"Clouds on the horizon for low-cost airlines"

Tuesday, September 28, 2004

Clouds on the horizon for low-cost airlines
Though not near bankruptcy, rising fuel costs and increased competition are
taking their toll on such carriers as Independence Air, AirTran, Frontier
and others
By Toby Talbot
Reuters


NEW YORK - As larger U.S. airlines suffer growing losses, low-cost carriers,
previously thought to be invincible, are not far behind, industry experts
say, due to soaring jet fuel prices, low air fares and more competition.
 
The parent of United Airlines, UAL Corp., which filed for bankruptcy in
August 2002, is still in Chapter 11. Earlier this month No. 7 U.S. Airways
filed for its second bankruptcy in two years, and Delta Air Lines , the
third-largest U.S. carrier, is fighting to avoid bankruptcy.

The U.S. airline industry has lost more than $30 billion since the Sept. 11,
2001, attacks on New York and Washington, as fear of flying and a weak
economy have slowed demand for travel. The industry is expected to lose
another $3 billion this year, according to the Airline Pilots Association.

But even though low-cost carriers are believed to be immune to the losses,
not all of them are cruising along. AirTran Airways, ATA Airlines, Frontier
Airways and FLYi (previously Atlantic Coast Airlines), are all expected to
post losses in the next quarter as the airline industry's turmoil starts
affecting the high-flying upstarts.

JetBlue Airways this month cut its third-quarter earnings forecast, citing
low fares and high fuel costs. JP Morgan analyst Jamie Baker a week ago said
he expected further cuts in forecasts by JetBlue and AirTran.

Telling a "legacy" from an "upstart"

But as the small carriers grow, the line that separates them from the big
"legacy" airlines is starting to blur, analysts say.

Michael Boyd, an aviation consultant at The Boyd Group, said the
"hub-and-spoke model," which refers to a route network that has specific
hubs used for connecting passengers, is not unique to legacy airlines,
contrary to popular opinion.

"That's a myth. Many, if not all, of the low-cost carriers also have hubs
these days," he said.

What really differentiates the two models is age and efficiency, according
to several experts. An older work force translates into higher labor costs,
because airline pay is based on seniority. Many of the low-cost carriers
employ relatively young staff.

In addition, the low-cost carriers use planes and staff more efficiently.
The average turnaround time for planes at low-cost carriers is 30 minutes,
versus more than an hour at the major carriers. And the discount carriers
only fly to the busiest airports.

But as the low-cost carriers grow older, their labor costs will also grow.
They are also facing ballooning costs from skyrocketing fuel prices.

Peter Klebanow, an industry expert and president of Ultramar Travel
Management, says the major carriers, at this point, have more options than
the low-costs.

"Major carriers have the opportunity to cut costs, but low-cost carriers now
have the pressure of rising costs," Klebanow said. "And with fuel prices
where they are, this could be a long, cold winter for all of them."

Still, air travelers need to have both kinds of carriers, Boyd said.

"If we just had JetBlue, 40 percent of airports in America would not have
air service," he said. "And if JetBlue began flying to those airports with
low volume of passengers, it would not have its cost advantage anymore."

A new model for discounters

In the past few decades, discount carriers such as People Express and Pan
American World Airways failed, even after starting with a bang. But the new
generation of low-costs have an advantage, according to Klebanow.

"Now, the low-cost carriers also offer amenities such as leather seats or
live TV that discount carriers in the past never did," he said. "At that
time, it was just a matter of price versus airline loyalty. Now, it's a
superior product for a lower price."

With the advent and popularity of the Internet, transparent pricing has also
given way to customer loyalty, analysts said.

Tom Hansson, vice president at Booz, Allen Hamilton, expects the low-cost
carriers, which currently operate in 30 percent of the U.S. market (in terms
of passenger trips), to grow about 45 percent over the next five years.

"And that growth is bad news for the industry," Hansson said. "The impact of
the growth would be very large, and would reduce air fares drastically."

As excessive demand keeps customers from balking at any increase in prices,
low-cost carriers will continue to see deteriorating balance sheets.

"There will be a shake-up in the industry. There will be selling, and there
will be mergers. Not all the majors will survive, but not all the low-cost
carriers will, either," Hansson said.


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