTran a steady source of income. AirTran's Atlanta hub is advantageous for Caribbean expansion, and AirTran should take advantage of it.

So AirTran has a dilemma. It has to find a way to grow and attract new customers in a very competitive market. Airlines that struggle sometimes try to shrink to survive, although that's a tactic that gets, at best, mixed results. AirTran is in an industry that is right now grappling with overcapacity concerns. Even though many legacy carriers have removed capacity from domestic services, the industry as a whole is concerned about adding too much new capacity, even with the upswing in the economy. As a result, AirTran is in a difficult position, especially since it has a weaker brand and less customer loyalty than its two principal low-cost competitors, Southwest and JetBlue. AirTran attracts flyers primarily on price, and if AirTran cannot fill planes, it cannot offer low fares. So this begs the question: How does AirTran combat this phenomenon?

My answer would be that AirTran should target its focus city markets for expansion. All of AirTran's focus cities could use more flights, and if AirTran markets itself well and commits to a buildup in service, it could increase customer loyalty, especially among business travelers, in certain focus city markets such as Boston, Baltimore, Orlando, Philadelphia, and Chicago. Focus city markets can serve as real catalysts for growth because AirTran still has relatively little service in all these cities compared to its Atlanta hub, and AirTran has an opportunity to link these markets to major business and leisure destinations across the country that AirTran currently doesn't serve nonstop from that focus city. But not only are focus cities great places for expanding the number of routes AirTran serves; they are great locations for AirTran dumping capacity on certain routes the airline already serves. AirTran already has lower load factors, on average, than most other low-cost carriers, and part of the reason for this is that AirTran has excess capacity on some routes in order to provide convenient service for business travelers. For example, AirTran has up to nine flights a day between Baltimore and Boston, and up to six flights a day between Chicago and Minneapolis/St. Paul, even though these flights are routinely half-empty. With flights spaced throughout the day, AirTran provides convenient service for business travelers, and can attract many customers who travel at the last minute and pay the highest fares. By dumping capacity on these routes, AirTran can lower fares for most customers, and still charge last-minute travelers pricey walkup fares. It's a strategy that has worked well on some routes, and not so well on others. If AirTran can target the right routes for capacity dumping, the airline can make a lot of money, even with half-empty planes. This seems to be the best way for AirTran to use its planes; to add new capacity to existing routes. AirTran needs to expand this model on more routes from more focus cities; it will enable AirTran to increase aircraft utilization and target valuable customer groups at the same time.

But even as AirTran has been making some of these changes, the airline has done it in too much of a vacuum. If AirTran wants to be an attractive choice to business travelers, the airline needs to offer a more competitive frequent flyer program. Recently, Frontier's frequent flyer program, EarlyReturns, won first place in the annual Freddie Awards, sponsored by InsideFlyer Magazine. AirTran's program, A+ Rewards, partners with EarlyReturns to offer more earning and redemption opportunities for travelers on either airline. A+ Rewards isn't a very friendly frequent flyer program to many travelers. It requires passengers to fly 16 one-way flights with AirTran in a year in order to earn a free ticket. While business travelers who fly frequently can meet those parameters, individuals who travel less frequently find little utility from A+ Rewards. For example, A+ Rewards isn't friendly to many small business travelers who travel just a few times a year, but often at the last minute. These business persons would rather travel with an airline where they know their travel is being adequately rewarded, most likely a legacy carrier, and sometimes a good frequent flyer program is the difference between a traveler choosing one airline over the other. With last-minute tickets, the stakes for airlines couldn't be higher, and AirTran should do what it can to court these travelers. Travelers on most other carriers have at least 18 months, and can extend all their miles with any sort of earning or redemption activity. If AirTran cannot make other aspects of its operation attractive to customers who buy tickets at the last minute, then capacity dumping will be worthless.

AirTran has a real challenge on its hands, to add capacity in a profitable manner, when overcapacity is the main concern in this industry. AirTran must reevaluate how it is adding capacity if it is to be competitive in the future, and dumping capacity on certain routes may be a profitable strategy, provided that it is done carefully and methodically.

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

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

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

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

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

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

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

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

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

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

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

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Skybus Announces Its Business Model and Destinations to the Flying Public

Skybus made its first formal route announcement today, announcing its first eight destinations, with service to start to some cities as early as May 22. Skybus also enabled customers to book tickets online starting today, with introductory fares starting at $10 each way excluding taxes. It's clear that whatever happens to Skybus; it will be a difficult battle ahead. The post ahead will analyze different elements of Skybus's announcement, and comment on the viability of the carrier.

First, a discussion on destinations. While some of the new airports Skybus announced service to today were more conventional low-cost airports, such as Oakland or Fort Lauderdale, others were less conventional, such as Bellingham instead of Seattle/Tacoma and Vancouver or Portsmouth instead of Boston. As a result, it appears evident that Skybus will have more trouble marketing some destinations than others.

Living in the Seattle region myself, I know the Bellingham airport isn't an acceptable alternative for Seattle, being over 75 miles away from the city. While it is closer to some of the Northern suburbs, it's still over an hour's drive from the main population centers in the area. Allegiant Air has capitalized on the demand for low-cost service to Las Vegas by offering cheap and frequent flights between Bellingham and Vegas. However, Allegiant has established itself on the route and has a good market in the area of both Americans and Canadians. Allegiant doesn't need the big population centers near Seattle for its route to succeed. Las Vegas is a destination that can support service from smaller airports like Bellingham because it attracts so many visitors. Columbus, Ohio attracts far fewer passengers and is a different story altogether. A daily flight on a 150-seat airplane cannot be sustained between two markets this small. Consequently, I seriously doubt that even with very low fares, Skybus will be able to succeed in the Bellingham market.

Portsmouth is a bit different. Since Boston, like Seattle, lacks a secondary airport close to the city, low-cost airlines such as Southwest have tried to market service to Boston from distant secondary airports in Providence and Manchester. Portsmouth is about the same distance from Boston (roughly 60 miles) as the other two cities, and as a result, Skybus should have less of a challenge attracting customers there, since many Bostoners are already accustomed to driving such distances for lower fares on Southwest. However, Skybus needs to market itself to travelers in the entire Boston-Manchester-Portland, ME area to maximize their brand awareness among potential customers. Southwest is already well-known by travelers in the area, but Skybus means nothing to them right now. With two initial daily flights, it's clear Skybus has high expectations for Portsmouth. Given Southwest's success using secondary airports in the region, there is reason to support that optimism, but Skybus must first market itself well in order to be successful.

Skybus also announced service to Oakland, Burbank, Kansas City, and Fort Lauderdale. These don't concern me nearly as much as Bellingham, but due to competition from Southwest, Skybus needs to be careful about how it expands in these markets. Southwest Airlines, currently the airline with the largest market share in Columbus, serves all four of these cities (though none nonstop from Columbus), with low fares, friendly service, and frequent flights. Southwest has a lot of loyalty in the Columbus market, and many passengers will be hesitant to ditch Southwest for Skybus, even with Skybus's noticeably lower fares. Skybus has done a good job of targeting markets that lack nonstop service from Southwest, but even these markets which lack Southwest nonstop service are well-served by Southwest nonetheless. As a result, Skybus will attract passengers who want nonstop service, but the airline may also face significant competition from Southwest, both on price, but more importantly on service. If Skybus can offer quality service to Columbus passengers who are used to Southwest's hospitality, it will succeed in Southwest markets. However, if Skybus cannot offer the level of service Southwest delivers, then Skybus will be at a significant disadvantage to Southwest, even with lower fares. Given all the hassles flying entails these days, service is becoming increasingly important for customers and Southwest can deliver in this department, even if it can't offer the lowest fares.

Skybus also announced new service to Greensboro, NC and Richmond, VA. I'm a bit skeptical of the Greensboro service, primarily because it is over an hour's drive from the Raleigh-Durham area, and many passengers would rather take advantage of Southwest's low-fare service from the Raleigh-Durham airport, even if it's not nonstop to Columbus. Richmond, on the other hand, still has need from the business community for increased low-cost nonstop service. This is an airport that has lost travelers due to high fares in recent years, and needs another low-fare carrier to help get them back. However, I am unsure whether Greensboro or Richmond can support a daily nonstop flight on a full-size aircraft. I think both these markets are risky, and may be better suited for three to five weekly flights instead of one daily flight. However, if Skybus is able to market itself well and divert traffic to these airports, there is a potential to make both of these routes work.

In addition to their destinations, Skybus announced some of their amenities and charges today. Skybus encloses their policies in this document, which seems to both insult your intelligence and confuse you at the same time. It includes reasons why Skybus lacks in-flight entertainment, assigned seating, and even a call center (it doesn't say what you do if something goes wrong). It also seems to stipulate some rules that will not make passengers happy, most notably that passengers may not bring their own food or drink onboard the aircraft (unless of course you've "brought enough for the whole plane"). I wonder if Skybus's first bad publicity will be when it refuses to allow a woman carrying breast milk onto the aircraft; that might quickly alienate much of their potential customer base. If a passenger does bring food onboard the aircraft, what are the flight attendants going to do, delay the aircraft, costing Skybus a lot of money, in order to kick the passenger off? Skybus can try to enforce this rule, but it will end up causing the airline more harm than good. Rule 10 seems a bit of a stretch as well; given the previous nine points, I doubt individuals will be so happy onboard Skybus planes. Skybus seems to be essentially everything easyJet is in Europe, with a hip brand, new A319 aircraft, fees for everything (although easyJet doesn't charge for checked baggage), and bare-bones service. But unlike easyJet, Skybus may have a tougher time surviving, especially with so many new planes coming online. How can Skybus effectively expand? The simple answer is: beyond Columbus quickly.

In order to create a successful airline, Skybus needs to do more than offer low fares to individuals traveling to/from Columbus. Skybus will inevitably have to create other bases, since Columbus cannot support 65-70 planes, but the best ones will probably be in smaller airports within 60-75 miles of the city centers. These would be similar to the hugely successful bases Ryanair has created in alternate airports within 75 miles of major cities throughout Europe. Larger airports, such as Oakland and Fort Lauderdale, already have enough low-cost service; Skybus needs a facility that has relatively little competition in order to create the best yields and lowest costs. This means Skybus needs to invest in some of the smaller airports it touts as being hassle-free alternatives to larger airports closer to city centers. Out of the destinations announced today, I believe Portsmouth would create the best base, since it's within relatively easy reach of Boston as well as other metropolitan areas. Portsmouth would be a prime location for Skybus to launch flights to Florida. Greensboro and Bellingham are also possible candidates for new Skybus bases, but these two markets have a smaller base of potential customers than Portsmouth does. Skybus should focus on linking these bases with leisure destinations, which is where most price-sensitive customers go. Bases in the West could be connected with cities in California, Arizona, and Nevada while bases in the East could be connected with Florida.

Columbus has a very limited potential market for Skybus, especially given that many business travelers who fly to the city would rather fly on an airline that gives out free peanuts instead of one that charges for checked luggage. If Skybus focuses too much of its growth in a market that cannot support it, then it will ultimately fail. Therefore, in order for Skybus to survive, it must rethink how it's expanding, and focus on linking underutilized airports near city centers, such as Portsmouth, New Hampshire (near Boston), Gary, Indiana (near Chicago) or White Plains, New York (near NYC). If the airline doesn't recognize what types of customers it will attract and cater to them by flying to leisure destinations, it will fail. I wish all the best to Skybus, but if they continue to expand from Columbus, ignoring other bases, I don't see how the airline can survive longer than two years.

Skybus to Announce Plans Next Week

Skybus, the Columbus, Ohio-based startup which plans to offer ultra-low cost flights, is expected to announce its startup routes next week. One of the ways Skybus plans to cut costs is by serving airports that are difficult to reach from Columbus, but which also have a sufficient catchment area to attract some passengers from nearby cities. The Foster's Daily Democrat reports that one of the cities Skybus will announce is Portsmouth, NH. Even though Boston is approximately 60 miles away from Portsmouth, given the small size of the airport as well as the traffic jams that make it difficult for many Bostoners to access Logan in a timely manner, Portsmouth could be attractive for many travelers, especially if Skybus offers sufficiently low fares from the airport. Southwest has been successful in getting some Bostoners to drive similar distances to access low-fare flights in Manchester and Providence. With Skybus' fares projected to be significantly lower than Southwest's, Skybus should certainly be able to attract Bostoners as well as people in the surrounding Boston-Manchester-Portland, ME area. While it's unclear what Skybus' other destinations will be; expect them to be similar in nature to Portsmouth. Skybus plans to announce the new service sometime next week, and launch ticket sales at that time. Next week Airline Bulletin will contain a more in-depth post about Skybus' announcement.

How Allegiant Must Find New Niches to Grow and Evade Competition

Allegiant Air must find new bases that it can succeed in, in order to effectively expand and evade some of its competitors. Allegiant has been successful at three bases, Las Vegas, Orlando, and St. Petersburg, and they appear to be interested in possibly forming bases in Palm Springs and Reno, which will soon have flights to Bellingham. Since Allegiant has already tapped into demand to the most popular vacation destinations, the airline will need to find ways to market destinations that currently have less demand. Allegiant needs to find ways of developing additional bases quickly. Allegiant must broaden its market and offer a greater variety of destinations to appeal to different kinds of customers. Reno and Palm Springs offer customers the opportunity for more adventure and recreation than Las Vegas. This will be important in enabling Allegiant to expand, since its customers, even the most compulsive gamblers and theme-park lovers, want new and exciting vacation opportunities, and if Allegiant can't provide those to them, then another airline will. It's unclear whether the Palm Springs and Reno bases will be successful, although it appears that like many airlines serving Palm Springs, Allegiant will make some of its flights seasonal to that city. Since Allegiant hasn't even started flights to Reno, it's too early to tell whether those flights will be successful either.

However, Allegiant also must consider forming new bases East of the Mississippi. Allegiant will likely develop another base in Florida, likely in the West Palm Beach-Fort Lauderdale-Miami area so that Allegiant will serve West, Central, and East Florida. However, Allegiant should also consider different bases in the East, most notably in Myrtle Beach, a popular vacation spot with seasonally fluctuating demand. Gulfport/Biloxi, Mississippi is also a potential base, although Allegiant recently made the city an origin spot for flights to Las Vegas and Orlando. With its popular Casinos, Biloxi could be marketed as a good vacation spot, although demand for travel to the area is much more limited than travel to Orlando. The important point is that Allegiant must create new choices for customers; without choices, customers will have few reasons to fly Allegiant repeatedly, unless they want to visit Orlando for the fourth time to witness the sights and sounds of a bunch of out-of-control, noisy children (my idea of a great time).

But, since some of these proposed bases have demand patterns which fluctuate seasonally, Allegiant needs to find a way to efficiently utilize its planes during both the winter (typically the more popular season to warm vacation destinations) and during the summer. As a result, it will take a bit more effort for Allegiant to develop popular summer bases, and if Allegiant wants to succeed in those markets, the carrier will need to work closely with local tourism authorities to market the destination. As a result, new destinations will need to be marketed to people who might not have heard of them. Colorado Springs is an example of a successful Allegiant origin market, which could be made a destination market in the summer months. The same is true for Bellingham, which is a gateway to recreation opportunities in the North Cascades in Washington State, as well as the plethora of recreation opportunities the Vancouver-Whistler, British Colombia area offers. However, this strategy is very risky and unlikely, but a possibility if Allegiant is very interested in increasing aircraft utilization.

Allegiant could take another strategy, and market flights from its small origin cities to big cities (through nearby alternate airports) popular with tourists during the summer, such as San Francisco, New York, and Washington DC. These are only ideas of how Allegiant can potentially increase aircraft utilization during the summer months, however, given the difficulty involved in making these destinations, particularly smaller markets like Bellingham and Colorado Springs, attractive, these markets probably won't be Allegiant's top-performing bases. Fortunately for Allegiant, since the company doesn't have expensive leases on new aircraft, they don't feel as pressured to increase aircraft utilization, and as a result, the company has been willing to park aircraft for extended periods of low demand. If Allegiant simply cannot find good places for these aircraft during the summer, it makes little sense for the airline to take unorthodox risks with its capital. Conversely, if Allegiant can't find new destinations for its customers to travel to, the airline will have few repeat customers.

Allegiant will also need to expand the number of origin markets it serves in order to diversify itself from the competition. Already Allegiant is encountering competition in some of its more established markets. AirTran recently announced new nonstop service between Bloomington, Moline, and Milwaukee to Las Vegas. The Milwaukee service is aimed primarily at offering competition to Midwest Airlines and demonstrating AirTran's commitment to increasing air service for the residents of Milwaukee. But that's not the case with the Bloomington and Moline service. Bloomington and Moline can probably support AirTran's new flights with the potential customers in the immediate area of those two markets. However, the Bloomington and Moline service directly targets several of Allegiant's markets in the region. Moline is a perfect destination because it's close enough to three Allegiant markets, Cedar Rapids, Rockford, and Peoria, so that AirTran can attract a wide range of Allegiant customers in the area who might prefer AirTran because Moline is closer by to their home, and because they prefer AirTran's amenities, such as satellite radio, which Allegiant doesn't offer. AirTran would not attract many customers from the cities Allegiant operates in, since they are all at least a 90 minute drive from Moline, but AirTran could attract customers from the outlying areas of those cities who are closer to Moline. AirTran's new Bloomington service offers similar benefits for the airline, since it too has the potential to siphon customers away from Allegiant's Peoria operations. Since AirTran has some of the lowest costs in the industry, they are ready to fight Allegiant, and Allegiant must fight back hard if the airline wants to retain its market share in the region.

As a result, Allegiant must both diversify and protect its origin markets. The company has already received permission to begin service to Canada, and may announce service from new Canadian origin markets soon. Since service between Canada and the US is typically through hubs, Allegiant has the ability to offer attractive point-to-point flights for customers in smaller markets who might be forced to connect in Vancouver, Calgary, or Toronto for most of their travel, which would save Allegiant's customers time and money. Moreover, customers in Canada are more accustomed to the lower-frequency vacation package business model that Allegiant uses, since Canada has several charter airlines, such as Air Transat, which sell vacation packages to popular leisure destinations and fly to them from major Canadian cities. The Allegiant model would take that one step further by offering service from smaller markets. Other Canadian cities which could see Allegiant service include Windsor, London, Hamilton, and Kitchner/Waterloo (all in Ontario), Abbotsford, Kelowna, and Comox (all in British Colombia), and Fort McMurray in Alberta.

That being said, there are still untapped markets in the United States. The biggest hole in the Allegiant network right now is in the South. Allegiant serves no destinations in New Mexico, Oklahoma, and Arkansas, and only serves two in Texas. Allegiant has tried offering service from several markets in Oklahoma and Texas (including Oklahoma City, Tulsa, Wichita Falls, and Killeen), but all these have failed. There are many smaller markets in Texas that have the potential for Allegiant service; the big factor holding Allegiant up is Southwest. Since Southwest already serves Las Vegas from many small Texas markets, Allegiant would have a challenge in many markets, even in ones where they aren't competing directly with Southwest, since Southwest serves airports relatively close to many potential Allegiant markets. As a result, that area of the country may be hard for Allegiant to build up, though Allegiant may want to give it another shot, since Allegiant does have a competitive cost base with Southwest. Moreover, Allegiant is also underrepresented in the Northeastern United States, in part due to the brutal competition among low-fare airlines in the Northeast-Florida market. However, Allegiant could still add service to three to five cities in Pennsylvania before the market in that state is saturated (Allegiant currently only serves one, Allentown, in the state). Similarly in New York State, there are several potential Allegiant markets, such as Ithaca and Utica.

Allegiant needs to take many steps simultaneously to ensure the company meets its ambitious growth targets and protects its market share. Allegiant must defend its turf vigorously in places like Peoria, even if it means engaging in a price war with AirTran, because if AirTran wins that battle, then it will motivate the company to enter other Allegiant markets, which could have a potentially devastating effect on Allegiant. Moreover, Allegiant must expand into new origin markets, especially in Canada, where two big Canadian airlines have created niches to be filled. And finally, Allegiant must find new bases to operate in order to offer more choices to customers. The best bases are ones that can attract enough traffic to support year-round service, such as Fort Lauderdale, but as Allegiant expands, they must be creative about new bases if they want to retain their niche as a vacation provider to people in small markets.

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

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

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

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

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

Will Skybus Ever Leave the Station?

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

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

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

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

The Limits of Future Low-Cost Airline Capacity Increases

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

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

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

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

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

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

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

As AirTran Expands, Longer Point-to-Point Flights Will Become the Norm: Baltimore to Seattle Was First, Orlando to San Diego May be Second

AirTran's recent announcement of service from Seattle/Tacoma to Baltimore was a surprise given AirTran's neglect to the Seattle market. However, it wasn't a surprise in that AirTran wants to open longer point-to-point routes. In the past few years, AirTran's business model has been focused on primarily short-haul flights up and down the East Coast, because their new, efficient 717 aircraft allowed the airline to open routes to smaller markets, and offer high frequencies to larger markets, making the airline a serious competitor to Delta with low fares and a strong route network out of Atlanta. However, AirTran isn't receiving any new 717s any more because the plane is no longer being built. Consequently, the only way AirTran is growing is with new, larger, 737-700 aircraft, that unlike the 717s, have the capability to fly transcontinental routes. AirTran first used its 737-700s to expand on longer routes from its Atlanta hub. AirTran recently started serving Phoenix from Atlanta, and this summer the airline will commence service to San Diego also from Atlanta. But AirTran now seems to be shifting their focus from serving Western markets nonstop from Atlanta, since the airline now serves, or will soon serve all the major markets on the West Coast (except Portland, Oregon, which will eventually be announced). Instead of opening new transcontinental routes from Atlanta or boosting capacity on existing transcontinental routes from Atlanta, AirTran is focusing on linking its major East Coast focus cities, including Baltimore, Orlando, and Fort Lauderdale to select markets in the West. Seattle lacked nonstop service to Baltimore, and up until AirTran's announcement, Baltimore was by far the most popular market that lacked a nonstop flight from Seattle, with over 600 passengers traveling the route daily. But just as Seattle needs service to Baltimore, San Diego needs service to Orlando. There are rumors (and like the ones I mentioned in an earlier post about new service to Portland, Maine, which turned out to be true, these appear to be plausible) that suggest that AirTran will launch new nonstop service between two of America's most popular vacation destinations. But not only is the leisure market significant between the two cities, there is also demand from business travelers in the defense and space industries. Although San Diego has had nonstop Florida service in previous years, airlines have pulled out because the yields can be too low (since most of the passengers are leisure travelers), and the demand wasn't satisfactory. AirTran knows how to survive in the low-yield Florida market, and has succeeded even with pitiful load factors. Moreover, AirTran won't be flying 200-seat 757s or other very large aircraft on the route, which is what some airlines tried to do years ago. Instead, AirTran's 737-700s hold 137 passengers, so AirTran can cater to the moderate demand for the route. Also, AirTran may try to cut costs further, by making the flight five days a week like the Seattle to Baltimore flight (most likely Thursday-Monday) even though that could reduce the number of business travelers AirTran attracts on the flight. Also, if AirTran makes the flight a red-eye, it will increase aircraft utilization, allowing the aircraft to fly other routes during the day.

If these rumors are in fact true, and AirTran announces Orlando to San Diego service, it will likely be a profitable route because there is sufficient, but not necessarily significant demand for a nonstop flight on the route and AirTran has such low costs that will reduce the breakeven load factor for the route. Moreover, the new route will be indicative of a pattern in AirTran's expansion. Future nonstop routes from various AirTran East Coast focus cities could help the airline work its way to profitability, as the airline can diversify its route network, increase aircraft utilization, and even charge a premium for some of these nonstop flights. AirTran may be starting some new point-to-point transcon flights in order to get a jump on Southwest, which is expanding on longer routes, especially from some of AirTran's key focus cities in Baltimore and Philadelphia. As AirTran continues to receive new 737-700s, they will likely start new nonstop transcontinental routes, probably from Florida (including from Orlando, Fort Lauderdale, Tampa, and maybe even Fort Myers), as well as Baltimore, and possibly Akron/Canton, Boston, Philadelphia, or even Charlotte. One thing is clear; AirTran will try to use at least some of their new capacity for longer routes in order to strengthen their market share in key focus cities, and to diversify themselves from expanding merely on cutthroat short-haul routes to and from Florida.

AirTran Transforms its Baltimore Focus City Into a Small Hub

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

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

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

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

AirTran and Midwest Launch New Routes to Underserved Markets

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

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

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AirTran's Changing Competitive Position on the East Coast

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

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

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

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

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

Memphis Receives New Low-Cost Service, but Will it Last?

Yesterday, Frontier Airlines announced that it would open a focus city in Memphis with flights to three cities on 114-seat A318 aircraft. Frontier's Memphis flights will start on May 12 with two daily flights to Denver, one daily flight to Orlando, and five weekly flights to Las Vegas (Thursday-Monday). Frontier is taking a major gamble in a market that already receives excess flights due to Northwest's hub in the city. The only other low-cost airline that flies from Memphis, AirTran, has had difficulty filling planes from the city, but that's primarily due to AirTran's Atlanta hub, which isn't convenient for flights to the Midwest or the West from Memphis. Consequently, until today in a press release, (which I will elaborate on later in this post), AirTran hasn't expanded their Memphis operations because of mediocre loads. But Frontier's new service is a gamble that may pay off considerably for the airline, which is struggling to expand outside of its Denver hub, or it may prove to be a disaster if other airlines lower fares too much and force Frontier out of the market. Frontier is making a very interesting move, since not only are they starting service to Denver, which offers a wealth of connection opportunities for passengers traveling to cities in the West, but they are starting point-to-point service to two, popular, yet low-yield destinations which Frontier has very little market share in. Frontier doesn't have any point-to-point flights from Orlando, and only offers up to three daily flights to Denver, while Frontier only has minimal (currently only one flight a day) point-to-point service between Las Vegas and San Francisco, as well as up to seven daily flights between Las Vegas and Denver (though given the volume of flights from Las Vegas on Southwest, nearly 200 daily, this is quite small). These destinations are very risky because they have such low yields, and Frontier isn't well-known in any of these cities, making it likely that passengers will consider airlines they're more familiar with, such as Northwest, US Airways or AirTran. These well-known carriers will also match fares and offer incentives for frequent flyers to fly with them, making it more difficult for Frontier as a new entrant into these markets. Orlando and Las Vegas are also high-volume destinations, so it's certainly possible that Frontier will be able to fill up their aircraft, even from a smaller market like Memphis, but at what price? If the yields are too low, Frontier will find plenty of customers, but few profits. If Frontier can fill planes on high-volume, but low-yield routes, it could convince Northwest to place more mainline aircraft in the city, creating some interesting, and rigorous competition for Frontier. And if Frontier's service is successful, then it could lead to more Frontier flights from Memphis, but I worry about the destinations Frontier has chosen to serve initially because I don't think Frontier has started service in a way that will allow these routes to be successful.

Moreover, I hope this doesn't signal the location of an Eastern hub for Frontier. Frontier has contemplated for some time whether to create a hub in the East to funnel passengers to a wider variety of East Coast cities. If Memphis is this location, I believe Frontier could have done better. While there are certainly advantages to Memphis, primarily that it is relatively free of service from low-cost airlines, especially Southwest, the disadvantages seem to outweigh the advantages. The market is relatively small, and Northwest has shown that Memphis cannot support nonstop service to many markets. Northwest's hub in the city is shrinking for this reason, as more and more regional jets are being placed on routes to and from the city. Frontier doesn't have a bunch of regional jets at its immediate disposal that it could use to directly compete with Northwest, though Memphis service could factor into longer-term plans to provide regional service on 70-seat jets operated by Republic Airways. Other cities, such as Cleveland, Raleigh-Durham, or Pittsburgh, might be more attractive hub locations for Frontier, since they are all underserved by low-cost carriers, and all have relatively high fares. However, because Southwest is present in all three of those markets, Frontier chose to avoid them, even if the cities Frontier planned on servicing from these potential hubs (primarily Denver and leisure markets in Mexico) lack direct competition from Southwest. Memphis is a good focus city for Frontier, and I hope it stays that way and doesn't evolve into a hub, although I question the approach the airline has taken to its expansion from Memphis. If Frontier makes Memphis a focus city, Frontier will still struggle in the market because it is launching flights to low-yield markets as an airline that few people in Memphis have ever heard of. Frontier should instead build a market to cities in the West via Denver, and then in the fall or winter launch flights to leisure destinations including Las Vegas and Orlando. Frontier is making the right decision to expand its wings beyond Denver, but Memphis may not have been the best choice, other markets, even with Southwest, provide more attractive long-term point-to-point opportunities for Frontier. I predict that the most successful flights from Memphis will be those to Denver, because it offers a variety of connection opportunities to cities in the West which are otherwise difficult to access with flights on Northwest, the point-to-point flights will likely struggle. When Frontier starts Memphis service in May, it will start a protracted summer battle between Frontier, Northwest, and to a lesser extent, AirTran, which could signal whether Frontier made the right choice by choosing to serve Memphis, or whether Memphis was unable to support Frontier's flights in terms of passenger numbers and/or yields.

As I mentioned above, Frontier isn't the only low-cost carrier that recently made an announcement concerning new Memphis service. AirTran announced today new daily service between Memphis and Orlando starting May 8. Given how AirTran's announcement for Memphis to Orlando service was bundled with announcement for new routes between Kansas City and Orlando as well as a second daily flight between Milwaukee and Orlando, it's unlikely that AirTran added this service to directly compete with Frontier, which made its announcement only yesterday. AirTran's new Memphis service makes much more sense than Frontier's. Both Memphis and Kansas City are AirTran markets that have struggled a bit and haven't attracted the loads AirTran hopes for. When AirTran introduces a new market, typically it introduces service to its hub in Atlanta first, but then often adds service to its major focus city in Orlando. Orlando is a major market for AirTran, and the airline has considerable market share in the city, making AirTran's flights popular with vacationers and residents alike. Most new markets demonstrate quickly that they can support Orlando service, given passenger loads that are transiting through Atlanta between a new market and Orlando. However, Kansas City and Memphis have both struggled, but AirTran feels that now is the time to expand service from both these markets. If AirTran adds Orlando flights, it won't change the realities of Memphis much. Unfortunately for AirTran, their Atlanta hub is simply a poor location relative to Memphis and given that Northwest's hubs in Minneapolis and Detroit, as well as hubs other airlines operate, such as American's in Dallas/Fort Worth, or Continental's in Houston, offer better locations and connectivity, AirTran will naturally struggle in the market. Their best hope to succeed is to market themselves as the airline to fly to Florida, and Orlando may only be the beginning of AirTran nonstop service between Memphis and Florida. Like other markets such as Milwaukee, passenger loads and yields over time will hopefully justify service to additional Florida destinations including Ft Myers and Tampa. AirTran has some of the lowest costs in the industry, and so they can afford to offer low fares on Florida routes and still be profitable. But Frontier has higher costs, and they may not be able to compete if fares decrease dramatically on routes from Memphis to Orlando and Las Vegas. The question in Memphis isn't whether low-cost providers can succeed, but rather how they succeed. Because Northwest still offers nonstop service to many cities from Memphis and because there is strong loyalty to Northwest from many in the Memphis area, it's unlikely that AirTran or Frontier should challenge Northwest on routes flown primarily by business travelers, such as Memphis to New York City and Memphis to Boston, at least until low-cost carriers establish themselves firmly in the city. Operating leisure routes is the best way low-cost carriers can profit from Memphis initially because they have such high volumes of passengers. Because of this, AirTran is making the right choice by slowly adding Florida service, but I worry about Frontier because they may be expanding too quickly in Memphis, and they may be opening routes which they may not be able to operate profitably if fares plummet.

Southwest Announces Resumption of San Francisco Service

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

ExpressJet's Independent Carrier Announces Initial Routes

ExpressJet formally announced the new routes that their independent carrier will fly, starting in April. Overall, the routes appear to avoid competition and provide opportunities for business travelers to fly nonstop on routes that currently lack nonstop service. Nonetheless, ExpressJet will face an immense challenge to create a profitable airline, although they certainly have a better business plan than Independence Air. However, numerous details bother me about ExpressJet's route map. First of all, there seem to be too many cities on it. It concerns me that ExpressJet will be able to build up awareness and a market for flights in cities that will only have one or two daily flights. ExpressJet should instead focus on linking 10 or 12 midsize cities and building strong markets in them, rather than offering one or two daily flights from a bunch of cities. Currently, ExpressJet's route map is a mix of small and midsize cities, with no clear pattern concerning why some small cities are being served while others are avoided. For example, Bakersfield, Corpus Christi, and El Paso only have one route each, and it might be difficult for ExpressJet to build a market in these cities when they plan to offer so little service. ExpressJet also plans to operate a heavy intra-California flight schedule. Even though ExpressJet plans to operate from smaller airports including Fresno and Monterey, there is still significant competition from low-fare carriers at larger airports nearby. ExpressJet may be able to succeed with these flights, but they need to count on a dedicated base of business customers who are willing to pay for the privilege to fly nonstop to Ontario and San Diego. The prices on intra-state travel are very low right now, and ExpressJet will need to market itself to customers well in order to justify its higher prices. Flights from Fresno and Monterey could justify higher fares, but how much higher when it costs less than $50 to fly to the other end of the state on Southwest? Otherwise, intra-California service may be a liability for the airline.

ExpressJet has done a good job diversifying itself in larger and smaller markets. Larger markets such as Omaha, Ontario, Oklahoma City, and Sacramento will all be serviced by ExpressJet, but the airline is careful to avoid any direct competition with Southwest, which serves all these cities. Moreover, in these markets, ExpressJet is ensuring that the flights are long enough so that the time saved by avoiding a connection is significant, and worth paying extra for. However, I am disappointed that this carrier didn't take advantage of opportunities that I believe they missed with some of their Midwestern cities. Omaha, Oklahoma City, and Tulsa could all use more connection opportunities to the Northwest and the Southeast. Unfortunately, ExpressJet decided against providing service between the Midwest and these two regions, which I believe is a mistake, since there would likely be more business travelers flying these routes, (as flights to California are often filled with leisure customers) and there are fewer connections to these regions than to California, so the time saved at the airport would be more substantial than for California nonstops.

ExpressJet will have difficulties attracting customers, because as an independent carrier with high-cost aircraft, it will inevitably be a tough sell for customers. However, this business model could work on many of the routes ExpressJet proposes. But ExpressJet will need to be extremely vigilant and monitor the profitability of their routes. Underperforming routes shouldn't be given a chance to prove themselves, they need to be cut quickly. If ExpressJet monitors their operations closely and looks for new expansion and revenue-generating opportunities, then they can succeed. However, if management doesn't take a realistic approach to this business, by not recognizing the realities of the balance sheet and the necessity to move airplanes quickly to profitable routes, then the carrier will fail. ExpressJet also needs to recognize that they should try to portray themselves as a unified airline, not a company that has a disjointed set of routes across the United States. In its future expansion, ExpressJet will need to do more to unify the carrier by adding more routes from current cities to cities in a wide variety of geographical locations (as aircraft range will permit). By unifying the carrier, it will allow ExpressJet to expand its customer base in its focus cities and provide a variety of flights, so business travelers will remain loyal to ExpressJet instead of bolting to another carrier that offers service to more cities. It's unclear how ExpressJet's independent carrier experiment will succeed, but my guess is that some routes will fail rather quickly and need to be dropped, while others will tap into large customer bases and be successful. This new carrier can be successful, but it shouldn't be attached to its current structure, because some of these routes will likely lose money, and if this airline is to succeed, then it must mold itself to the changing realities of the airline business, and the needs of its customers and shareholders. This is what Independence Air failed to do, and if ExpressJet doesn't do it, then the carrier will fail and they will send a lot of regional jets back to Continental.

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

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

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

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

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

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

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.

AirTran and Midwest Announce New Routes in time for Summer

Earlier today, AirTran announced new seasonal service between Atlanta and San Diego as well as service from St. Louis to Atlanta and Orlando. Meanwhile, Midwest Airlines announced new service between Kansas City and Seattle/Tacoma. None of these announcements are surprises; St. Louis and San Diego are two of AirTran's largest unserved markets, and Midwest service to Seattle has been expected for some time now. But both these announcements demonstrate that both carriers plan on growing, regardless of whether a merger occurs. Interestingly, both carriers have a common enemy with these latest route announcements: Southwest. Southwest's strength in Kansas City and St. Louis demonstrates that a merged airline would have better leverage against a more powerful competitor, at least in certain markets. Southwest is the only carrier that currently offers nonstop service between Seattle and Kansas City, and the service has done quite well for the carrier. Meanwhile, Southwest offers nonstop service between St. Louis and Orlando, as well as nonstop service between St. Louis and many other destinations that passengers who fly AirTran will have to connect in Atlanta to get to. Southwest also offers service between San Diego and Eastern hubs in Nashville and Baltimore that offer easy connections to most AirTran cities. While AirTran's and Midwest's new routes should be successful, they will face intense competition from Southwest, and that could lead to lower fares and a competition for market share in cities that AirTran or Midwest will have difficulty gaining a foothold in because Southwest is already well established.

However, a merger between AirTran and Midwest could lead to a stronger, consolidated position in markets that either AirTran or Midwest as well as Southwest are strong in. This is because Midwest currently offers a far superior product to Southwest, but also commands a fare premium which many passengers are unwilling to pay. AirTran has a product that is roughly equal to Southwest's. AirTran offer less legroom than Southwest, but compensates with free satellite radio. The merger plan calls for a combination of both products that will allow the merged carrier to have an product and cost advantage over competitors. If the merged carrier can keep costs low, and given that AirTran's costs are some of the lowest in the industry they should be able to, then the merged carrier could profitably offer fares competitive with Southwest while maintaining an advantage in terms of product offered. By merging, the new carrier will also be able to consolidate costs in shared markets leading to a further reduction in costs. Kansas City is one example of a market the merged carrier could expand and gain market share profitably. Southwest and Midwest have dozens of daily flights from Kansas City, but AirTran only has three. A merged carrier could consolidate gate space and counter costs at the airport to help keep a substantial cost advantage over Southwest. The new airline would offer service to most of the cities that Southwest currently services from Kansas City, but with lower costs and with a better product. Midwest Airlines already has a popular brand and significant market share in Kansas City, and the merged carrier could build upon that advantage with lower costs and fuller aircraft. But, the advantages experienced in focus cities like Kansas City would be less true in some of the smaller operations in the merged carrier's network. Spokes, such as San Diego, are integral to the carrier's network, but will result in fewer synergies and more difficulties in obtaining market share. Midwest already offers nonstop service between Kansas City and San Diego, and AirTran will soon offer nonstop service between San Diego and Atlanta. However, neither carrier has much market share or name recognition in the San Diego market, and it's unlikely that the merged carrier will dramatically increase their San Diego operations to change the status quo anytime soon. Because both carriers have such few flights to the city, there would be few synergies that the airline could build upon and lower costs. Also, the size of aircraft operated to the city could be a liability, since Midwest's 717s and AirTran's 737s are flying near their maximum range for San Diego flights, and larger aircraft from legacy competitors could serve the city more cost-effectively. Meanwhile, strong competitors, including Southwest, could lower fares in San Diego because they have synergies that create lower costs in larger operations. This trend could lead to many spokes becoming unprofitable for the merged AirTran/Midwest. This problem isn't unique to AirTran and Midwest, other carriers such as Frontier or the former America West faced difficulties lowering costs and expanding in spokes with competitors that had much larger operations. In San Diego, Southwest has the market share that could enable it to lower fares and drive competitors out of the market. Many competitors have been decimated by Southwest on shorter routes to and from San Diego, but because Southwest offers fewer flights to destinations farther away and Southwest's business model is built on short flights, not long ones, Southwest is less competitive on longer routes. This is an advantage that Midwest and AirTran could capitalize upon, but unfortunately the size of Midwest and AirTran's operations wouldn't allow a merged carrier to effectively compete with Southwest on longer routes to or from San Diego without a revamped strategy. Instead, the merged carrier would be wise to focus on point-to-point flights between focus cities where Midwest or AirTran already has a strong presence. That way, the merged carrier could keep costs down because of synergies in their operations while commanding a small fare premium on some routes between focus cities that currently have little or no nonstop service.

The new routes that AirTran and Midwest are announcing separately could be important components of a merged network. However, given the threat of Southwest in many markets, the merged carrier would only be able to compete and grow profitably in markets that AirTran or Midwest already has a strong foothold in. New spokes that are coming online to one network or the other could be the weaknesses in this airline's network because neither carrier has the market share or the name recognition to expand significantly in a market dominated by another provider. Focus cities, which will be critical pieces of the new airline's network will have to be built from the ingredients already present. Cities like Kansas City, Chicago, Philadelphia, and even Charlotte could become important focus cities for the merged carrier, but spokes in the carrier's network will likely remain as they are, spokes, without hope for significant expansion. That is fine if the carrier can still muster enough market share to be competitive on longer flights where passengers will connect, but if Southwest or other LCCs force the merged carrier out of certain spokes, like Seattle/Tacoma or San Diego, then the strength of the airline's network is greatly diminished, and many passengers, particularly those who fly on higher fare tickets for business, will likely opt for other airlines that offer more destinations. In recent days, AirTran has been pushing the issue of a merger ahead and plans to solicit Midwest investor support for the plan. However, it remains to be seen whether a merger will occur, and whether it will strengthen or weaken both airlines.

Southwest Rejects Gaming, Considers Alternate Methods to Boost Ancillary Revenues

Southwest Airlines CEO Gary Kelly told the Financial Times that the airline has ruled out gaming as a method of boosting its sagging revenue growth. Southwest has been at the forefront of the effort to raise fares in recent months, in part due to the rising cost of fuel for Southwest due to the carrier's expiring fuel hedges. However, Southwest wants to limit those increases in order to keep air travel affordable for passengers, since so many of Southwest's customers in particular are price-sensitive. Many of Southwest's customers take discretionary trips, which would not be taken if airfares were much higher. Instead of using fare increases as a mechanism to boost revenue, Southwest is considering boosting ancillary revenues from various sources, such as hotel and car rental booking engines on Southwest's site. Each time a hotel, car, or cruise is booked on Southwest's site, Southwest receives a commission, a win-win situation for all involved. While these revenue streams can be very profitable to a carrier that operates in leisure markets, Southwest is only collecting revenues from a relatively small number of customers who use the service. Allegiant Air, which operates flights to three of Southwest's leisure markets, Las Vegas, Orlando, and Tampa, has been far more successful in converting air travel purchasers into package purchasers. Southwest could certainly learn a thing or two from Allegiant, perhaps by incorporating Southwest's vacation Web site into their primary Web site better. But even if Southwest is successful at selling more vacation packages, there are still many untapped revenue streams that Southwest needs to exploit. Southwest's costs are rising too quickly, and are already well-ahead of their newer competitors including JetBlue and AirTran. If Southwest increased the diversity of their ancillary revenue streams, not to the point of Ryanair, but enough to make Southwest the US LCC leader in utilizing ancillary revenue streams, (at least until Skybus comes along) then Southwest would be able to lower fares and compete more effectively with other low-cost carriers.

The first area where Southwest can make itself more competitive with other LCCs is in the area of checked baggage. Southwest should realign its antiquated checked baggage policy to make it comparable with other carriers. Southwest is the only major US airline to allow customers to check up to three complementary 50 lbs bags; most carriers only permit passengers to check two free bags. While few Southwest customers check three bags, it would be a good way to raise excess baggage revenues from the small number of passengers who do check three bags, and it would also send a signal to customers that Southwest plans on enforcing baggage policies more strictly. While Southwest would likely face backlash from customers if it decided to reduce the limit even further to one free checked bag, Southwest would be wise to monitor the Spirit experiment closely and see whether customers adapt to Spirit's one-bag policy without too much difficulty or resentment towards the airline. If so, then Southwest should quickly adopt a similar policy. The policy would reduce the number of bags checked on Southwest flights each year and it would increase the amount of revenue Southwest collects in excess baggage fees, an important ancillary revenue stream. If Southwest implemented the policy, it would likely be successful for both passengers and the airline provided that: a) Southwest gives customers sufficient time to make the transition, and helps customers by offering clear, accessible information about revised baggage policies. b) Southwest charges a relatively low fee for the second checked bag. Spirit plans to charge $10, which seems reasonable for Southwest, since it still allows customers who want to check two bags to benefit from low fares, but simply pay a small fee to reimburse the airline for the cost of checking that second bag. c) After a transition period, Southwest strictly enforces both checked and carry-on baggage allowances. Customers who try to cram too much into their carry-on should be forced to check that bag at their own expense. This approach to reducing the amount of baggage carried on aircraft shouldn't be unique to Southwest. United has already considered charging for checked baggage under their "bare fare" concept. Other low-cost airlines should consider adopting stricter baggage policies, following the guidelines above, but only if customers adapt to Spirit's new baggage policy without too much trouble and animosity towards the airline. Otherwise, the increased excess baggage revenues and the lower baggage handling costs will mean little as airlines lose valuable repeat customers. But even if Southwest doesn't adopt a one-checked bag policy, they should at least realign their baggage policies to make them comparable with other carriers.

Southwest should also consider charging for seat assignments. Southwest is the only US carrier to not offer any seat assignments, but the airline is developing procedures for doing so. If Southwest used seat assignments as a revenue source then the airline could attract customers who are turned off by the airline's "cattle call" boarding system. However, if Southwest sold seat assignments, there would inevitably be passengers who wouldn't purchase one. If Southwest wanted the system to work in a humane way that benefited customers the most, they would offer three boarding groups. The first group would be pre-boarders, such as the disabled and parents with small children. The next group would be passengers with assigned seats, and the final group would be passengers without assigned seats, who would choose seats onboard the aircraft like the "cattle call" system Southwest currently uses. However, if pre-boarders boarded before those with assigned seats, there would likely be conflicts of parents being forced to move after they've taken a seat. So if Southwest sells assigned seats, they should do it in much the same way Northwest does with its Coach Choice program. Certain window and aisle seats (for simplicity's sake, in the first few rows only) could be booked in advance, as well as bulkhead and exit row seats. That way, flight attendants could direct pre-boarders away from seats that had already been assigned. While paying for assigned seats might make Southwest uncompetitive with low-cost airlines like JetBlue that assign virtually all seats, it would allow the airline to raise revenues and still allow customers who don't desire a seat assignment to not have to pay for one.

There are other numerous ways Southwest could raise ancillary revenues, and they are too numerous to discuss in great detail. However, gaming will not be the only form of ancillary revenues that Southwest will reject. Southwest will likely reject in-flight mobile phone use, at least for the time being, because most customers find the idea of ringing phones in-flight too distracting and it would add to the stress of travel. When the technology is perfected, then Southwest might consider it. However, the only way in-flight mobile phone use might satisfy customers is if passengers can only text message with people on the ground, and don't have the ability to talk to them. A text message-only service would be far less distracting for most passengers. However, Southwest won't likely implement such a system for many years because of the technological imperfections and the high installation cost. Another source of ancillary revenues that I doubt Southwest plans on tapping anytime soon is in-flight food and beverage offerings. Southwest, like most low-cost carriers, offers complementary snacks and nonalcoholic beverages to passengers. Many passengers relish this perk, and it's unlikely Southwest will modify this policy anytime soon. It's likely that Southwest won't offer expanded snacks or meals, such as sandwiches or salads to customers, even for a fee. Southwest recognizes that most of their flights are short, and customers would rather purchase a higher-quality meal at the airport than a sandwich in the air. However, Southwest's flights are getting longer on average, so in the future, Southwest may consider adding a selection of sandwiches or salads that customers can purchase on longer flights. However, I don't expect Southwest to implement that change in the near future, but it's not completely out of the question. If Southwest can find the right suppliers at the right cost, they may decide to test heartier food on some of their longer flights. But implementation of buy-on-board food on Southwest probably won't be for at least one to two years. Finally, Southwest may add in-flight entertainment to their aircraft. If Southwest does so, they may consider charging for the service. Southwest will want entertainment that is versatile, that customers on flights of an hour or four hours can use and enjoy. That means that Southwest will probably not be showing movies in the cabin anytime soon. Video screens would be prohibitively expensive for the short flights Southwest operates since customers need a longer amount of time to enjoy video entertainment. However, satellite radio is a definite possibility, and Southwest may be able to charge for the service. While offering satellite radio could help Southwest's image and their bottom line, Southwest should consider charging a nominal fee for the service. That fee could be nothing on short flights, but on longer flights, many customers would be willing to pay a fee of up to $5 to listen and Southwest should charge. AirTran, which like Southwest operates relatively short flights, has installed satellite radio on all its planes and doesn't charge customers to use it. However, customers who don't have headphones can purchase a pair for the nominal fee of $2. Adding satellite radio is a more realistic possibility than charging for seat assignments or meals, but it's still not a certainty, and the implementation of the technology will depend on the direction the airline plans to take. Southwest has a lot of options for boosting their ancillary revenues, but any attempt to do so has to coincide with a transformation the airline is making. If Southwest is trying to transform itself into a more competitive airline with somewhat higher costs, then they need to offer some of the services passengers expect such as in-flight entertainment or seat assignments for free. But if Southwest wants to raise revenues and keep costs down, they should only implement services and products that will raise revenues. However, if Southwest adds these frills, then the airline needs to give customers the option of using the product or service. Some customers may want to, and others won't, but Southwest needs to accommodate all its passengers if it expects to remain competitive in the future regardless of the direction the airline plans to take

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

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

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

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

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

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

Will San Diego Continue to Prosper Without a New Airport?

San Diego's lone single-runway airport, Lindbergh Field, is the world's second-busiest single-runway airport, after London's Gatwick Airport. But unlike Gatwick, Lindbergh Field has no plans to expand, since it would be virtually impossible to build another runway on the site given the fact that the airport is tightly bounded by the Pacific Ocean, residential neighborhoods, and a military instillation. There is no room on the current site to construct a new runway, and the airport is becoming increasingly crowded. New gates are being built, and soon the airport will operate at 86% of its total gate capacity. All experts project that with the growth of the San Diego region, the airport will eventually become insufficient to handle the amount of air traffic the region will demand, although it's debatable when that will occur. San Diego's economy might suffer, as airfares rise with increasing demand for seats to San Diego and consequently, many tourists may balk at the region. This past November, the citizens of San Diego voted down an advisory measure that would have allowed the airport authority to work towards building an airport at the Marine Corps Air Station Miramar near San Diego. That proposal was opposed by the military, because the plan involved the airport operating jointly with a military base, something the military wants to avoid at all costs. The failure of this measure means that there is no clear plan for a relief airport in the San Diego area. There are no ideal sites, and as the region grows, more and more potential sites will become developed and unusable for an airport.

Many residents have been fighting a proposed new airport, arguing that Lindbergh Field can handle much more traffic, and point to the example of London Gatwick as an airport that handles considerably more passengers with a single runway. However, while there are numerous flaws in that argument, the primary flaw is that many, if not a majority of the aircraft that use London Gatwick are operated by European low-cost carriers, which are notorious for packing in seats. Gatwick has two large terminals, and can accommodate all the passengers airlines bring in and doesn't need a second runway because the airlines that operate there operate aircraft with a very high number of seats at high load factors. EasyJet and Monarch are two of the largest carriers at Gatwick. EasyJet packs 156 seats into its A319s, and operates with an average load factor of over 80%. Monarch operates several aircraft types including the 757, which it packs a horrendous 235 seats into, making it a very, very uncomfortable aircraft to fly on. It too operates with very high load factors. Many airlines at Gatwick are charter airlines, and fly to many of their destinations less-than-daily, consolidating many passengers into a few infrequent flights. San Diego has to contend with many more different sizes of aircraft, from commuter aircraft to large single-aisle planes, and the majority of airlines that operate into the airport have reasonable seat pitch, and operate with lower load factors than carriers in Europe. San Diego isn't abnormal in that regard, that's simply the state of American air travel today. Southwest is the largest tenant at Lindbergh Field, and operates 122- or 137-seat 737 aircraft from the airport with load factors of around 75%. Part of the problem is that some of the flights San Diego has to support are regional flights on commuter aircraft to LAX or the Bay Area, which carry fewer passengers, but take about as much time to land as larger aircraft. Many airlines that do fly to San Diego fly there with 737-sized aircraft because that's what the market requires, and that won't change anytime soon if customers want frequent flights to a variety of cities throughout the day. San Diego will not be able to support anywhere close to the number of passengers Gatwick supports because of the nature of the airlines that fly there and the desires of customers who travel there.

One potential solution for Lindbergh Field is for the airport to require airlines to operate aircraft with a certain number of seats onboard in order to make most efficient use of the runway. Perhaps no airline should be able to fly aircraft to Lindbergh that have fewer than say 120 seats. That's a working estimate, and the airport authority could create a different restriction based upon the needs of the airport. This restriction wouldn't solve the gate problem, since the airport will still eventually run out of gates, but operating larger aircraft to the airport will allow airlines to make better use of the existing gates. If the airport put in a restriction requiring airlines to fly aircraft with a certain number of seats onboard, many airlines might get upset, since they want the flexibility to cater to customer's demands. Airlines feel that San Diego warrants 737-sized aircraft because many customers prefer more frequent flights to the airport. Also, many airlines are short on larger aircraft, and don't want to have to switch 757s or 767s from other, longer routes, to operate short jaunts to San Diego just because the airport can't accommodate more aircraft. It's difficult to fathom what would happen if airlines were forced to operate larger aircraft to Lindbergh Field, whether the airlines would simply go ahead with the proposal or fight it out with the airport. But one thing is clear; if the airport imposes restrictions on the number of seats an aircraft must have so it can land at the airport, airlines will be forced to trim flights, and while the number of seats may be the same as before, customers will lose some choice on flight timing and that will likely have an adverse impact on tourism and business in the region.

The people of San Diego must wake up and recognize the crisis that lies before them. Unless they work with the local airport authority and the military to find a realistic solution to overcrowding at Lindbergh, Lindbergh will become increasingly crowded and airlines will be unable to expand flights to meet the growing needs of the tourist industry as well as the residents of San Diego. Any solution will be far from ideal, and will likely be at least an hour away from downtown San Diego because unfortunately, that is the distance most realistic airport sites are from downtown. So when a new airport is built, it must include new high-speed rail links to downtown San Diego to help move visitors easily and cheaply from the airport. Any plan may also force residents to choose between loyalty to the military, and loyalty to economic growth and tourism because a new airport in San Diego may have to be built on a military facility, even one that is currently in use. It's far from ideal, but the rapid growth in the region doesn't leave the airport authority with many options. Unless residents are willing to stand up to the military, although it's unlikely in a military town like San Diego, a new airport may not get built until it's too late, and Lindbergh is operating over its capacity. When that happens, the residents of San Diego will regret not having taken corrective action to construct a new airport, because it will limit business and tourism growth in the region and make it a less attractive place to live.

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

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

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

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

Should Northwest Consider a Merger?

According to some recent reports, including this article by The Pioneer Press, the answer is yes. And there are many reasons why Northwest would make a good acquisition target, especially with US Airways (if the US Airways/Delta merger doesn't go through) or even United. However, the possibility of a Northwest merger with United is far less likely for antitrust reasons as both airlines have large market shares in Asia, and particularly China. Neither airline would want regulators to force them to give up what could potentially be their most lucrative routes. But, US Airways on the other hand is a very attractive merger target for Northwest. US Airways now has healthy financials, unlike Northwest, and US Airways's route network fits perfectly with Northwest's, making this merger nearly as attractive as the Midwest/AirTran deal.

US Airways has hubs on both coasts, but lacks a central hub in the Midwest, where Northwest's U.S. hubs are concentrated. Remember that part of the worry with the America West/US Airways merger was that the new airline would have a "barbell network", with extensive service on both coasts, but lacking in the Midwest and Rockies. A Northwest merger would solve that problem. The biggest problem with the two airlines' route networks is the number of hubs in both. If a merger occurred, the airline might consolidate hubs. It's less efficient to have hubs in two cities relatively close to each other, and both airlines already have that problem in their respective networks. Northwest has two close hubs in Minneapolis/St. Paul and Detroit while US Airways has two close hubs in Phoenix and Las Vegas. If a merger occurred, some hubs would likely be closed. Between them, the two airlines operate seven hubs in the United States in addition to Northwest's hub in Tokyo. It's probable that at least three hubs would close down and become focus cities if a merger occurred.

I would guess that Northwest's hub in Memphis, where Northwest's regional lift providers Pinnacle and Mesaba do most of the flying for Northwest, would be the first to go. Memphis is Northwest's smallest U.S. hub, and has struggled with traffic issues for a long time. Memphis is a bad, bad location for a hub, because it lacks a strong base of origin and destination (O&D) traffic, and is in a relatively poor location geographically. O&D traffic refers to the number of passengers that use Northwest to fly to its Memphis hub but who aren't connecting but rather departing or arriving in Memphis. Because Memphis is a relatively small city, the number of flights it gets is very disproportional to the number of passengers who actually are traveling to/from Memphis. Cities like Phoenix or Detroit have larger populations and are better locations for a hub, provided they are in a reasonable geographic location. If Northwest's Memphis hub closed, the merged carrier would probably realign its regional operations. Pinnacle, one of Northwest's two regional lift providers contracts exclusively with Northwest, and their hub is in Memphis. Unless Pinnacle can demonstrate to the merged carrier that it is a valuable supplier, they may have to liquidate. Consequently, a Northwest merger could be opposed by many of Northwest's regional lift provider employees. But, Memphis wouldn't be the only hub to go in a US Airways/Northwest merger. The next likely hub to go would be Minneapolis/St. Paul. Since the hub is located near Northwest's larger hub in Detroit, Minneapolis makes no sense as a location for a hub from a geographic perspective. But moreover, Minneapolis receives far too many flights given its O&D needs. A merged carrier will need a Midwestern hub, and Detroit is a prime location, with Northwest's new terminal and a larger O&D base. Northwest has committed to Minneapolis for too long, and they need to realign their flight schedules in the city to better reflect traffic levels. Minneapolis is simply a duplicate hub that would be too expensive to operate for the merged carrier.

It's important to remember that any hub will receive a disproportionate amount of flights, otherwise, it wouldn't be a hub, since some passengers won't be departing or arriving the hub city. But it makes no sense for an airline to put a hub in a city that will receive few O&D customers, since they help pump up load factors, and airlines can typically charge O&D passengers more since the hub carrier has muscled out low-cost carriers that lower fares. For example, AirTran is currently the only low-fare carrier in Memphis. Minneapolis/St. Paul only has AirTran, Frontier, and Sun Country. Northwest can charge a lot in those markets, and they will make great focus cities, but they don't make sense as hubs.

But now the question becomes which US Airways hub gets eliminated if there are to be four in the merged carrier's domestic network. US Airways operates hubs in four prime cities, Las Vegas, Phoenix, Philadelphia, and Charlotte, and if a merged carrier decides to dismantle a hub operation in a city, there will almost certainly be a smaller, but substantial focus city operation. At first glance, the most logical choice for which hub should be dismantled is Charlotte. The smallest O&D market of the four by far, the city is also relatively out of the way geographically. However, that's where the criticisms stop. There are numerous reasons why it would be foolish for US Airways to dismantle the Charlotte hub. First, the South is one of America's fastest-growing aviation markets, and if Northwest's Memphis hub is dismantled like it should be, then Charlotte needs to remain intact as the Southern hub for the merged carrier. Second, Charlotte itself is a prime business market, and US Airways is able to charge a premium to the business travelers, who travel to/from Charlotte. Charlotte is America's number two city in terms of banking operations, after New York City, so there is a lot of business traffic that goes to and from Charlotte. Third, Charlotte still supports a large network of US Airways regional flights. Even though US Airways has trimmed the size of its regional operation, it's still very sizable compared to other carriers' regional operations, and the Charlotte hub enables US Airways to profitably compete with Delta on flights to and from smaller cities. Charlotte could become a focus city, with the merged carrier dismantling most of its regional and international flights and leaving only point-to-point service from Charlotte to major business and vacation destinations. However, if that were to occur, it would allow Southwest to come in and compete directly with the merged carrier on the routes it still operated. The merged carrier would quickly lose market share to Southwest, and would be relegated a much smaller role in Charlotte. So is there another US Airways hub city that could become a focus city?

The answer is yes, and that city is Las Vegas. Las Vegas has traditionally been a very low-yield market, with low-fare carriers of all stripes hankering to compete in a leisure market with seemingly endless growth potential. With US Airways having reduced their costs considerably, they can compete head-to-head against Southwest and other discounters. A focus city at Las Vegas wouldn't reconstitute a drastic change in their schedule, it would only mean that US Airways dump what little regional service operates from the airport, and perhaps the little international service to Mexico that exists there as well. US Airways concentrates most of their West Coast regional services and international fights from its Phoenix hub. By reducing non-mainline flights at Las Vegas, the airline would concentrate those resources in a larger, and more profitable O&D market, Phoenix, and save Las Vegas for primarily low-yield O&D passengers.

But hubs aren't the only areas where Northwest and US Airways would be great partners. Northwest provides service to few cities in Europe from its Detroit hub and instead offers connections to cities throughout Europe from KLM's Amsterdam hub. Northwest has a code-sharing agreement with KLM that allows both airlines to offer effective connections to North America and Europe without Northwest having to serve too many cities in Europe and vice versa. US Airways also offers limited European service, but offers a broader array of destinations than Northwest. US Airways also has some flights to Central America while Northwest has extremely limited service to the region. US Airways doesn't have any service to Asia, while Northwest offers an extensive Asia network. Internationally Northwest and US Airways don't fit each other as well as other airlines, since if a merger occurred, Europe and Asia would receive plenty of flights, while Latin America would suffer. Every legacy carrier, except perhaps Delta, has a stronger position in terms of market share and routes in Latin America right now, than a merged US Airways/Northwest would have without any new routes. Domestically, both airlines offer limited point-to-point service, the exceptions being for US Airways flights from focus cities on the East Coast such as Boston, New York LaGuardia, and Washington National, and so if the hubs make sense fiscally and geographically, and Las Vegas, Minneapolis/St. Paul, and Memphis are cut as hubs, but left as focus cities, the combined carrier would have a very strong network domestically and internationally.

Fleetwise, this merger also makes a lot of sense. Both carriers are primarily Airbus carriers, and both operate A320 and A330-series aircraft. There are also some Boeing planes in both fleets, however. Both carriers operate the Boeing 757, so integrating those fleets (aside from some of Northwest's older 757s which have different emergency exit, and thus seating configurations) shouldn't be a problem. US Airways also operates ten older 767-200s, and dozens of older 737-300s and 737-400s. Northwest operates none of these models. Northwest operates the Boeing 747, an aircraft type that the old America West used to own in the 1980s, but has since rid itself of. Integrating these fleets shouldn't be much of a problem. The merged carrier could create a uniform seating configuration on all A320 and A330-series aircraft, and on most Boeing 757 planes. Current seating configurations could be kept on planes that only one carrier currently operates. Planes wouldn't also change their current routes much. If a merger occurred, Northwest's 747s would likely continue to operate Asia-Pacific flights, while US Airways's 767-200s could continue to be operated on Atlantic routes. If capacity cuts occurred, some of the older 737-300s or -400s would likely be taken out of service, helping the merged carrier save on maintenance costs for the older aircraft.

However, like many mergers, this one may encounter problems from labor. Northwest has already strained labor relations immensely, by forcing union mechanics to strike and bringing in scabs to replace them. Northwest also replaced all airport employees in non-hub airports with contract employees, and as a bankrupt carrier, Northwest has slashed employee wages significantly. Northwest pilots and flight attendants may be rightly worried about any proposed merger, but sadly, Northwest may be unable to thrive in the next decade if it doesn't make its route network and costs more competitive. These two labor groups should try to work with Northwest management to find an agreement by which the airline can merge, and the new company will keep seniority, pay, and benefits intact, because if they don't, pilots and flight attendants may decide to strike. It appears that while this merger won't happen right away, since US Airways still needs to figure out whether it will merge with Delta, it makes far more sense than the US Airways/Delta merger for the companies involved in terms of synergies of routes and fleets. What a Northwest/US Airways merger can't do, that a Delta/US Airways merger can do, however, is have the power to raise fares significantly, since Northwest and US Airways dominate different regions, while a Delta/US Airways merger would create a very powerful carrier on the East Coast that could hike ticket prices significantly to certain cities. But the US Airways/Northwest merger would allow both carriers to cut costs and to strengthen their respective networks, something both carriers need even more badly right now than the ability to raise fares.

United Airlines Toys With "Bare Fare" Concept

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

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

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

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

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

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

The Merits of a Midwest Airlines/AirTran Merger

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

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

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

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

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

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

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

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

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

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

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

Two Airlines Take Increased Risks With New Flights

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

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

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

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

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

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

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

With LAX Threatening Rate Increases, Will Airlines Make a Further Push to Reduce Airport Costs?

Due to rising security and maintenance costs, Los Angeles International Airport (LAX) is considering increasing costs for some of its tenants. The new rates would only affect airlines with short-term leases up for renewal soon including Southwest, Alaska, and Frontier. However, these are low-cost carriers who are most sensitive to any rate hikes. With LAX feeling the pinch, will other airports follow with similar proposals and will carriers react by trimming or eliminating flights to certain airports? Let's take the example of Southwest at LAX. Southwest has been at LAX for over 20 years, and has no plans to leave anytime soon. LAX is one of Southwest's ten largest destinations with nearly 120 daily departures. Southwest has made a major commitment to LAX and won't likely leave anytime soon for a variety of reasons, but this potential rate hike demonstrates how vulnerable to cost increases many airlines including Southwest still are, and how increases at other airports could trigger additional losses for still-struggling airlines. But before I go any further, it's important to keep airport costs in perspective. While airlines are trimming all of their costs due to the pressure to lower fares, airport costs make up a relatively small part of an airline's budget and haven't been trimmed as much as labor or amenities. At Southwest, they make up less than 10% of Southwest's total costs, partly because some airport costs are passed onto passengers as taxes through Passenger Facility Charges (PFC) that airports can use for improvements. Different airports charge different amounts, depending on their needs. Airports can charge passengers $0.00, $3.00, or $4.50 per segment, adding up to $18 on a round-trip ticket.

Southwest is in the midst of a transition right now and consequently is vulnerable to any cost increases. For decades, Southwest has had the lowest costs of any airline in the United States, allowing the carrier to charge low fares. Southwest today still has low costs, but it's not because of free-for-all seating, no meals, or the use of alternate airports, it's because of their fuel hedges. Southwest made a brilliant, calculated gamble years ago that fuel prices would increase. They have increased sharply, and Southwest is reaping rewards no other carrier can come close to. But, Southwest's hedges are running out. Southwest has hedged successively less amounts of fuel in the coming years, from well over half of its fuel needs this year to 25% by 2010. This means that Southwest will have to start paying higher fuel bills, and their costs will increase. Southwest's labor costs are also relatively high in the industry since most legacy airlines have used bankruptcy to cut wages in the past few years and carriers that have made those cuts have passed on lower costs to their customers. Southwest is transitioning from 10-15% growth a year to likely 8-10% growth a year, as the airline can't sustain a higher growth rate given their current size. And Southwest is starting to serve airports it once shunned, such as Denver or Washington Dulles, because although they have higher airports costs than most of their other destinations, they command a revenue premium, and Southwest is willing to pay the higher costs if they can generate enough revenue to offset the cost of doing business at a higher-cost facility. But the jump in fees at LAX could increase Southwest's terminal lease cost from $13 million a year to $49 million a year, nearly quadrupling its cost of doing business at the airport.

While it's unlikely that Southwest would jettison LAX because of their longstanding commitments, what would happen if the rate increase forced the airline to leave the airport? Southwest would likely try to replace most of the service at other airports in the LA Basin, including Burbank, Ontario, and Orange County. But Southwest couldn't replace all of its lost service because of the size of replacement airports, and would likely lose considerable market share in the region. There are also runway constraints at Burbank and Orange County, both of which have short runways that prevent Southwest from operating longer flights out of those airports. Southwest might consider entering low-cost Long Beach, but given the battle for the existing slots between JetBlue, American, and Alaska, Southwest likely couldn't commence a sizable operation at the airport without considerable legal action to get the necessary slots. Southwest's airport costs would certainly diminish, but a move out of LAX would cost the airline revenue, market share, and loyal customers and would be more trouble than it's worth. But Southwest did exit another high-cost airport in California six years ago. In 2000, Southwest left San Francisco International and moved all its SFO operations to nearby Oakland. Southwest did this for several reasons, the most important being airport costs. San Francisco costs several times more per passenger to fly from than what Oakland costs, and Southwest wasn't commanding a sufficient revenue premium to stay at the airport. Moreover, San Francisco is a delay-prone airport, and Southwest was having trouble sticking to its schedules when they weren't able to execute 25-minute turnarounds due to frequent fog. Oakland is a large airport, and has worked with Southwest to minimize costs. In the San Francisco Bay Area, there was a real alternative for Southwest that could handle the now 139 daily Southwest flights cheaply and efficiently. In the Los Angeles Basin, there is no sufficient alternative for Southwest. None of the alternate airports in the region can accommodate Southwest's traffic level.

However, that hasn't stopped Southwest from trying to reduce airport costs in another key market. A year and a half ago, Southwest created a plan to leave Seattle/Tacoma International Airport and start commercial service from Boeing Field near downtown Seattle, an airport with no commercial service. Southwest was upset at a massive expansion at Sea-Tac that included an unnecessary new runway and a modern, new terminal that went over-budget numerous times. Instead of paying for that project, Southwest pledged to spend hundreds of millions of dollars to build a brand new terminal at Boeing Field. Alaska Airlines immediately responded with a similar plan, and both were later rejected a year ago by King County, which owns the airport. Part of the reason was that many residents were worried about increased noise, however, that was a fallacious argument, as cargo carriers routinely fly into Boeing Field with aircraft that are several times louder than Southwest's. Nevertheless, residents jumped on the anti-noise bandwagon forcing the county to table Southwest's and Alaska's plans to expand commercial service to Boeing Field. But, Southwest is still committed to the issue, and will continue to fight for the right to build a terminal at Boeing Field, although it now lacks much of the political capital to do so given the current public opposition to the plan.

But Seattle isn't the only city where airlines may change airports to find lower costs. St. Louis' Lambert Field will cost considerably more to operate from in the next several years, as American Airlines downsizes and other airlines are having to pay a higher share of American's costs. Southwest has the second-largest operation at the airport and will find itself with a substantial cost increase in the coming years. But, a plausible alternative does exist in the MidAmerica Airport across the river in Illinois. Currently, the only scheduled service at MidAmerica are Allegiant's flights to Las Vegas and Orlando. But if Southwest entered, they would have a lot of leverage with the airport about costs and charges. Any entry into MidAmerica might have to come with a new terminal, financed by Southwest, but if the airline made a commitment to the facility, it could save Southwest millions of dollars a year. The airport is only 30-45 minutes from downtown St. Louis, not ideal for travelers, but certainly manageable. However, like the LAX scenario, this one's unlikely, but it's plausible, and if St. Louis continues to hike fees, then Southwest might seriously consider a move to MidAmerica.

But even at airports that Southwest won't leave from anytime soon, Southwest still has leverage and an incentive to reduce costs. One example is in San Jose. The airport is undergoing an expansion to create a new Terminal B and a new North Concourse that will force the airport to raise fees significantly. Southwest, one of the airport's largest tenants along with American, has encouraged the airport to scale back its plans to make the terminal more economical. A year ago, the airport announced that it would proceed with a scaled-back plan after Southwest's protests. Unfortunately for Southwest, unlike in San Jose, they voted to approve Sea-Tac's expansion plan without much question, raising Southwest's fees considerably. If Southwest wants to stop more of these massive expansion projects, they need to look well into the future and make the assumption that the project will go over-budget. That doesn't mean Southwest should try to block any airport improvements, but they should be economical, specific, and appropriate for the airport and the airlines that serve it. Oakland doesn't need the same kinds of improvements that a larger San Francisco needs because of the two types of airlines that serve each airport. Overall, low-cost airlines like Southwest and JetBlue serve Oakland, and legacies and international carriers serve San Francisco, and the latter carriers might not feel the pinch of airport costs as much as Southwest does.

Many cities want their airports to become museums, with plenty of open space, artwork, and class. Airports want to project a classy image to woo businesses to the airport. After all, when a new businessperson comes to town, the first thing he or she sees is the airport, it can make a great first impression, or a sour one. But airports need to radically reconsider how they are expanding, and passengers need to reconsider what an airport terminal should look like. Airports aren't shopping malls, and they aren't luxury hotels, and if passengers continue to demand low fares, then airlines will try to force rate cuts on airports. In Europe, the balance between cost and class has shifted at some airports. One example is a low-cost terminal opening in Marseille to the likes of Ryanair and EasyJet. The terminal costs airlines about 1.30 Euro per passenger instead of 6 Euro for the main terminal. The terminal was constructed out of an old freight warehouse and offers no jetbridges and few amenities to passengers. This is similar to Amsterdam's low-cost Pier H where the gates are a 10-15 minute walk from the restrooms. While this won't happen immediately in the States, some airports may begin to reconsider what an airport terminal looks like, and passengers may need to understand that in order to keep costs low, airport terminals may need to have more retail space, fewer seats, fewer restrooms, and no jetbridges. If airlines in the United States really want to lower airport costs, they need to start pressuring airports to completely redesign terminals in order to maximize the number of passengers that the terminal can accommodate while minimizing the cost to airlines.

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

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

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

JetBlue Squeezes Into Chicago

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

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

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

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

Odds & Ends

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

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

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

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

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

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

JetBlue May Soon Rejoin Select Global Distribution Systems

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

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

Seat Assignments at Southwest-A Sign of Things to Come

Southwest's announcement of a limited test of assigned seating this past week should come as no surprise to any industry-watchers. The carrier recently spent $5 million upgrading its reservation system in order to handle the complexities of assigned seating. Southwest is the only major U.S. carrier to not assign seats. The reasoning behind Southwest's "cattle-call" boarding system is that's its more efficient than assigned seating. In fact, Southwest copycats Ryanair and Easyjet in Europe have adopted the cattle-call system. In fact, when Southwest started 35 years ago, the cattle-call system was significantly faster than assigned seating. But with the digital age upon us assigned seating is considerably cheaper for the airline to implement, and it won't necessarily have an effect on Southwest's turnaround times, if managed correctly. Southwest may need to start using stairs or twin jetbridges at certain locations to help facilitate the speedy boarding process.

What this signals is an emphasis by Southwest towards improving their product to standards of other low-cost carriers. JetBlue, AirTran, and Frontier, all have assigned seating in one form or another and all have entertainment. Southwest will need to compete since low fares aren't enough anymore. Southwest has an important choice to make, and it needs to make it soon if it already hasn't done so. Changes must be implemented soon, since Southwest's cost advantage currently is with their fuel hedges, and those will dry up in 2010. Currently, the percentage of Southwest's fuel that's hedged is dwindling. Will they try to compete on price alone, a la Skybus, or will they try to keep up in the amenities race, along with offering a competitive fare? Southwest appears to have taken the latter option. Commencing service to Denver and soon to Dulles, two notoriously high-cost airports shows that Southwest is more focused on revenue improvement than on cutting costs. Southwest needs to find a way to cut their labor costs, already they have been asking their flight attendants to work longer hours in their latest contract. Labor may become a problem for Southwest in the future, if Southwest doesn't find a way to manage those costs.

Southwest hasn't aggressively cut costs in recent years like other major airlines. Certainly the legacy carriers had more fat to trim, but Southwest hasn't exerted its influence over certain costs that could be cut. Air traffic control costs are huge, as this country has an outdated ATC system, and no cohesive plan to fix it. It's costing airlines like Southwest millions if not billions in lost productivity and increased costs through delays and taxes. Instead of using their political capital on Love Field, Southwest should consider doing something to fix the ATC system. But perhaps more importantly, Southwest hasn't taken a hard enough line with expensive airports. While Southwest has avoided high-cost and delay-prone airports such as San Francisco, Boston, or Washington National, they haven't put enough pressure on airport operators to cut costs. Certainly the Boeing Field episode in Seattle was a public display of Southwest's frustration with high airport costs and gross mismanagement. But what Southwest hasn't spurred, for better or worse, are low-cost airport terminals found in Europe. These terminals don't use jetbridges, which would help Southwest load and unload faster, and are farther away from the main terminal. While they are cheaper to use, they are also more inconvenient for the passenger, and that may lose Southwest customers when they are competing with the likes of JetBlue.

If Southwest's assigned seating tests are successful, and the airline pushes ahead with full-scale implementation of assigned seats, then that won't likely be the only move Southwest makes to improve their product. Aside from assigned seating, Southwest may offer more food on its planes (may I suggest Texas barbecue sandwiches?), more legroom, or another amenity that could win over customers. Observers can only wait and see what Southwest will do, but whatever it is, it will likely signal a departure from Southwest's long tradition of a simple no-nonsense travel experience.

P.S. I will be away for a few weeks, so don't expect to see a post until around July 20th. Happy summer!

Southwest May Finally Adopt Assigned Seating

Over 18 months ago, this site reported that Southwest is considering assigned seating. Well now, Gary Kelly, Southwest's CEO has admitted that the airline is considering assigning seats. In fact, the airline recently spent $5 million to upgrade its reservation system to see how easily it could assign seats. The airline is also contemplating how this would affect its operations. Southwest is the only major US airline to consistently have 25-minute turnaround times, the lowest in the business. Southwest has expressed concern in the past that offering assigned seats would increase that time, causing an increase in lost productivity and consequently, costs. 

Adopting assigned seating now would be a terrific move for Southwest. The airline will begin to lose many of its cost advantages in the coming years as their fuel hedges expire and labor costs increase. As other low-cost carriers begin to compete more and more with Southwest, Southwest's arcane seating system will help lure customers to Southwest's competitors. With passengers demanding more amenities (such as assigned seating) than ever from airlines, Southwest's free-for-all is something they simply won't put up with, especially since Southwest isn't the only airline in town with low fares. By allowing passengers to select seats in advance, Southwest could create a new revenue stream, if it so chooses, a smart move on routes where it doesn't compete with the likes of JetBlue which lets nearly all passengers select seats for free. Some airlines such as AirTran let some passengers who purchase more expensive tickets pre-select seats for free, those who fly on the most discounted tickets get seats assigned at the airport. Adopting assigned seating would put Southwest where it needs to be, in leagues with other discount carriers, since Southwest can't compete on price alone forever, and when the carrier finds its fuel hedges gone, it will need every customer it can get, and not simply customers willing to put up with open seating.

Four Carriers Best Positioned for a New Wave of Growth

In the United States today, there are three carriers which currently don't fit current parameters. By that I mean that current definitions of carrier size and operations don't fit several medium-sized U.S. carriers. Let me explain. Legacy carriers are becoming more reliant on their hub-and-spoke systems, many non-hub routes which were overall less profitable and more difficult to market have been cut, leaving legacies with their core hub networks. Certainly there are exceptions, as focus city operations from Delta in Boston to American in New York have been kept, but overall non-hub flights simply aren't as common as they once were. This means legacies are refocusing and expanding hubs, and trimming flights at certain hubs. Hubs such as Cincinnati for Delta or Memphis for Northwest are based primarily on the presence of regional aircraft vendors such as Comair or Pinnacle respectively. With regional jets becoming increasingly unattractive for airlines, particularly from hubs, these hubs cannot muster the origin and destination traffic (passengers arriving or departing a city) to substantiate the large presence in a market that can't support that. Consequently airlines are downsizing these hubs but increasing flights at profitable, efficient hubs, just look at Delta's expansion from Atlanta or American's expansion from Dallas/Fort Worth.

Meanwhile, smaller low-cost airlines such as Frontier, JetBlue, and Spirit all follow a different model. Spirit and Frontier are primarily hub-and-spoke, Spirit having some point-to-point routes but are primarily funnel travelers through its Fort Lauderdale hub. JetBlue is primarily point-to-point, but does have connections from Upstate New York to Florida and other destinations (including Raleigh-Durham and Charlotte pretty soon if insider speculation holds up). In any case, these airlines operate either hubs or point-to-point, there is less in between, while legacies are refocusing their efforts on hubs. Yet there are airlines out there, AirTran, Alaska, Southwest, and US Airways which operate a number of substantial focus cities in addition to hubs, but have networks which use the best of both worlds.

These carriers should be squeezed the most in the next few years, but at the same time can be catalysts for growth as AirTran and Alaska have yet to expand nationwide, and Southwest still has many markets to expand to. AirTran, for example, has propagated along the East Coast, similar to US Airways before its America West merger, and is only now expanding to major markets on the West Coast such as Seattle/Tacoma. With the exception of the Bahamas, AirTran has yet to expand internationally, something the airline will likely do in coming years as it seeks higher yields that international routes offer. AirTran also is receiving deliveries of new aircraft, which will help further its expansion. AirTran operates its major hub in Atlanta, but operates a significant focus city in Orlando, as well as smaller focus city operations in Baltimore, Boston, Chicago, Fort Lauderdale, and elsewhere. The airline has successfully combined its hub operations, which link smaller markets such as Pensacola to AirTran's network, while offering the convenience of non-stop flights to/from cities other than Atlanta.

What will create growth in the next ten years are mid-sized markets, populations are expanding in the states, people are spreading out, and airlines must shift to that reality. Believe me, election demographers exploited that in the last election and will in future elections. Some of the most important and fastest-growing population centers are close to major interstate highways, in the Sun Belt, and in the exurbs (beyond the suburbs) where SUVs and megachurches symbolize a dramatic shift in the population and how Americans are now willing to trade convenience for space. The exurbs offer cheap living but that comes at a price, commutes can be 45 minutes or an hour each way to a major city. So, what does all this have to do with air travel?

AirTran as well as Alaska, and to a lesser extent US Airways and Southwest can exploit markets which are close to exurbs. People may be willing to drive an hour to work, but with the kids in tow, may not want to drive more than 20 minutes to the airport, particularly with low fares nearby. AirTran has exploited low airport costs at many airports and its efficient 717 aircraft which are a critical asset to the airline and enable it to serve these medium-sized markets. Take a city such as Sarasota, Florida. The airport was desperate for an airline that would bring low fares to an airport previously controlled by high fare monsters such as Delta. AirTran stepped to the plate and its success was phenomenal, in short, not only have they expanded Atlanta service since they started serving Sarasota, but they also have started serving other cities, including Baltimore, Chicago, and Detroit. Travelers in the area would have been forced to consider the larger Tampa airport if low fares hadn't come to town. Not only that, but other airlines have started service at the airport, trying to pick up some of the AirTran business. If Delta comes to town, they will most likely serve Atlanta and nothing more. With JetBlue and their Embraers, you may get service to a couple of important markets, most likely New York and Boston, but if you don't want to fly there, then you are most likely out of luck with the airline. With AirTran, Alaska, Southwest, and US Airways, you get the best of both worlds. These airlines can connect mid-sized destinations to larger focus cities in addition to hubs. Certainly there will be a place for the JetBlues of the world and the Uniteds, but here you get the best of both worlds. These four airlines that are well-positioned to access midsized markets will get a revenue boost, airports will want new service to complement in many cases regional jets which are the only other aircraft many of these airports get, passengers who live nearby will want the low fares, and in many cases will be willing to pay a little more for a nonstop. But at the same time, having the best of both worlds also leaves you to be squeezed which is a real possibility.

While AirTran, Alaska, Southwest, and US Airways are the best candidates to exploit these markets, they also are vulnerable as well. If JetBlue expands to some of the AirTran, Alaska, Southwest, and US Air focus cities, they could have a product advantage over any of these four carriers. Also, none of these airlines is perfectly positioned to exploit these new markets. AirTran is the best positioned, but with a lack of service in the Southwest or on the West Coast in general, they could miss out on a number of the big growth and revenue opportunities. Alaska doesn't seem interested in tackling medium-sized markets outside of California, but could effectively capture smaller markets in California, Arizona, and Nevada with its regional aircraft, which could prove to be an advantage over other carriers like Southwest which can't access those markets. Southwest's two largest operations are in the Southwest (duh!), in Las Vegas and Phoenix, and even though it may not be able to access many of the medium-sized markets which are attractive these days, it can net some, just look at their success in Texas, even though most of those markets were there from the early days of Southwest, they could replicate their success throughout the Southwest, and potentially in the Midwest. But with the relatively large size of Southwest's planes and Southwest's desire to have new markets which can support a minimum of ten daily flights, Southwest may have a tough time accessing this revenue. US Airways has grown substantially with its latest acquisition, but still can access many of these markets, from convenient hubs across the South and in the Sun Belt, from Charlotte to Phoenix. US Airways also has international service, which could be a boost, but unfortunately, is in the process of consolidating service to/from hubs, not to/from focus cities, so if US Airways keeps growing, it could become just another legacy. However this plays out, this is the most important growth story for air travel in the next five to ten years and we've already seen airlines address this with new planes. Did anybody think JetBlue would purchase another aircraft type within four years of its launch? Nobody I heard of, including the CEO for that matter. These markets have already come to define our politics for better or for worse, and in the long run airlines must change routes to meet this demographic shift. AirTran, Alaska, Southwest, and US Airways are the best companies for the job, but let's see how many actually take full advantage of their opportunity.

Southwest Decides to Enter Northern Virginia

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

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

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

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

Southwest Raises Fares- It's About Darn Time

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

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

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

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

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

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

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

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

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

The Battle for Atlanta...

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

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

Virgin America Prepares For Takeoff

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

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

Bush Takes A Step In The Wright Direction

Recently, President Bush signed a bill that included an exception for Missouri from the Wright Amendment governing commercial flight operations from Dallas's Love Field Airport. Today, Southwest Airlines announced new service from Love Field to St. Louis and Kansas City, dealing a blow to American Airlines, the dominant carrier in the Metroplex. Southwest will begin flights to both cities from Love on December 13, a very, very short period from when they announced the service today. American has notified the airport that it will start operations from Love Field ASAP due to the Southwest threat.

Frankly, this is a really lame maneuver, an idle threat, that should get cancelled in 6 months or so, and is just posturing by American, which wields a great deal of influence in Texas (in addition to Southwest). In fact, both companies are headquartered in the Metroplex. It doesn't make any sense, and reflects how confused American is when it comes to Love Field. This isn't the first time that American has been at Love. In 2000, American launched a premium service to compete directly with the now defunct Legend Airlines, which launched business class service out of Love. After Legend collapsed (primarily due to the fact that nobody wanted the service, as American too lost millions of dollars on that venture). American is now panicking because it's afraid that all it's Dallas traffic is going to be snapped up by Southwest. Southwest will lower fares in the markets it enters from Love, but it has a number of fundamental problems that American can capitalize on.

First, Love Field physically can't expand unlike DFW, and even with a Wright repeal (the "Wright" thing to do, by the way), Southwest can't have infinite operations out of Love. Southwest can expand like they announced today, and future flights to Baltimore, Chicago, Orlando, Los Angeles, Oakland, and Phoenix are all possibilities. However, having a 250 daily flight operation isn't going to happen (which is intended at Baltimore/Washington).

Second, while Southwest is headquartered in the city, many people haven't flown the airline as often as they would like, or not at all, since Southwest currently doesn't offer non-stop flights between Dallas and such popular destinations as Los Angeles, Las Vegas, Orlando, Chicago, New York City, and many others. Even if Southwest started those destinations, it's unlikely Southwest will be serving London, Tokyo, or Buenos Aires anytime soon. American has the loyalty, and if they are competitive with Southwest on fares (which they should have no problem doing) then customers don't have a real reason to switch. An airline without assigned seating, in-flight entertainment, and a varied frequent flier program can't compete against the world's largest airline with many perks.

Finally, Love Field can't move, but business and people are. Development, both residential and commercial is headed to the suburbs and exurbs near Fort Worth, closer to the main DFW airport. Love is in the older part of town, and becoming increasing less convenient for business travelers and consumers. American has that advantage. Although DFW is becoming a more expensive airport with the expansion, much of it over the top, it is becoming more convenient, and with gas prices becoming ever higher, consumers will pay more for value and convenience, which American offers from DFW. With gas prices so high, check out the public transportation page from airports on the upper right hand corner of the page, it can save you tons on taxis.

American is a smarter airline than this, and this is a reactionary move which should result in an embarrassing conference call next quarter. As Mao said, all reactionaries are paper tigers, meaning they look bad, but have no bite. American has every right to oppose Wright, but if clear heads prevail, then Wright will be repealed. American needs to utilize their strengths from their DFW megahub. As increasing foreign investment pours into the tax-friendly South, American will find their strength. And if a company can trust American for international service, then why not for domestic service? That strength is what’s going to help American prevail in Dallas-Fort/Worth.

Southwest At Denver-No Certain Victory

Southwest Airlines will announce its new destinations from Denver this week, but even when its new service starts early next year, it will not be a certain defeat for Frontier and United. As a New York Times article pointed out last week, Southwest has its own set of problems and isn't invincible. Southwest has higher labor costs than most airlines these days since most of the legacy carriers have been able to force their employees to accept a lower cost structure. Southwest is competing against a surfeit of low-fare carriers in most of its markets and Denver is no exception. However, Southwest is no-frills, with no entertainment, no assigned seating, and no premium cabin. Southwest will be up against Frontier and United, two strong competitors with great customer service and brand loyalty in the Denver area. While Southwest has repeatedly said that Denver International Airport was too expensive to operate in, Southwest needs the traffic from the city to facilitate its 15% growth rate.

Denver is different than other cities. For example, when Southwest entered Philadelphia, they were competing against a high-fare dinosaur. Southwest didn't have many low-fare competitors to worry about, especially on lucrative East Coast routes. Denver has two strong carriers, Frontier and United, and Frontier has lowered fares significantly in the market and United matches them on a regular basis. Southwest was able to draw passengers in Philadelphia since they were competing in a high-fare environment. Denver isn't a Florida low-fare environment, however, it does have relatively low fares. Will Southwest be able to draw passengers from the hometown team (Frontier) and the business traveler's favorite airline (United)? Quite possibly, but it depends on customer service, scheduling, and a host of other issues. If Southwest doesn't lower fares significantly in the market, doesn't provide product advantages like Frontier and United do, and doesn't provide a host of convenient flights to major cities, what chance do they have? Denver will be extremely difficult for Southwest. They can make it work and are up for the challenge, but it will be quite a challenge, even for Southwest.

Analysis of the Southwest Situation

Southwest Airlines generated a great deal of buzz today. They reported earnings which were nearly double those of the same quarter last year, $227 million versus $119 million last year. They also announced that they will begin flying to Denver International Airport effective next year. However, schedules and destinations will be announced sometime next week. However, the airline has problems that many in the media and the public can't see. The first is the ATA codeshare. While Southwest was hesitant at first about this agreement, but it allowed them to grow traffic on their flights and then put passengers onto ATA flights to places such as Hawaii or Mexico. However, ATA seems to be struggling of late and there are rumors in employee circles that the airline may fold soon.

ATA has been trying to shed some planes and get smaller aircraft with lower lease costs. ATA spent way too much for its new fleet, beginning in 2000, and it has been unable to cut costs in other areas. It has lost certain contracts it had with tour companies, such as Pleasant Holidays, which was very profitable flying for them. ATA began scheduled service in 1986, but it wasn't until the late 90s when they achieved major carrier status that they were a major competitor to Southwest. ATA just hasn't found enough of a market flying to Hawaii and other leisure destinations. It could be two days, two months, two years. But there's a good chance that ATA will drop scheduled service and revert to their charter business. That's a great business, especially the military part of it, which involves shuttling troops between the states and the Middle East, great especially since we don't seem to be leaving Iraq anytime soon. ATA's charter business will stay strong, but scheduled service is in the tank.

Southwest's other problem is that it has so much fuel hedged, it isn't prepared for the end of the decade when all its fuel hedges expire. Southwest is fundamentally losing money, and if it weren't for its hedges it would be. The Southwest system is great, traffic flows between Las Angeles and Las Vegas aren't growing too much and the yields really aren't growing. But what is growing are the routes between smaller markets, markets that can be accessed only with regional jets or E-jets, and international destinations. Of course, Southwest doesn't serve any international destinations or have any regional jets. That's where the traffic is growing, and with gas prices as high as they are now, many people are willing to pay a sizable premium to fly out of their local airports. Take a guess, are people with $3.00 gas more willing to drive to a Southwest airport, or fly from their local airport and pay a little more for the ticket. Both the airline and the customer wins. But Southwest does lose. Southwest needs to overcome this problem, and quickly, since 2009 will come soon, and that's the last year of fuel hedges at Southwest (and only 25% of the fuel is hedged) and after that, Southwest will be on their own.

Second Quarter Profits And Losses

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

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

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

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

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

Southwest Expected To Announce Move To Boeing Field Today!

It has been reported in the local press that Southwest Airlines is expected to announce a change of location of its Seattle-Tacoma operations from Sea-Tac International Airport, to Boeing Field just south of Seattle. This move will drive many people in Seattle nuts! First of all, residents who live close to Boeing Field are opposing the move, citing increase noise, which is really a groundless complaint, since the airport already has over 800 take-offs and landings a day, and some of them are larger aircraft, such as A300 or DC8 aircraft that UPS and FedEx use at the airport. Those aircraft make, much, much more noise and Southwest's 737s are no big deal compared to them. Second, those who are in charge of the airport, and frankly, any taxpayer who helped contribute the billions for terminal renovations and a ridiculous third runway. Others who are particularly unhappy are those with Alaska Airlines, which says that it might move some of its operations to Boeing Field if Southwest moves. Alaska and other airlines at Sea-Tac will be left with higher fees as a result of Southwest's departure which comes after recent renovations at the airport, which have left the carriers at the airport with increased fees. This only adds to that increase. There are many opponents, and they may put up more of a fight, but otherwise it's clear skies ahead for Southwest.

Update- Southwest has put out a press release and a slick report detailing their plans. The plan calls for a brand new terminal (versus a very small one currently handling commuter traffic on mostly scenic flights) that has 8 gates capable of handling Southwest's 737s along with concessions, a parking garage, the works! Southwest plans to ramp up its current Seattle-Tacoma service from 38 departures daily to 60 when the terminal is completed, and with plans to grow to 85! This will not be a Baltimore or Las Vegas, but Southwest is making a long-term commitment to Puget Sound area, and this is encouraging. Hopefully, even lower fares out of Seattle will result of this move, but not for four years. Southwest will need approval from the King County Council to get the green light, however, if all goes to plan, Southwest will be flying from Boeing Field in 2009!

American, Continental Report Profits, Yes Profits!!!

The United States may be suffering a red-state, blue-state divide, but there does seem to be one thing that those in a very red state, Texas can do better than those in blue states. That's run a profitable airline. Southwest, very profitable, and in the second quarter we can add Fort-Worth based American and Houston based Continental to that list.

Continental reported a net income of $100 million for the quarter, which includes a $47 million special gain relating to the contribution of ExpressJet shares to Continental's pension plan during the quarter. In the quarter, RPMs were up 8.3% with ASMs up 5.5% The load factor for the second-strongest quarter of the year for most airlines, was 79.6%. That really shows how much demand for air travel has increased, it also means, that there are many full flights.

American Airlines reported a second quarter profit of $58 million. In the second quarter, RPMs were up 7.4% and ASMs were up just 2.3% and as was the case with Continental, decreased domestically. This helped set a company record load factor of 79.5%. Not bad at all. Both airlines did a wonderful job of cost cutting, especially since American spent $434 million more for fuel in the second quarter than it would have if fuel had stayed at second quarter 2004 prices. That's a great deal of money, and the kind of profit that would have brought back investors to the company.

Both American and Continental have done a great job of staying out of trouble, and have been able to diversify its strategies so that they don't have to always compete with low-cost carriers, especially Texas's third profitable airline, Southwest. Both American and Continental have decreased domestic capacity, but seem to be doing a better job of fighting Southwest. In Dallas, there is a huge debate about the Wright Amendment, there was a bill introduced in the Senate yesterday that American opposes that would allow Southwest to fly outside of a number of states that it's currently limited to by Wright. American would lose a great deal of money if that bill passes, but it would be the "Wright" thing for the industry, as it would lower fares for Metroplex customers, and American would be able to find it's strengths else where. Remember, growth in the Metroplex is occurring near DFW airport, not Love Field, so even though it would be a big win for Southwest if the bill passes, it would be far from the end of the world for American. American and Continental, however will continue to lose money for the year, but it will be a much better year, and with more expected cost-cutting, yes these airlines will be making money year-round again.

Southwest Announces 41% Increase In Profit And New Destinations From Ft. Myers

Southwest Airlines made two very exciting announcements today. The first, is that travelers in the Southwest Florida region will now be able to fly between Ft. Myers and Baltimore two times daily, Chicago Midway twice daily, Long Island/Islip once daily, Orlando three times a day, and Philadelphia once daily. Southwest will start serving Ft. Myers October 2, 2005. Southwest is timing some of these flights so that passengers will be able to connect to other Southwest destinations, such as Las Vegas, Los Angeles, or Seattle/Tacoma. What's interesting here is that Southwest generally has a criteria that a new destination must be able to sustain at least ten daily flights to Southwest cities before Southwest begins service there (some of Southwest's destinations in Texas are exceptions). Ft. Myers only has nine daily flights to start out, but it will most certainly grow to perhaps 15 or more by October 2006. But it all depends on how the travelers in that region respond, since Ft. Myers already has low fare service to certain areas, which might make it harder for Southwest, since travelers in many cities they open (such as Philly have suffered with high fares). Ft Myers already has some service, for example, JetBlue already serves Ft. Myers with service to New York, (Remember, Southwest scheduled one daily to Islip on Long Island) as well as Boston (which Southwest serves with Providence, RI and Manchester, NH, no service was announced to those destinations).

Southwest's second announcement, that they made $159 million in the second quarter, which was 41% better than the $113 million they made in 2004. Southwest did an excellent job of controlling its costs, considering the higher-than-expected price of jet fuel (though Southwest had hedges in place to help control that expense), and especially they glut of seats on the East Coast, considering the fact that Southwest's big city on the East Coast is Baltimore/Washington, and that the airline has been competing with a suicidal airline, Independence Air. It's hard to compete with an airline determined to commit suicide, but Southwest did it, and they should be congratulated. The second half will be tough, but with more flights out of Pittsburgh, and new flights to Ft. Myers, Southwest will continue to grow and prosper.

Indianapolis- A Perfect Example Of The Low-Cost Battles

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

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

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

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

Southwest To Fort Myers, FL!

Southwest Airlines announced today that it will start service to Fort Myers, FL beginning in October 2005. Southwest hasn't announced initial destinations from Fort Myers (Southwest announces the city first, then destinations at a later date). However, expect service to Baltimore/Washington Airport, Chicago Midway, Nashville, and Philadelphia. This will be the sixth city in Florida that Southwest will serve and expect some intra-Florida service because of that in addition to the cities listed above. Southwest will probably start service at the airport with only 10 daily flights, but if traffic expands like it generally does when Southwest comes to town, more will come. Good news for Southwest Florida!

Midwest At Milwaukee- They Aren't Going Away Anytime Soon!

According to recently released data, Midwest Airlines along with its regional carrier Midwest Connect posted strong gains in market share in their two key hub cities, Milwaukee and Kansas City in the first quarter of 2005. The airline carried 43.1% of all passengers from the airport, a 2.6% increase over fourth quarter 2004. Northwest Airlines has recently focused more attention on Milwaukee and has made a focus city with many non-stop flights to non-hub destinations. However their market share decreased over the same period down 1.1% to 20.9%. 

In Kansas City, Midwest's market share increased 1.3% to 6.5%. However this is well shy of the dominant carrier at the airport, Southwest Airlines which grew its market share .3% to 32.4%. Southwest doesn't currently serve Milwaukee. This is good news for the struggling carrier which has been trying to carve out a niche in an environment dominated by the low fares of Northwest and Southwest Airlines.

Southwest Thinks About Switching Airports in Seattle

Several local news sites in the Seattle metro area reported late yesterday that Southwest Airlines is in active discussions with King County, which manages the airport south of Seattle better known as Boeing Field. Southwest is upset at costs of doing business at Seattle's main airport Sea-Tac, especially the high landing fees which are one of the highest in the nation. Southwest seems willing to build a terminal and parking garage for the project, however, all plans at this stage are not final and seeing canyon blue aircraft at Boeing Field will take a few years. Southwest's ties to the beautiful Pacific Northwest are more than the 40ish flights it runs out of Seattle/Tacoma daily. Southwest is one of Boeing's best customers, as it runs a fleet of over 400 737s, Boeing's best-selling aircraft, produced in the region.

Certain members of the governing council in King County are opposed to the move, worried that the project would increase noise over South Seattle neighborhoods, and would take traffic away from Sea-Tac. Southwest is the airport's fourth-largest airline, after Alaska Air Group carriers Alaska and Horizon, and United Airlines. In addition, if Southwest were to leave, it would make things harder for Sea-Tac which has been struggling with cost overruns and delays on its projects, provoking Southwest into moving. The Seattle region is fine with one airport, but the move might teach Southwest airports elsewhere, in places such as Cleveland, Detroit, Fort Lauderdale, Orlando and elsewhere, that Southwest can and is willing to move to other airports in order to find lower costs.

Loco Over Love!

Earlier this year, Southwest Airlines started a legal push to lift the Wright and Shelby amendments which limit travel out of Dallas Love Airport. Today, they released a report which criticized the laws, stating that if the Dallas/Fort-Worth Metroplex was opened to competition, then travelers in the region would save millions of dollars. In fact, the report stated that if Southwest started service to 15 new cities from Love that cannot be served from the airport currently, then Metroplex travelers would save $688 million per year, because American Airlines, the dominant carrier at DFW would be forced to lower fares to match those of Southwest.

However, American Airlines and DFW are fighting back with their own studies. Less than a month ago, DFW released a study stating that if the Wright Amendment were repealed, then DFW would lose 204 flights per day, 21 million passengers would be lost annually, and the airport's traffic levels would drop to those of 20 years ago. So which side is really right?

Hands down it's Southwest and the pro-Love people. American Airlines has had a monopoly on the market for many years, and has been able to charge high fares. Southwest is being reasonable when it asks for equal competition, because that's all it wants. Keep in mind, most of the growth the Metroplex is experiencing is towards the area DFW serves. The airport is spewing complete nonsense when it talks about traffic levels from 20 years ago. All the new low fares that Southwest will offer for Dallas can only benefit the Metroplex as an attractive, low-cost vacation destination, and it will only hurt American in a minor way. Remember that Southwest doesn't have much of a hub-and-spoke operation, and most passengers traveling Southwest will be going to Dallas. For American, most passengers on their flights will be traveling to their hub, Dallas is one of Americans largest hubs, if not the largest, and these new flights to Dallas by Southwest will not cause a mass exodus by American, few if any flights will be cut, and the Metroplex will not suffer because of this increased competition.

Two Dallas-area congressmen have recently introduced a bill to repeal the Wright and Shelby amendments. If the GOP has no problem with free-market competition, then there should be no problem with the bill getting passed.

The European Low-Cost Battleground: Cost Cutting To The Max!

In the United States, Southwest Airlines started the low-cost revolution 34 years ago, and has consistently delivered solid profits while offering punctual flights, low fares, and a smile. They delivered this by putting customers first, while never forgetting their employees. The phrase, "you get what you pay for" is something never forgotten at Southwest. To achieve this Southwest cut costs in an industry that really wasn't interested in doing so. They even bought trash bags that didn't have the Southwest Airlines logo on them to save money. To many, that sounds pretty extreme. However, many in the United States don't know how far this cost cutting has been taken in the new low-fare battleground, Europe.

     The largest European low-cost airline, Ryanair regularly offers fares significantly below cost for say 10% of the seats on its aircraft (as low as 99 euro, and even free sometimes).  However these bargain fares don't include the high European taxes which can reach up to $30 round trip or more depending on which airports one is flying to and from. Ryanair recently celebrated its twentieth anniversary, and Ryanair's arrogant CEO Michael O'Leary predicted that Ryanair would overtake the number of passengers carried per month by British Airways, Europe's largest airline this year. However, don't expect Ryanair to be spending like crazy. It recently announced that it has banned employees from charging mobile phones at work, since it costs the company electricity, while employees at its headquarters are required to bring their own stationery. Don't expect any free pretzels on Ryanair either, they make passengers pay for all food or drink, and the flight attendants push carts loaded with food and duty-free goods up and down the aisles the entire flight. In addition, passengers who have questions shouldn't e-mail them, unlike most airlines in the U.S. (except Southwest ironically, which still only accepts direct mail). They only take complaints in writing, and this way they boast consistently that they have the lowest complaint rate of any airline in Europe (this is because the vast majority of customers who want to complain don't know how).

     In addition to recuperate costs on their call center people with inquiries must pay per minute for talking to a Ryanair representative. Ryanair also flies to secondary airports, nothing new here, except many of the airports it flies to are old air force bases, de-commissioned after the Cold War, and many of them are not close to city centers. For example, Hahn Airport, which is used for the Frankfurt, Germany markets is actually 64 miles from Frankfurt. That's a bit different than using Oakland for San Francisco. In addition, Ryanair gets subsidies from communities hoping that Ryanair flights will bring tourist traffic to their region. However, in one case, Ryanair opened a base in an airport far south of Brussels, and that airport gave Ryanair subsidies of 4 million euro that Ryanair is now being forced to pay back due to a European Commission ruling.

Another thing about Ryanair is that although most of their flights are on time, since they run an efficient operation, when things don't work out, it's hard to get where you want to go. In the U.S. if your flight is canceled, then you will get booked on a later flight or on another airline. With Ryanair this doesn't really happen, since not only might one be at an airport, which most airlines don't fly to since it's so far out of the way, but Ryanair saves money by not having to pay other airlines to fly their passengers. If your plane doesn't show up, you might be able to get on the next flight, if it has seats available. Keep in mind; this might not be for 24 hours. This is how it loses the customers it gains with 99 cent fares.

Ryanair isn't going away soon, it has ordered 225 Boeing 737-800 aircraft, and options for 200 more. The new aircraft will have non-reclining seats, no window shades or magazine pockets since all these privileges increase maintenance costs. In addition, the overhead bin lockers are fitted with advertisements for various companies increasing revenues. However, if all this sounds bad there is hope. Ryanair is certainly not the only low-cost carrier in Europe. EasyJet is struggling to make money, mainly due to high fuel costs, but doesn't cut costs to the bone. The fares generally are a bit more, but it's much more like Southwest, with flight attendants telling jokes, flying to airports remotely close to city centers, and being able to complain and be heard. EasyJet is also expanding, ordering new aircraft and serving mainline routes across Europe. In addition, over 50 other European low-cost airlines have started, or failed over the past few years, and there will be many more to come, but in a few years there will be consolidation, and only the best, such as Ryanair and EasyJet will survive, and like Ryanair's CEO Michael O'Leary once said" there will be a bloodbath coming". The next few years will be especially interesting, because consumers will decide if they want cheap, sometimes inconvienent service, or more expensive reliable service.

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

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

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

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

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

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

Can Independence Air Survive?

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

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

Can US Airways Make A Comeback?

With Southwest starting new service to Pittsburgh in a couple of days on May 4, can US Airways fend off the new onslaught of low-fare competition on the East Coast and make a comeback to profitability? The answer is complex, but in this author's view, yes, because US Airways has made improvements in recent months to improve its efficiency, and cut costs. When US Air released its first quarter financials, its losses were up, but only because of high fuel prices, and costs had been cut dramatically labor-wise and elsewhere. However, with Southwest soon to be at two of US Air's three major hubs, and in secondary markets that US Airways operates in, the question remains whether US Air can survive.

When Southwest announced service to Philadelphia in January 2004, US Airways was struggling financially and was desperately trying to cut costs. Its service suffered as a result, and Southwest saw an opportunity to enter the market. Southwest has done well in Philadelphia and is making a major push there. However, US Airways is still a major presence at Philly and has strong load factors out of there, so although Southwest may be winning the war, US Airways isn't really loosing this battle. When Southwest enters Pittsburgh, they will serve Las Vegas, Chicago Midway, Orlando, and Philadelphia non-stop to start with. US Airways has reduced its Pittsburgh operations, but at the same time can fight Southwest more effectively for a couple of reasons. The first is that on the lucrative Philadelphia-Pittsburgh route, where US Airways has been able to charge exorbitant fares for many years US Airways will offer the same fares as Southwest, but many more flights, making it more convenient for business travelers between the two cities. Southwest will be offering 4 out of its 10 initial daily flights from Pittsburgh to Philadelphia. The second is that US Airways has a more extensive network than Southwest from Pittsburgh and it offers some non-stop flights to some popular Southwest connecting destinations, such as Fort Lauderdale, Los Angeles, and the Washington D.C. area. 

In the near future US Airways is looking to make itself a hub-and-spoke low-fare carrier, like AirTran, and it's trying to diversify itself by expanding into higher yield routes, particularly in the Caribbean and Latin America. US Air is doing this by creating a mini-hub in Fort Lauderdale. In addition, US Airways needs to protect its routes on the Eastern seaboard, and they can do that by investing in certain markets, such as Washington D.C. and Boston. Take D.C. as an example, Southwest operates out of Baltimore, and it looks to become Southwest's biggest station with upwards of 200 daily departures. US Airways has many gates at a more convenient airport for most in the area, National, and if US Air is able to match Southwest's fares from that airport, then they might maintain their market share, and more importantly make money in the D.C. area. All this is totally feasible, and bankruptcy isn't imminent for US Airways at this point. 

Southwest Airlines First Quarter Profit Triples!

Southwest Airlines announced today first quarter earnings of $76 million dollars nearly triple those of the first quarter of 2004. Southwest was able to make money mainly because they were 86% hedged for the first quarter of 2005 at $26 a barrel. This saved the company $155 million in the first quarter, allowing them to make money. The company is significantly hedged already for years to come, and it will be interesting to see how other low-cost competitors did, and whether they hedged enough.

Southwest Ends Houston-Intercontinental Service

Yesterday, with little fanfare, Southwest Airlines ended its service from Houston Intercontinental to the only destination from IAH, Dallas Love Field. Southwest is competing with both American and Continental Airlines on the Dallas-Houston Route, and Southwest has a large market share. However, costs from the bigger Intercontinental Airport forced Southwest to stop the service. Southwest will continue offering several daily flights between the secondary Houston Hobby Airport and Dallas Love. Depending on the day of the week, Southwest offers up to 60 one-way flights between the two cities or about 30 round-trips. However, there is less frequency on the weekends.

For more information about this exit from Intercontinental, see this post.

Evaluating The ATA/Southwest Codeshare: Is it Working?

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

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

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

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

Southwest is Celebrating 20 Years in Chicago With 7 New Cities!

Yes, 7 new cities will now have Southwest Airlines links to Chicago and the new flights will start as soon as May 4, 2005 and as late as July 5, 2005 with a new daily non-stop to San Jose, CA. Incrementally, new daily non-stop flights will start to New Orleans, Austin, Buffalo, Albany, Tuscon, and Sacramento. In addition, expanded service will be launched between Chicago and Tampa Bay, Philadelphia, Albuquerque, Houston Hobby, Long Island/Islip, NY, and Los Angeles.

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

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

A Fight About Nothing But Peaunts

Delta Airlines announced today that it will eliminate its buy-on-board food program on all domestic and U.S.-Canada flights as well as  some flights between the U.S. and Central America and the Carribean. The changes will exclude Delta's Song "low-cost" carrier and its Delta Shuttle operation. Not to be outdone, however, Southwest Airlines issued a press release attacking "other airlines [that offer] less than peanuts." that starting in April it will offer some of the same new snacks that Delta will start offering free to its economy passengers as well as the pre-packaged snack boxes that Delta will offer on flights longer than 3 hours, 30 minutes.

ATA+Southwest Expand Codeshare!

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

New Routes From Southwest and AirTran

AirTran Airways, announced new service into Charlotte today with service to Baltimore and Atlanta. The carrier will use its 717 aircraft and it will be the second low-cost carrier in Charlotte along with Independence Air.

Southwest Airlines announced the routes it will be serving from Pittsburgh, which the airline announced service to earlier this year. Four flights to both Philadelphia and Chicago, and 1 daily flight to both Orlando and Las Vegas.

New Routes...

Alaska Airlines announced late Friday that it will start service between Seattle/Tacoma and Dallas/Fort-Worth twice daily, with one of those daily flights providing same-plane service to Anchorage. In addition, it has been rumored that both Frontier Airlines and Southwest Airlines will announce new routes over the coming week. Southwest will supposately announce routes from Pittsburgh sometime this week. We'll see.

Southwest is Leaving a Market!

For me, it has always been a mystery why Southwest Airlines serves both Houston Intercontinental Airport AND Houston's secondary Hobby Airport. Intercontinental only has a few flights a day to Dallas Love Field, which Hobby has more of, and besides, what's the point of serving both airports in the same metro area if you only are making a serious comittment to one of them? Well, today, Southwest Airlines announced that it will end its services at Intercontinental Airport in early April, and consolidate its operations to Hobby. This is only the fifth airport that Southwest has ever left in its legacy. The last one Southwest left was San Francisco when Southwest consolidated its Bay Area operations to the cheaper and more reliable Oakland and San Jose Airports. That was in 2001.

Fourth Quarter Profit/Loss

Today American Airlines announced that it lost $387 Million in the traditionally strong fourth quarter. American attributes the loss to a dramatic increase in fuel prices and decreased pricing pressure on the industry as a whole.

Northwest Airlines announced that it lost $420 million excluding unusual items.

Southwest Airlines announced its 32nd consecutive year of profitability, making $66 million in the fourth quarter and $313 million for the entire year.

Southwest is Sayin' Hello to Pittsburgh!

Today, Southwest Airlines announced that it will be serving Pittsburgh, PA starting in May. Flight destinations and times have yet to be announced. This is a big step for Southwest, starting service to Philidelpha 7 months ago, or what will be 1 year when the Pittsburgh service starts. This is another blow to the struggling US Airways, which used to have a hub at the airport and still has significant operations there. At this point, Southwest may not have to compete with US Airways when May rolls around.

Update on the Southwest/ATA Situation

Today, a federal judge approved the Southwest plan for ATA and 6 gates at Chicago's Midway Airport. Southwest will invest $47 million initally in ATA for a 27.5% stake in the airline, and $30 milliion after ATA emerges from bankruptcy. Southwest will also invest $40 million in the 6 gates and a manitenance hangar at Midway Airport. In addition, there will be a code-share agreement at flights from Chicago Midway Airport, however, Southwest believes that future agreements are possible at Seattle/Tacoma, Los Angeles International, Orlando, Las Vegas, and Phoenix if there is enough efficency and cooperation between the two carriers.

Southwest Aims at AirTran

What would you pay for 6 gate leases and a code-share alliance, well for Southwest Airlines at Chicago's Midway airport, it's $100 million. Southwest wants 6 of ATA's gates at the airport, and a code-sharing alliance with ATA. $50 million would be for the gates and the other $50 million would be a loan to help keep ATA in business, keeping in mind that ATA doesn't operate on many of Southwest's routes, and because ATA will maintain some service from Chicago, it will be to places such as Mexico, Hawaii, and not much else, however, anything at this stage can happen. The agreement will probably have ATA cut its service from Chicago to places such as Phoenix, Seattle/Tacoma, and Las Vegas. Read more (Click on the "additional plans for Midway" story).

PDX-CHI

Once again, in the news here is about the Chicago Midway airport mess, and although it's unclear if Southwest will place a bid on ATA's gates or 737-800 aircraft. However, regardless of that, it has found room to expand, and it's adding a new, daily non-stop flight to Portland, OR. It recently added 5 flights from Midway, including one to the Pacific Northwest, at Seattle/Tacoma.

What's Bad for ATA, is a Boon for Southwest

Southwest Airlines LUV announced a total of 16 new daily filghts from Chicago's Midway airport, including adding flights to Seattle/Tacoma, Orlando, Philadelphia, and various other destinations. Service will start in early 2005. Clearly an opening move in trying to prevent a competitive comeback at the airport from AirTran AAI which will start service at the airport soon, replacing ATA ATAHQ .

Southwest Considers Assigned Seating!

Southwest Airlines, LUV the king of low-fare carriers, publicly says that they are considering removing their policy of free-for-all seating, and replacing it with assigned seating, seen at other carriers such as JetBlue JBLU. They attribute this shift to new technology and that they are serving longer routes, where people have preferences about where they would like to sit.