"Discount Carriers Drive Innovation in the Industry"

Wednesday, September 3, 2003                         
  
Discount Carriers Drive Innovation in the Industry
By SCOTT MCCARTNEY 
The Wall Street Journal


One carrier offers leather seats, good legroom, on-board spa packs and
relaxation amenities. Its planes are newly painted and outfitted, and it
charges only $25 to make ticket changes. Satellite-channel in-flight
entertainment is coming next month, the airline says, with interactive
gaming and connecting gate information broadcast directly to seats.

The other carrier offers cloth seats, tighter legroom and a $100 fee to make
changes to tickets. Free satellite television? Not for a long, long time, if
ever.

Which one charges the higher fares? The one with the cheaper service. And
even more ironic: Both are owned by the same company.

As you might have guessed, the first airline is "Song," which is Delta Air
Lines' new effort to combat low-cost competitors. The other airline is
mainline Delta. Two airlines, same company. And in a strange twist of
today's airline industry, Delta is offering some of its best amenities to
its lowest-paying customers.

Why? To compete with rival upstarts, you have to offer both low prices and
high quality. As a result, many of today's discount carriers are offering
very high-quality service -- better than the so-called full-service airlines
in many instances.

This begs the question of what you consider "quality" airline service. Many
travelers have considered the cattle herding on Southwest Airlines quality
transportation. It is safe, clean, and reliable, with lots of flights, but
neither inflated expectations nor inflated fares. The new generation of
discounters has taken that standard even higher. They fly new airplanes,
offer amenities like live satellite television and provide friendly service
along with cheap fares. Of course, if you want something more than a snack,
you generally have to buy it.

Others argue that quality airline service requires first-class cabins, meal
service and broad networks capable of taking you to Tokyo and Tampa. Quality
service means the most convenient or quickest flight to a destination,
rather than roundabout trips on a carrier with limited reach. For many,
quality airline service may be something as simple as priority boarding for
elite-level frequent fliers. It can be a matter of personal taste.

Driving Innovation

What's indisputable right now is that the cheap-o airlines are driving
innovation in the business. They are the ones investing in new technology
and new capabilities, and forcing the financially strapped old airlines to
respond somehow. They have the youngest fleets. And they are the ones
growing, even as the old guard is still trying to shrink its way back to
profitability.

"It's a more credible threat [to the big airlines] than it ever has been,"
says UBS Warburg analyst Sam Buttrick.

The problem is it's not easy for the old guard to respond. It's one thing
for JetBlue Airways to order its new planes equipped with satellite
television, and something else for a carrier like AMR Corp.'s American
Airlines to find the means to retrofit new entertainment systems into 800
jets. It's easier for upstarts to hire friendly, eager, smiling, inexpensive
new employees, and another for big companies to rally thousands of workers
who are struggling through big pay cuts, pension issues and other painful
concessions.

Delta has addressed the problem with "Song." In the past, airlines made
their airline-within-an-airline concepts low-cost, bare-bones operations.
You got less on Delta Express than you got on mainline Delta, but in most
cases you paid less, too. Same for Shuttle by United, or US Airway Group
Inc.'s MetroJet. None of those worked, and now Delta has shifted gears to
make its low-cost effort higher quality.

Song keeps costs low by flying its planes 13 hours a day, compared with 10
hours a day for Delta. Song borrows discount-carrier techniques such as
getting planes unloaded and reloaded quickly on the ground. And it has lower
staffing requirements than Delta. Operating costs, Delta says, are 22% lower
on Song than on Delta.

But in other areas, Song doesn't scrimp. The airline has asked New York
designer Kate Spade to create uniforms for its crews -- I doubt it will be
cheap polo shirts and khaki pants. Song, which began flying April 15,
promises an in-flight entertainment system in October that will offer live
satellite television, pay-per-view programming and games that even allow
passengers to play each other. Song has a new, clean look and a new
attitude.

Cheapening the Brand?

So far, leisure-oriented Song sends most of its flights between several
Florida cities and both New York and Boston. It also serves New
York-Atlanta, one of Delta's biggest business-travel routes, but only from
Kennedy Airport , which is JetBlue's home base. It flies to Las Vegas from
Orlando and Fort Lauderdale, and to Los Angeles from Orlando and Tampa
starting Wednesday.

There's plenty of overlap between Song and mainline Delta, so by offering
niceties to low-paying customers, Delta would seem to be cheapening its own
brand. How do those older Delta planes and plain Delta uniforms look by
comparison? What does a Delta business traveler think when he gets a cheap
ticket and enjoys watching CNBC on one trip to Los Angeles, then boards a
regular Delta flight with a $2,000 ticket and wonders where his 24 channels
of satellite television are?

Delta's president, Fred Reid, says that Song is a way to diversify the
company's brand, not dilute it. At an airline conference last spring, I
asked Mr. Reid about this and he suggested that there was nothing to prevent
Delta from adopting the amenities offered at Song. Delta wanted to play in
all sectors of flying passengers, from commuter lines to mainline to
discount operations to private jets. Delta has an "AirElite" division
offering business-jet charters. As things are tried at Song, they might
migrate to the mainline.

That will be a long-time coming. For now, the industry is just turned on its
head.
 


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