Pointing to exceptionally high load factors and indicators of a travel demand recovery, major U.S. network airlines are pushing ahead with capacity increases for 2004 that they said are designed to protect marketshare from intensifying low-cost competition. Accurately predicting next year's travel demand and properly adjusting growth could mean life or death for certain financially troubled airlines as the industry struggles to recover.
Lower-cost carriers, an increasingly influential factor in the supply-demand equation, meanwhile, have set their sights on new business destinations and once again are descending on major carrier hubs. Their encroachment into legacy carrier-dominated markets gives them rising prominence in corporate travel programs but also increasingly will pit one low-cost carrier against another, a development heretofore limited to just a handful of routes.
Southwest Airlines plans to enter a US Airways hub in May when it will launch service from Philadelphia International Airport to "a variety of short- and long-haul destinations." JetBlue Airways, after a setback in Atlanta, is preparing Boston service. Frontier Airlines and AirTran Airways also plan ambitious growth: respectively 60 percent in the next five years and 25 percent annually.
Well aware of planned incursions in their hubs by smaller competitors, major carriers are not sitting back on their heels. The nation's largest airline, American Airlines, for example, said it is finished retreating and plans to add at least 5 percent more capacity next year versus 2003 levels
(BTN, Oct. 27).Along with regional affiliate American Eagle, the carrier—which said that its customers value "lots of flights to lots of destinations"—last week added nearly 50 flights, roughly 10 percent, to both its Chicago O'Hare and Dallas Ft. Worth schedules. American faces growing competitive pressures from ATA Airlines and Southwest in the Chicago market and AirTran in Dallas.
Other major carriers also have pegged next year's capacity growth between 4 percent and 10 percent and are expected to vigorously defend their hubs from lower-cost interlopers. Overall, growth plans that position 2004 to be the first full year of industry expansion since the peak of the last boom cycle in 2000 have many industry observers pondering potential pricing battles and possible insolvency for weaker competitors.
"Every time there has been a large increase in capacity, it has certainly led to fare wars, and I don't see it being any different this time," said John Heilner, vice president of consultancy Management Alternatives. "We are in the part of the supply and demand cycle that favors buyers and, with low unrestricted fares coming forth in much larger volumes, it may well stimulate business demand."
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Direct Assault' On PhillySouthwest's Philadelphia venture—surprising in that the airline atypically selected a large, congested hub airport that may erode its heralded aircraft utilization rates—will present a fresh challenge to long-time market leader US Airways. Some industry observers and executives at competing carriers said that the development ultimately could be a death blow for struggling US Airways, which during the past decade has been all but chased out of Baltimore Washington International Airport by Southwest.
US Airways relies on Philadelphia traffic as a fulcrum on the East Coast and to feed international flights. The carrier's CEO, David Siegel, called Southwest's decision "a direct assault on our principal hub" and vowed to "stand and fight." AirTran, ATA Airlines and America West each already offer limited services from Philadelphia.
Still, Philadelphia is a market "ripe for more low-cost carrier growth," Heilner said, suggesting that Southwest's entry would draw central New Jersey travelers away from Newark. Philadelphia will be Southwest's 59th city and the first new one since it added Norfolk, Va., in October 2001.
Michael Lynch, managing partner of airline procurement services for Eclipse Advisors, suggested US Airways will try to lock in as much corporate business as possible before Southwest announces Philadelphia specifics in December. He expects the initial schedule likely will include service to Chicago Midway, Raleigh-Durham and either Manchester, N.H., or Providence, R.I.
"The corporate buyer in Philadelphia will be the winner, whether they support Southwest or not," Lynch said. "Look at how AirTran brought down segment costs between Philadelphia and Boston."
Speaking of Boston, a large market with no dominant carrier, JetBlue is setting up shop for a January entry. The carriers' sales personnel already have hit the streets to talk with corporations about the carrier's services and value proposition.
Low-cost carrier growth has not been without its setbacks. JetBlue next month will retreat from Atlanta after just seven months of service. The carrier has been running daily flights to Long Beach, Calif., but faced a heavy retaliatory response from both Delta, which flooded the market with capacity and low fares, and AirTran, which launched its own Atlanta-Los Angeles service.
"While we applaud JetBlue for making a hasty exit from an inhospitable Atlanta market," said J.P. Morgan Securities analyst Jamie Baker, "its actions underscore a basic tenant of airlining: Dominant carriers defend hubs."
"Delta got extremely competitive in adding capacity, and it will be interesting to see what happens," said AirTran director of sales Bill Howard. "This needs to be a wake-up call to travel management: This is what happens if new entrants are not supported."
JetBlue officials, however, insisted the airline could have maintained a presence in Atlanta, but considering fierce competitive pressures applied by Delta and AirTran, opted to redeploy resources to more profitable opportunities.
Indeed, JetBlue still runs roughly 20 daily, nonstop transcon flights between New York and the West Coast and next year will continue to add a new plane each month to handle demand for more frequencies in existing markets, as well as services in new markets.
AirTran, which continues impressive expansion, next year will add transcontinental services and boost operations in the Northeast and at Baltimore Washington International.
"We also will do more in Dallas Ft. Worth," Howard said. DFW, dominated by American, is a mini-hub of sorts for AirTran rival Delta. The two, of course, battle head-to-head in their mutual Atlanta hub where AirTran continues to gain marketshare.
Meanwhile, AirTran, which last month finally began service from Reagan Washington National, is asking its Atlanta-based customers where it should fly next. AirTran's Web site offers 36 choices, including flights to competitors' hubs at Charlotte, Chicago O'Hare, Cincinnati, Detroit, Phoenix, Salt Lake City and Seattle.
"The low-cost carriers are setting the tone and setting the price points in many markets," said former Johnson & Johnson purchasing manager Pete Turso, speaking during an educational session this summer at the National Business Travel Association conference in Dallas. "It is testimony that low-cost carriers have designs on the corporate market."
Despite all this growth by major carriers and their lower-cost competitors, at least one industry observer suggested planned capacity increases don't go far enough in addressing demand recovery.
"2004 will be a bang-up year," said Terry Trippler, airline expert at Trippler & Associates in Minneapolis, suggesting that positive economic news, or at least the perception of an improving economy, always is a trademark of a presidential election year. "The airlines will add capacity and bring fares up to profitable levels. It can be pulled off." Trippler, noting that analysts were "wrong" about airlines' third-quarter financial performance and "will be wrong again" in predicting an overcapacity scenario, said the number of enplaned passengers in 2004 could approach the high-water mark achieved in 2000.
Virgin Atlantic, for one, was bullish on prospects for 2004, citing a 10 percent increase in premium traffic during the past three months, resulting partly from capacity restoration. Said Virgin chairman Sir Richard Branson: "For the first time in months, the early signs are that better times may be ahead."
Analysts, however, stressed that signs are just that. "Until such time corporate travel budgets are re-set—obviously a year-end occurrence—we do not anticipate anything other than anecdotal evidence of business travel recovery," said J.P. Morgan's Baker.