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FEATURE-Clouds on the horizon for low-cost airlines
Sun Sep 26, 2004 02:11 PM ET
By Jui Chakravorty
NEW YORK, Sept 26 (Reuters) - 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. (UALAQ.OB: Quote, Profile, Research) , which filed for bankruptcy in August 2002, is still in Chapter 11. Earlier this month No. 7 U.S. Airways (UAIRQ.OQ: Quote, Profile, Research) filed for its second bankruptcy in two years, and Delta Air Lines (DAL.N: Quote, Profile, Research) , 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 (AAI.N: Quote, Profile, Research) , ATA Airlines (ATAH.O: Quote, Profile, Research) , Frontier Airways (FRNT.O: Quote, Profile, Research) and FLYi (FLYI.OQ: Quote, Profile, Research) (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 (JBLU.O: Quote, Profile, Research) 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.
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."
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.
var year = new Date() document.write('© Reuters ' + year.getFullYear() + ". All Rights Reserved." ); © Reuters 2004. All Rights Reserved.
Sun Sep 26, 2004 02:11 PM ET
By Jui Chakravorty
NEW YORK, Sept 26 (Reuters) - 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. (UALAQ.OB: Quote, Profile, Research) , which filed for bankruptcy in August 2002, is still in Chapter 11. Earlier this month No. 7 U.S. Airways (UAIRQ.OQ: Quote, Profile, Research) filed for its second bankruptcy in two years, and Delta Air Lines (DAL.N: Quote, Profile, Research) , 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 (AAI.N: Quote, Profile, Research) , ATA Airlines (ATAH.O: Quote, Profile, Research) , Frontier Airways (FRNT.O: Quote, Profile, Research) and FLYi (FLYI.OQ: Quote, Profile, Research) (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 (JBLU.O: Quote, Profile, Research) 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.
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."
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.
var year = new Date() document.write('© Reuters ' + year.getFullYear() + ". All Rights Reserved." ); © Reuters 2004. All Rights Reserved.