"PBS: Low Flying Fares"

Tuesday, September 17, 2002

Low Flying Fares
Tom Bearden reports on how low airfares are revolutionizing the airline
business (10:58)
The Online News Hour
Public Broadcasting System (PBS)

If you have a multimedia equipped computer, click on the following link
to listen to this segment in RealAudio:
 
http://audio.pbs.org:8080/ramgen/newshour/expansion/2002/09/17/airlines.
rm?
 
A transcript of the program follows: 

TOM BEARDEN: The busiest domestic airport in South Florida today isn't
mighty Miami. It's Ft. Lauderdale-Hollywood. A major reason this
once-junior partner has gotten so big is the discount airlines, also
once a junior partner in commercial aviation. The same week U.S. Airways
filed for bankruptcy and United threatened to do the same, discount
carrier Southwest Airlines was serving Ft. Lauderdale with 36 crowded
flights a day. A few hundred yards down the concourse, a smaller
discount carrier, Air Tran, was checking people in for some of its 12
daily flights. Ft. Lauderdale is also served by Frontier, another
discount airline based in Denver, by Florida-based Spirit, and by Jet
Blue, a two-year-old carrier headquartered in New York. Jet Blue has
increased traffic so much that there are now more people flying between
ft. Lauderdale and New York than there are between New York and Los
Angeles. Ed Nelson is the airport's marketing chief. 
ED NELSON: When I first came here in 1989, there were 600 people a day
looking to fly between Ft. Lauderdale and Atlanta, and at the time, it
was Eastern and Delta. Now that Air Tran is in the market and they have
the low fares that Delta, of course, has matched, the local marketplace
is 1,800 a day. So along came this little upstart that kind of brought
quite a few people, over a thousand people more, to the marketplace. 

TOM BEARDEN: But more is going on here than just more passengers. The
discounters, which used to specialize in leisure travelers, are now
carrying more and more business fliers. 

J.C. PHILLIPS: I'm in business for myself, so that's the only way that I
can travel, that I can afford to travel. 

TOM BEARDEN: So price is the determining factor? 

J.C. PHILLIPS: Price is the determining factor, yes. 

JOHN BILLACORTA: I used to fly Delta, and I have Delta sky miles
program, and I won't be getting that with this. But the trade off again
is the convenience and the price. 

TOM BEARDEN: That critical shift of business fliers away from the major
carriers began when the economy began going south in late 2000. The
trend accelerated after September 11, as businesses cut travel expenses.
It's now in the process of transforming the shape and direction of the
whole industry. A few years ago, experts predicted there would soon be
only three or four mega-carriers in the U.S. Instead, Southwest, once a
scrappy upstart, is now a $5 billion business, and the low-fare segment
of the industry has been more profitable post-9/11, than the majors. The
Business Travel Coalition, an alliance of corporate travelers, surveyed
182 travel managers, and found they had cut their spending on air travel
16% last year. 68% said they planned to fly the low fare carriers more.
Kevin Mitchell, who heads the coalition, says the big airlines weren't
prepared for the shift.

KEVIN MITCHELL: The airlines have believed a lot of their own rhetoric
over the years, that the business traveler is inelastic, will pay
anything to go anywhere at anytime. And there is something different
going on this time, and it took the airlines a long time during this
winter and during the first two earnings reports to really get an
integrated and fuller picture that much of the premium business is gone
forever. The $1,800 fare from Syracuse to Phoenix, there are going to be
fewer and fewer people willing, and able, to pay that fare going
forward. 

TOM BEARDEN: The major carriers make nearly all their profits from
business travelers. That's why losing them has an impact far beyond the
actual numbers of passengers they've lost. Leisure travelers, who buy in
advance, pay relatively low fares. Business travelers, who often have to
fly at the last minute, often pay three or four times as much. Bill
Swelbar is an economic consultant to the airline industry.

BILL SWELBAR: They have always built their system around that high yield
business passenger, and certainly, you know, losing that $2,200 Transcon
flier to an alternative airport, or to a low-cost carrier, you know,
paying $400 or $500 for the same piece, you know, the value in that
service is less. 

TOM BEARDEN: I've read the difference between profit and loss on a given
flight is a couple people? 

BILL SWELBAR: I think it's... over time, it's been three people per
airplane is the difference between profit and loss. 

SPOKESPERSON: Thank you for calling the airlines. Have a great day, sir.


TOM BEARDEN: The low fares that are killing the major airlines are
profitable for the discounters because they have much lower costs. Many,
such as Spirit, have simple route structures that go only from point A
to point B without the network carriers' banks of flights converging on
expensive hubs. Another reason is that some fly only one type of
aircraft, like Jet Blue with Airbus 320s, or Southwest with the Boeing
737. That dramatically reduces training and maintenance costs.
Post-9/11, the low-fare carriers have moved aggressively. When the big
carriers cut flights, they ramped up service, even moved into new
markets. The Baltimore-Washington Airport is a good example. When US
Airways shut down it's own low-fare division, called Metro Jet, Air Tran
jumped in. They now have 23 flights a day. Joe Leonard is Air Tran's
chairman.

JOE LEONARD: We keep our systems very, very simple, and as a result...
and we're also very flexible, so we can spool up or spool down rapidly,
as we did after 9/11. We took capacity out real fast, but with the
cooperation of our unions and our employees, we kept everybody on the
payroll but reduced our costs at the same time. That gave us the ability
to ramp back up and start expanding as soon as we saw the opportunity to
do so. 

TOM BEARDEN: Southwest was already at BWI. With its 138 flights a day,
it had already moved the airport past longtime rival Dulles in domestic
passengers. The parking garage is graphic proof of what analysts call
the "Southwest effect"-- a low fare carrier attracting new passengers,
who are willing to drive long distances for cheaper tickets. Geico
Insurance travel manager Joe Dixon says the average ticket price dropped
from $475 to $300 when his company's employees began flying Southwest,
Air Tran, and Spirit. 

JOSEPH DIXON: We did a ticket for our CEO One day from Baltimore and he
lives here in Virginia to go... I believe it was Cleveland, and he did a
connecting flight to save the $50. 

TOM BEARDEN: Low-fare carriers are also moving into the big carrier's
fortress hubs, going after markets the big guys weren't pursuing. For
example, Frontier added non stops between Ft. Lauderdale and Denver, in
February. Three months later, Spirit did the same. Spirit marketing
chief Tom Anderson says it's all about finding new business. 

TOM ANDERSON: The largest ski club in the United States is here in South
Florida. So Floridians like to ski. Well, not surprising-- or perhaps to
some people it's a surprise-- that people from Colorado love Adventure
Travel, and one of the largest scuba clubs in America is in Colorado.
And you've heard, you know, some talk about and stories about how the
larger carriers cut back their service and how smaller national airlines
filled in the cracks. In a couple of occasions in the last year or so,
we've been able to do that fairly effectively. 

TOM BEARDEN: The discounters are also finding success going head-
to-head with the majors, something that was considered impossible not
long ago. Air Tran is competing directly with Delta at Atlanta. Delta is
matching fares and losing money, while Air Tran's cost structure allows
it to remain profitable.

TOM BEARDEN: Are you in any way involved in a war of attrition with
Delta? 

JOE LEONARD: We... ( laughs ) Delta competes with us vigorously. We are
competed against more... stronger by Delta than the other low-fare
carriers seem to experience. But having said that, we've done very well;
we've demonstrated that we can take what Delta throws at us and still be
profitable.

TOM BEARDEN: Low-fare airlines haven't always been this successful.
There were a lot of startups in the '70s and '80s, but most eventually
went bankrupt. At 12-year-old Spirit Air, which just carried its 15
millionth passenger, Tom Anderson says today's low-fare airlines have
more staying power. 

TOM ANDERSON; A lot of other airlines can lower their fares to our
levels, but we know immediately once they get below a certain level with
that fare, they're losing money on every passenger, every mile. Now some
airlines have a scorched-earth policy, you might say, about staying out
there and just waiting out that fare structure and hoping that
eventually the fares will go back up, or that perhaps competitors will
fall by the wayside. But we've proven to ourselves and to our
competitors that we'll stay in the market. 

TOM BEARDEN: Some of the industry's behemoths seem to be getting the
message that times have changed. After having lost a billion dollars
last year, Delta recently announced a joint marketing agreement with
continental and northwest, as a way of competing for more passengers.
One airline that's never underestimated the discounters is American,
which worried about lost passengers following the Gulf War in the early
1990s. When I spoke to American's CEO in 1994, he put it bluntly. 

TOM BEARDEN (1994): Do you fear Southwest and the new entrants? 

DONALD. J. CARTY, CEO American Airlines (1994): I fear them in the sense
that their competitiveness, particularly their cost competitiveness,
threatens the viability of American airlines. And in that sense, I do
fear them, I guess. 

TOM BEARDEN: The biggest airline in the world is worried about
Southwest? 

DONALD J. CARTY: Size is irrelevant. 

TOM BEARDEN: Despite those fears, American didn't change its business
model or price patterns, and went on to make more than $5 billion profit
when the economy began growing again. But this time, Carty recently told
his employees: "The problems we're having.won't get better when the
economy gets better. Low fare competitors are going to be with us for
some time." Carty cut the schedule and reorganized flights at Dallas-Ft.
Worth to spread traffic out over the day. Employees can be more
efficient with fewer peaks and valleys. American has also laid off
27,000 workers since September 11. That's about twice as many people as
the entire work forces of Air Tran, Frontier, Spirit, and Jet Blue
combined.
 


 Do you have an opinion about this story?
Share it with other readers in our CAA Discussion Forums

http://www.californiaaviation.org/cgi-bin/dcforum/dcboard.cgi?conf=DCConfID8

*****************************************