"Discounters' determination to grow is likely to shrink fares"

Title: Message

Friday, August 8, 2003

Discounters' determination to grow is likely to shrink fares
By Marilyn Adams
USA TODAY


Atlantans have seen what low-fare air service can do to prices. Four months ago, a non-stop Atlanta-to-Los Angeles flight bought at the last minute ran a stunning $2,221 round-trip because only Delta Air Lines flew it.

Now that discounters AirTran Airways and JetBlue have jumped into that route, a last-minute round-trip seat goes for as little as $403, one-fifth the old price. If the expansion plans of three leading discount airlines succeed, fares on hundreds of air routes nationwide are in for the same kind of breathtaking fall.

Big aircraft orders by AirTran, JetBlue and Southwest mean that cities and routes that have never been reached by low-fare carriers will get new discount service in the next five years. The hundreds of jets on order won't carry executives to Hong Kong or families to London. These three carriers see their future in short- and long-haul domestic routes where fares are high and fliers fed up.

These discounters won't be taking on just the major, high-cost airlines as before. Regional carriers serving midsize cities — until now insulated from low-fare competition — are being targeted for the first time.

Air Tran, JetBlue and Southwest are only three of the nation's discount carriers, but they're the healthiest and fastest-growing. Southwest, the biggest discount airline, with 379 jets, is taking 42 new planes next year and more than 20 a year after that. JetBlue and AirTran are poised to double their fleets in five years. Even as traditional carriers American, Delta, Northwest and United are losing billions of dollars and shrinking schedules to cut costs, those low-fare carriers remain profitable.

Growth opportunities abound. Those three airlines, with fellow low-fare carriers America West, ATA, Frontier, Spirit and Sun Country, control a quarter of the domestic market. In five years, the cities that have low-fare service will outnumber those that don't, predicts AirTran executive Kevin Healy.

Some cities gaining low-fare service might be big markets that discounters wouldn't have touched a few years ago. Then, dominant carriers were too strong and had a stranglehold on airport gates, which they could hold for years even if they didn't use them. As the big airlines have cut back, some gates are being freed up or airport leases rewritten to leave room for competition. Now, one or more of the three discounters are publicly expressing interest in once-impenetrable hub airports for United, Delta, Northwest and US Airways. They potentially include Chicago O'Hare, Minneapolis, Detroit, Charlotte, Pittsburgh, Cincinnati and Memphis, some of the most costly air markets in the nation for fliers.

JetBlue CEO David Neeleman calls these cities "pockets of pain."

Minnesotans know the price of living in a city without enough low-fare service: It's $1,634 round-trip non-stop to New York for a business traveler booking at the last minute, and $2,106 non-stop to Los Angeles round-trip. Despite some recent inroads by discounters, Minneapolis is still 82% controlled by hometown giant Northwest Airlines, and it shows.

"We're stuck — they are the only game in town," says Ross Dahlin, a general manager for Andersen Windows, based in Bayport, Minn.

"Minneapolis is one market that's screaming for low-fare service," says analyst Jim Parker, who closely tracks discount airlines for Raymond James Financial.

St. Louis is suddenly on the discounters' radar screen, too. When American Airlines recently announced that to cut losses, it's cutting in half the St. Louis hub it bought from TWA, AirTran and JetBlue immediately showed interest. Southwest, which already flies there, said it will expand.

But there are big risks with these big aircraft orders and the rapid expansion they'll fuel, such as new debt, labor tensions, cost increases and the pressures of adding planes and pilots. Eventually, discount airlines accustomed to competing against high-cost traditional airlines will begin competing directly against each other on more routes. Discounters also will see competition from new low-fare subsidiaries of Delta and United.

"They are going to begin treading on each other's toes," says aviation consultant Morten Beyer. "There's a risk they'll lose control of the process."

Says AirTran CEO Joe Leonard: "This (jet order) is a big deal for us, and it's a little scary, too."

AirTran: Girding for long-haul

The jets each airline has ordered will determine where they go. AirTran, which flies mainly out of Atlanta to cities in the East, has ordered 50 Boeing 737-700 jets with options for another 50, and deliveries start next summer. If all option planes are bought, the airline's fleet will more than double by 2008.

CEO Leonard says he expects the airline to buy at least 85 planes. Although the 737-700 would allow AirTran to fly to Canada, Mexico and the Caribbean, those leisure destinations don't appear to be high on its list.

Leonard says he expects to start service to three to five new cities a year. If recent actions are a guide, AirTran can be expected to expand at Atlanta Hartsfield, which is adding a fifth runway, and Baltimore-Washington International, where AirTran is now the second-biggest behind Southwest. It's also expected to launch more transcontinental flights and enter more historically high-fare cities in the Northeast and Midwest.

Leonard notes that the Upper Midwest is still hurting for discount air service in cities such as Minneapolis, Detroit, Chicago O'Hare and Milwaukee, some of which AirTran already serves. Earlier this year, AirTran began transcontinental service with non-stop Atlanta-Denver service in May and Atlanta-Las Vegas in June.

AirTran is expected to launch more long-haul routes, but they won't necessarily come without a fight. When JetBlue and AirTran started the Atlanta-Los Angeles service this spring, Atlanta-based Delta dropped fares, raised its Los Angeles service to 13 daily flights from eight and offered passengers triple frequent-flier miles. Stung by the response, JetBlue dropped two of its three Los Angeles flights and started Atlanta-Oakland flights instead.

JetBlue: Eyeing smaller markets

New York-based JetBlue, which flies 42 Airbus A320s today, has ordered 100 Embraer 100-seat jets and has the option to buy up to another 100. It will get the first seven in 2005 and another 18 a year for the next six years. If JetBlue buys all those planes and other Airbus jets it has options on, its fleet could grow to 290 planes by the end of 2011.

Today, JetBlue flies its 162-seat Airbus jets mainly from New York to Florida, California and Upstate New York. Its "anchor airports" are Kennedy, Washington Dulles and Long Beach, Calif..

"It's no secret we're interested in Chicago — and I mean O'Hare, not Midway Airport," says Dave Ulmer, JetBlue's vice president for planning. JetBlue wants to steer clear of Southwest and ATA airlines at Midway. JetBlue also has been talking to Boston Logan, where Delta, American and US Airways dominate and where gates used to be almost impossible to get.

Rather than just watch its competitors, JetBlue has taken cues from history, studying 20-year-old federal data on where defunct low-fare pioneer People Express flew in the 1980s and how many passengers those cities produced. JetBlue also weighs local support when picking cities. "We've been approached by at least 100 airports," says Ulmer. "We've got mugs, T-shirts and mouse pads from all over the country."

The smaller Embraer jets are headed for midsize markets that have ties to New York, as well as for large cities JetBlue might like to serve several times a day, such as Minneapolis, Houston or Detroit. Benefiting most from JetBlue's Embraer order are cities in the Northeast, Southeast and Midwest that are captives of major airlines or their regional carriers today. Although it's not saying which airports its small jets might enter and when, those on a top-25 list include Columbus, Ohio; Greensboro, N.C.; Memphis; Milwaukee; Kansas City; and Portland, Ore.

Southwest: Keeping mum

Discount leader Southwest, profitable for 30 years, will grow at a slower pace than the other two but will continue to exert the biggest influence on fares nationwide because of its size. Based in Dallas, it flies Boeing 737s to 59 airports in or near large cities.

Southwest is mum as usual about which new cities it's eyeing. It plans to expand at Baltimore, where it will have 26 gates by 2005, up from 19. Chief Financial Officer Gary Kelly says St. Louis, where Southwest already flies, is "potentially a tremendous opportunity." Improved bookings and fares in recent weeks have prompted Southwest to move up deliveries of several 737s; 42 will come online next year, up from 34.

Kelly says Southwest will add at least one city next year. It will also continue "connecting the dots," as Kelly puts it, linking its East Coast airports to its strongholds along the West Coast. Last fall, Southwest launched its first non-stop transcontinental service from Baltimore to Los Angeles, then added Baltimore-San Jose, Calif., and Baltimore-San Diego this year. Today, the airline serves Las Vegas from Baltimore and Upstate New York. And it flies to Phoenix from six East Coast airports from New England to Florida.

Kelly says Southwest, which built its business on flying to less-congested alternate airports, isn't ruling out any airport if it can make the math work.

That seems to be the new mantra of this breed of airline. Says AirTran CEO Leonard: "Nothing's off-limits anymore."

Big-growth plans

How AirTran, JetBlue and Southwest have grown and where they're headed:
AirTran
	2000	2003	20081
Jets	51	67	158
Departures2	294	408	900
JetBlue
Jets	5	44	173
Departures2	24	186	520
Southwest
Jets	324	379	567
Departures2	2,600	2,800	4,252
1 USA TODAY estimates; 2 Average daily departures; Sources: Airlines listed

Competition's payoff

Plane tickets are often cheaper on routes where low-fare airlines fly. How some top domestic markets compare where low-fare airlines captured small and large passenger shares in 2002:
Market (includes all major airports)	Low-fare airline passenger share	Walk-up fare round trip1
New York to Boston	0%	$237
New York to Rochester, N.Y.	66%	$435
Boston to Orlando	4%	$499
Boston to Baltimore	50%	$252
Minneapolis/St. Paul to Washington	8%	$1,390
Minneapolis/St. Paul to Phoenix	38%	$762
Detroit to Atlanta	0%	$464
Detroit to Tampa/St. Petersburg	43%	$236
Los Angeles to San Francisco	70%	$213
Los Angeles to Seattle	11%	$434
1 — For tickets bought Tuesday for travel Wednesday and Thursday. Sources: Back Aviation Solutions, USA TODAY research