Low-fare carriers may find '04 hard

[pb4ufly]

USA TODAY

Three of the nation's leading discount airlines — Southwest, America West and AirTran — reported strong fourth-quarter profit Thursday, but discounters face a tougher 2004 than expected.
Costs are rising. They are competing more with one another, and their old foes, the biggest carriers, are no longer running away.

AirTran President Robert Fornaro said, "There's a land grab going on among low-fare carriers," especially in the Northeast. "Everyone wants to start a low-fare airline."

That's good news for consumers, at least in the short run.

Most discounters should stay profitable this year, but some won't make as much as Wall Street forecast months ago. Under pressure:

•Southwest (LUV). Rising wages and fuel prices are forcing costs above the airline's ideal level of 7.5 cents to fly one seat one mile, said Chief Financial Officer Gary Kelly. To pull costs back down from last quarter's 7.69 cents per seat-mile, belt-cinching measures include closing three of its nine reservation centers.

Cost pressures will ease a bit in the second half of the year as growth accelerates, Kelly said. But the pressure to keep fares low in new markets will also restrain its revenue growth. Southwest "will pull out all the stops" in Philadelphia, where it will begin flights in May, Kelly said.

Southwest earned $66 million in the fourth quarter, a 57% increase from 2002's fourth period.

•AirTran (AAI). It is "pretty pessimistic on both fuel (prices) and revenue," and its new Atlanta-Los Angeles route is losing money, CEO Joe Leonard said. Fourth-quarter net income of about $22 million almost tripled the $7.5 million earned a year earlier.

•America West (AWA). Fuel prices and rising wage and benefit costs will be a challenge this year, as will intense competition on new non-stop transcontinental routes, CEO Doug Parker said. Current prices on those routes are so low they can't be sustained, he said.

America West earned $6.8 million in the fourth quarter, compared with a net loss of $52 million a year earlier.

•Frontier (FRNT). The airline Thursday set its top fares at $299 one-way, 25% to 50% lower than before. It has said fourth-quarter profit estimates won't be met.

•JetBlue (JBLU). The carrier said in December that its fourth-quarter profit would not meet analysts' earlier expectations. "We no longer believe JetBlue is capable of earnings growth in 2004, despite a planned 37% increase in capacity," J.P. Morgan analyst Jamie Baker said in a report this month.

 

[V2+10]

On the other hand...from Time.com

B U S I N E S S

Friendlier Skies

It's not just the low fares. The discounters are beating the major airlines on cabin comforts too
By SALLY B. DONNELLY/BOSTON

Monday, Jan. 26, 2004
Stephen Kulakowski sat in the boarding area at Boston's Logan International Airport earlier this month, waiting for his JetBlue flight to Orlando and looking apprehensive. It was only the fourth airplane trip for the 19-year-old college freshman. But what really worried him was the suspiciously low one-way ticket — priced at $92.60--on an airline he had barely heard of. By the time he landed in Florida, the experience on board had left him wanting to fly again. "The flight attendants greeted everyone, the leather seats made it feel like first class and the satellite TVs were great. I thought the flight had been fast forwarded," said Kulakowski.

That's just the kind of glowing report that has major airlines fighting for their lives. Low-fare carriers are no longer simply competing on ticket price, they are also raising the bar with the services they offer. While the Big Six airlines (American, Delta, Continental, Northwest, United and US Airways) struggle with high costs and dissatisfied passengers, small, low-cost airlines like JetBlue, AirTran, Frontier and Spirit have learned to please customers, make money and grab market share, all at the same time. They have become major players in the industry. Low-fare carriers, including pioneer Southwest Airlines and the improved America West, account for 30% of the market, compared with just 5% a decade ago.

The Big Six are desperately trying to adapt to the new rules of the marketplace. They are striving to match the smaller airlines' fares, and American and Delta just started giving away tickets to counter JetBlue's recent expansion. But the most dramatic escalation of the air war is the creation of two totally new airlines. Next month United, which has been in bankruptcy since December 2002, plans to start flying its own knock-off low-fare airline called Ted. Flying initially from Denver to Las Vegas and Fort Lauderdale, it will offer customers a multichannel entertainment system called Ted TV. Ted is aimed squarely at Frontier, the low-cost airline that has eaten away at United's dominance in flights out of Denver. Frontier accounts for 16% of that airport's passengers, up from 8% five years ago. Last year Delta created Song, a brightly colored, all-coach carrier, with a sassy marketing style, that flies lots of leisure routes to cities like West Palm Beach, Fla., and Las Vegas. Song is targeted at JetBlue, which has most of its flights on the East Coast. But even as United and Delta try to reach down to compete in the low-fare arena, that market has been changing radically.

Though Southwest actually created the no-frills, low-fare business model 30 years ago, the new-generation carriers have transformed the perception of cheap airlines. Price clearly still matters: airfares are on average 50% lower than they were 25 years ago, allowing for inflation, according to AirlineForecasts, an industry research firm. But passengers also expect better service — even if they do have to bring their own food. JetBlue, which started flying four years ago from its New York base, was the game changer. Its spanking new Airbus jets, live satellite TV and consumer-friendly policy of never bumping a passenger have significantly raised customer expectations of low-fare carriers. Its clever marketing campaign drew passengers who in the past might have shunned off-brand airlines. Indeed, the densest concentration of JetBlue passengers can be found in Manhattan's affluent Upper East Side. The airline, which has 214 flights to 22 cities and carried 9 million passengers last year, is likely to qualify as a major airline this summer when its revenues are projected to top the $1 billion threshold. But Wall Street analysts have begun to wonder if JetBlue can handle its rapid growth and new competition: its stock price is down to $25 from a high of $47 last fall. Denver-based Frontier, which flies mainly new Airbus planes to its 42 destinations, carried more than 5 million passengers last year, up 37% from the year before. It added Los Angeles last month as its second major airport base, and in the spring will start point-to-point service to Minneapolis, Minn., and to Kansas City and St. Louis, Mo.

The new entrants from United and Delta face a difficult battle against this latest generation of low-cost carriers. Major airlines have tried many times in the past to start an airline within an airline to compete against low-cost competitors. All such attempts have failed. United and Delta are trying again, a sign that they realize their financial problems will not be solved simply by getting over the post-9/11 travel slump and the recent recession. "We know which way the industry is going — towards quality, low-cost carriers," says John Selvaggio, the head of Song. "We had to play both defense and offense." Song's fares are competitive, the TV and music offerings that the company is installing on board are enticing, and the flight attendants have apparently been encouraged to shed the stoic professionalism of mainline Delta Air Lines and put on an irreverent face. On a recent Song trip, a flight attendant asked over the p.a. system, "Can I have your attention?" As travelers looked up from their video screens and newspapers, she proceeded to ask for a man by name and told him to stand in the aisle. "Mike is single, 26 and looking for a good woman," she chirped, leaving passengers to wonder if they were on an airplane flight or in a bar at spring break. More disconcerting are Song's plane interiors, which are blue accented with orange and a green that appears to be of Soviet vintage. And while the food is tasty — Asian chicken salad, turkey focaccia — you have to pay for it.

The personality of the Ted brand remains obscure, though its launch is just weeks away. United claims Ted will offer not only the audio-video luxuries but also more legroom in the first six rows of the all-coach cabin as well as complimentary Starbucks coffee. The airline says it's striving for something different. But when Sean Donahue, chief of Ted, says, "We want people to feel welcome and relaxed," he raises the question of why passengers don't feel that in United's "Friendly Skies."

Nor is it clear how Ted and Song can make money. The staff at both airlines work at the same high-wage rates as their mainline colleagues, yet the fares are much cheaper. One airport executive is skeptical: "Ted calls itself a low-cost operation, but it will also be a low-revenue producer." Song filled less than one of every two seats in September, the most recent month for which figures are available. And aviation sources told TIME that Song has postponed plans to add more airplanes to its fleet, raising questions about how well its business model is working.

The clear victor in this battle is the airline passenger. "There has never been a better time to be looking for a cheap ticket," says Frontier's CFO Paul Tate. Stephen Kulakowski couldn't agree more — he happily flew home from Florida on JetBlue.

How They Compare in the Air

San Francisco/Oakland -- New York City
--JetBlue $498
--Northwest $598

Phoenix -- Washington
--ATA $254*
--United $1,720

Salt Lake City -- Fort Lauderdale
--Frontier $348
--Delta $2,204

Dallas/Fort Worth -- Philadelphia
--AirTran $650
--American $1,852

Fort Myers -- Atlantic City
--Spirit $168
--Delta $208*

*Connecting flights

Note: These are the best round-trip fares, according to Travelocity as of Jan. 16. No advance purchase required. Some restrictions may apply

TED
Ted (the last three letters of United, its parent) begins flying Feb 12. On board: CUSTOMIZED COMEDY TV and Ted beer. But can it save United from bankruptcy?

SONG
Delta's younger sibling offers competitive fares, COLORFUL SEATS and tasty food you can buy on board. Also promised: Kate Spade uniforms for flight attendants

FRONTIER
The Denver-based discounter with the distinctive ANIMAL DECALS on its tails took large bites out of United across the West. It just added a second home base in Los Angeles

JETBLUE
The low-fare carrier with the sky-blue marketing theme is changing the rules on flights to Florida. BLUE POTATO CHIPS, anyone? Latest amenities: XM radio and first-run movies

AIRTRAN
Based in Atlanta with 508 flights daily to 45 destinations. Flew 11.7 million passengers in 2003. Claim to fame: BUSINESS-CLASS UPGRADES for $35 above full coach fare

SPIRIT
Founded 13 years ago and still privately held. Last month the Fort Lauderdale — based airline stretched its wings with its first INTERNATIONAL DESTINATION: Cancun, Mexico

 

[DrinkSweetTea]

Its so bogus when they quote prices based on walkup fares. No wonder the big guys can win when the media is constantly make the LCCs smell like a rose. $1900 DFW-PHL gimmie a break. This story only applies to those that for somereason decide they have to go that day.

 

[Astra Guy]

Walkup fares and buying the day before a flight are examples of some business travelers methods in the past. You know..the same ones that are charged 1000% more because of the multi-tiered system. I don't know how the math works in terms of making money on the LCC side but if they can at these low fares then they will gain more and more business traveling buyers.

 

[F9 Driver]

BTW

Frontier has not warned regarding earnings.

We commented when releasing December numbers that the high fuel costs would impact CASM. A statement like every other airline could have made.

Also UAL's Ted has just matched Frontier's 299$ maximum domestic Denver walk up fares as of today.

 

[lowecur]

Whoa!

Song interiors appear to be of Soviet Vintage. General, are you now the interior decorator?

 

[General Lee]

Lowecur,

Obviously you haven't been on Song. The colors will wake you up immediately. (I don't think the Soviets had lime green etc.?)

And I love this quote:

"Nor is it clear how Ted and Song can make money. The staff at both airlines work at the same high-wage rates as their mainline colleagues, yet the fares are much cheaper. One airport executive is skeptical: "Ted calls itself a low-cost operation, but it will also be a low-revenue producer." Song filled less than one of every two seats in September, the most recent month for which figures are available"


Only the pilots make the same as mainline, no one else. The stews make a lot less, but can pick up more trips. The gate agents are the same. And, there are less stews on each flight---4 instead of the normal 5, because the passengers are now watching TV or watching free movies. And, as far as September goes---everyone knows that it is one of the slowest months--right after Summer break is over. Did they look at NOV or during the Holidays? No? There are some months that travel just slows down---like SEP/OCT, and the three weeks after Xmas break is over, etc.... Then things heat up again for Spring Break and Summer is usually pretty full. This is always true, and don't always believe the hype boys!!! And no more E-170 or E-190
orders on the horizon Lowecur.....dump that stock.

Bye Bye--General Lee

 

[LearLove]

Obviously you haven't been on Song. The colors will wake you up immediately. (I don't think the Soviets had lime green etc.?)

I 'm sure the inside will wake them up, but I bet that the "lime green sperm" painted on the fuselage gets their attention first.

 

[zonker]

So the flight attendants and gate agents make less... How about the ramp guys? Same thing?

Also, what's the morale situation among the people hired to work the Song flights? I don't understand how forcing folks to work for less translates into a good customer service experience.

 

[lowecur]

emb stock

And no more E-170 or E-190
orders on the horizon Lowecur.....dump that stock.

The stock has rather tanked the last few weeks. We need you guys to hurry up and settle that contract. Afterall, waiting for that 200 a/c order from WN by June will hurt momentum the next few months.

I see AA stepping to the plate by the end of the year. The Feds will re-evaluate ORD in 6 months, and probably request further cuts. If they don't get the voluntary type, they will place slot restrictions. The E-series would give them the flexibility to maintain some semblance of frequency that the MD80 cannot give them.

 

[General Lee]

Zonker,

I really don't know about the ramp guys, they have the same contract uniforms as the other guys handling mainline, so I guess they are the same. Also, the mechanics are probably the same, I will ask them next time I am in FLL. But, it is my understanding that the stews and the gate people are Song employees (infact, I know it). Most of the check in stuff at the ticket counter is done with a kiosk I believe.

Learlove,

It is a very FERTILE environment, indeed.


Lowecur,

I don't know man, I think the product is good but the orders aren't there yet because many of the Majors still have a lot of 50 and 70 seat orders left, and not much cash after that. Maybe Southwest will do it, but maybe they won't. AA may also be a possible customer, but they may just shift more MD80s into ORD, or keep the F100s longer. As far as our negotiations, we are ready to NEGOTIATE, but the company is stalling, hoping we will take the bait and the resulting 30% paycut. Hey, we have a contract and will negotiate this!! They can't treat us like the rest of the non-union company. I hope it works out.

Bye Bye--General Lee

 

[zonker]

Zonker,

I really don't know about the ramp guys, they have the same contract uniforms as the other guys handling mainline, so I guess they are the same. Also, the mechanics are probably the same, I will ask them next time I am in FLL. But, it is my understanding that the stews and the gate people are Song employees (infact, I know it). Most of the check in stuff at the ticket counter is done with a kiosk I believe.

So how do they compete on a low cost scale? It doesn't make any sense.

And if the name of the game is customer service, how is it possible to expect a great product when you force your front line customer service people to work for less? Maybe it's great at Song. Hell, I don't know, I've never ridden on a Song flight.

The other odd thing is they use the same gates, the same flat screen TV's to board..."Song...A Delta Airlines Service." It has to be confusing to the customer. At the very least, weird.

Delta is a great airline, and they do a lot of things very well. Is this one of them? We shall see, right?

 

[Skank]

I think if the General had been named VP in Charge of Interior Decorating he would have gone with a nice red plaid seat with white piping and green shag carpet. Uniforms would have been miniskirts with white patent-leather go-go boots (the General has a thing for the '70's). Ceilings would have been, of course, mirrored.

Sorry, now back to your regularly scheduled drivel about this and that.....

 

[Astra Guy]

I knew Braniff would resurface! Great! Coffee, tea or me?

 

[Dave Benjamin]

Lowecur,

Obviously you haven't been on Song. The colors will wake you up immediately. (I don't think the Soviets had lime green etc.?)

Didn't the AMC Gremlins and Ford Mavericks have nice lime green interiors too?

 

[thruthemurk]

<<"I'm sorry Dave, I can't let you do that" - from Orwell's epic 1984>>

I believe that line is from 2001 - a Space Odyssey.

 

[JD2003]

alright

Bowman: "alright Hal...I'll go in through the emergency air lock"