April 6, 2004
Calling for Perspective on Low-Cost Airlines
Here are some facts:
JetBlue Airways accounts for less than 2 percent of the available airline seats in the domestic skies. JetBlue has 57 aircraft. In February, it flew 836,000 passengers to 22 domestic cities and one foreign city - San Juan, P.R.
American Airlines, by comparison, accounts for about 19 percent of the available domestic seats. American has 730 aircraft. In February, it flew 6.8 million passengers to 150 cities around the world.
And here is a refrain I heard again and again during an airline and business-travel industry conference last week sponsored by Universal Air Travel Plan Inc., the global corporate travel payment network: Every time we pick up a paper, industry people here said, we seem to read another story gushing about the wonders of JetBlue, Southwest, Ted, Song or some other low-fare airline, while the major network carriers are dismissed as grunting dinosaurs lurching their way to the tar pits.
"There seems to be a 'JetBlue Is a Great Airline' story once a week," David Field, the Americas editor for Airline Business Magazine, told a group that included corporate travel managers, executives from network and low-cost airlines and other business-travel industry representatives. Most chuckled in agreement.
Not that anyone begrudged the low-fare carriers their success, which is generally expected to lead to them having a 40 percent share of the domestic market by 2005. To the contrary, company travel managers are delighted at lower business fares that the low-fare carriers have forced throughout the airline industry.
Still, a lot of people here questioned the lack of a certain perspective, especially as the network carriers increasingly are competing head-to-head on price in markets they share with the low-cost carriers who get all that adoring ink. As Mr. Field put it, the low-fare carriers are unquestionably "an economic phenomenon - but they're also a media phenomenon."
But without a lot of notice, he added, the network carriers, which are also called legacy carriers, have "learned to fight back." On many routes, "the legacy carriers are now low-fare carriers," he said.
Now anyone who really, truly understands the economics of airlines is probably too smart, or unstable, to be working for either an airline or a newspaper. As Warren E. Buffett has often pointed out, if one tabulates all of the airline industry's finances since the day the Wright Brothers bounced into the air at Kitty Hawk in 1903, one will discover that, cumulatively, there has not been a single penny of profit. (Mr. Buffett has also suggested that, in hindsight, shooting down the Wright Brothers on that beach would have been a reasonable financial, if not moral, move.)
So we will thankfully avoid airline microeconomics here to present a more general picture, a glimpse into some of what the experts were saying and hearing at this conference:
No doubt about it, the revolution is here. Sometime this year, it is firmly believed, the network airlines, whose trembling fingers still cling to the tattered roots of whatever is left of the traditional, maddeningly complex fare structures, will capitulate.
"This is a real transformation - this is it, and it's been a long time coming," David Hilfman, vice president for sales at Continental Airlines, said of the industrywide rush toward adopting less complicated fare structures.
Bill Howard said that at the network carrier where he worked before joining AirTran Airways as national sales director in 2000, "we had markets where we had 70 and 80 different fares filed for a given city pair."
Low-fare carriers have grabbed business-travel market share not just on price, which network carriers increasingly match or even beat on competing routes, but on simplicity. "You've got to create a price structure and keep it simple and low," Mr. Howard said. "In any given market, we have five fares and five fares only," he said of AirTran's fare structure.
Many low-fare carriers, worried that network carriers have cut prices while still offering good service and things like premium cabins, have abandoned the conceit that "no frills" is a terrific marketing concept to business travelers. So they are improving in-flight services and even adding business- and first-class seating, while scrambling to expand routes and keep their costs from escalating.
But in these areas of service and reach, network carriers intend to continue dominating the turf while hammering away at their high operating costs. And some corporate travel managers say they are quite willing to pay a little more for scheduling convenience and in-flight comfort for traveling employees.
Susan Dupart, who manages the annual travel budget for Aspect Communications, said that "rock bottom, cattle-car" travel might be cheapest, but it was not always necessarily best. "We want our employees to travel comfortably," she said, "and we're willing to pay a fair price" for it.
Ralph Colunga, who manages corporate travel at Cisco Systems, agreed. "At the risk of being run out of here, I'll say I am willing to pay for a certain level of service," he added. That doesn't necessarily mean more spending, he said. It means managing spending more efficiently through innovations like mandated in-house online booking, enabling travelers to experience "world-class self-service," Mr. Colunga said.
It's generally acknowledged that one or more of the network carriers could disappear, and that this might happen sooner than many airline analysts expect. But there was firm agreement here that network carriers will not only survive but will find a way to prosper, no matter how hard the low-fare airlines come at them, and for this obvious reason:
"It's not just a question of how to get from New York to Florida," Continental's Mr. Hilfman said. "You have got to have people who can fly you from Paris, Tex., to Paris, France."
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