Considering relative financial health, advancing marketshare and business models nimble enough to adapt to changing client needs, low-cost carriers are poised to gain more influence in corporate travel circles.
Specific low-cost carrier trends may emerge and mature, including a strategic focus on network strengths, participation in and development of alternative distribution channels, signs of product differentiation—such as those offered by JetBlue versus Southwest—and other new strategies to leverage inherent advantages.
Some major network carriers already have adopted low-cost tactics, such as fleet simplification, rolling hubs, higher aircraft utilization rates and fewer inflight services and amenities. Certain airlines, America West Airlines and several overseas, have begun restructuring their fares to resemble the straightforward low-fare model, while many others are exploring distribution costs savings. "What we are seeing is the de-romanticizing of air travel," said Emre Serpen, a partner in Sabre Consulting. "The next five or six years will be all about value for your money, simplicity and getting wherever you are going quickly. The majors really are paying the price for what they have been doing for years, which is focusing on revenues and complexity."
That price is reflected in more poor financial performances announced this month. American, Delta and United airlines reported third-quarter losses of hundreds of millions of dollars. Continental and Northwest airlines lost $37 million and $46 million, respectively. Consistently profitable Southwest again was the only major in the black, recording gains of $75 million, though it acknowledged uncertainty in achieving a profit for the fourth quarter. AirTran Airways eked out a $1.2 million quarterly profit. JetBlue Airways, which has yet to report, should earn near 32 cents a share, according to Thomson First Call analyst consensus estimates, which would be down slightly from the two previous quarters but still well above most larger competitors.
Meanwhile, many of these carriers, small enough to react to changing customer needs and behaviors, will continue to craft programs attractive to corporate clients. Knowing full well that JetBlue, for example, does not negotiate corporate discounts, one travel manager recently sent the carrier a request for proposal anyway. "They came back to us immediately and said, 'Let's see what else we can do to add value to your program,' " the buyer said. Much of that value-add, whether it be from JetBlue, Southwest or any of the other nontraditional corporate suppliers, will come in the form of new distribution channels facilitating transactions.
JetBlue, for example, recently signed a letter of agreement with AgentWare that permits access to the carrier's Web fares through AgentWare's Travel Console product and is exploring direct AgentWare connectivity into JetBlue's res system. JetBlue also cooperates with Outtask. "While our model is consumer direct, we do realize that corporations, particularly larger ones, need certain things that our model does not address right now," said JetBlue manager of national corporate sales Noreen Courtney-Wilds, noting that distribution through the AgentWare channel relieves pressure on JetBlue's thinly spread salesforce. "We had not been able to get our inventory in front of the agencies in the corporate market to the degree we would have liked because of lack of global distribution system participation."
Meanwhile, AirTran, Frontier and JetBlue each are developing or considering their own Internet booking portals along the lines of Southwest's Swabiz, which steadily has grown in popularity among corporate buyers.
AirTran sales director Bill Howard said the carrier "very soon will launch a corporate booking site on airtran.com" intended as a cost-effective distribution vehicle beneficial to larger corporate customers. Few details were available.
Frontier's online booking tool for larger clients will be ready by early 2003, according to Lowell Miller, the carrier's director of sales and distribution. "We are looking to provide point of sale benefits," he said, "and we continue to evaluate opportunities to partner with AgentWare and others. If there is a need for that in the managed travel sector, we will see how we can be part of it."
Some of the low-cost carriers' strategies to limit GDS use already has provided an acute cost advantage. "We spend hundreds of millions on GDS fees," said American Airlines CFO Jeff Campbell. "We need to move closer to the levels of low-cost carriers." With that goal in mind, AA recently launched and then sweetened EveryFare, a new program for travel agencies. Northwest and US Airways also recently launched agency programs providing Web fare access and trimming their own distribution costs
(see story).Meanwhile, estimates on low-cost carrier domestic marketshare growth range from about a quarter of the total in the next year or so to well over half in the years following. Low-cost carriers already are present in a majority of domestic U.S. markets and the steady march continues this winter: JetBlue will offer more seats between New York JFK and Florida than East Coast giant Delta, according to Aviation Daily. The carrier is increasing service on many other business routes.
"As we look at the portion of our domestic/Caribbean network exposed to low-cost carriers, last year it was 25 percent and this year it is 75 percent," AA's Campbell said. "That is a stunning one-year change."
Aside from several European carriers that fundamentally have altered short-haul operations to compete against the likes of EasyJet and Ryanair, Delta has been the most upfront about plans to protect domestic marketshare from low-cost competitors. Its own low-cost strategy—likely to complement or replace existing Delta Express operations—will be unveiled next month and launched sometime next year.
But Sabre's Serpen, for one, said new low-cost units within major carriers inherently are flawed. "Earlier attempts just did not work," he said, referring to now defunct US Airways' MetroJet and Shuttle by United, among others. "If you mix and match and try to build something new, you introduce complexity into an already complex operation."
Certainly, low-cost carriers face challenges, some endemic to the industry at large and some exclusive to each of them. "There are issues as the model changes. Aircraft utilization levels will decline in catchment areas that become too crowded," said Chris Tarry, analyst at Commerzbank Securities, commenting last week at the Association of Corporate Travel Executives global conference in Munich. "There also is a lot of concern in pilot groups" about compensation.
Low-cost carriers will continue plugging away and taking advantage of over-burdened network carriers at every opportunity. "Why not codeshares?" Serpen asked. "It is not a low-cost phenomenon yet, but there may be some interesting synergies between catchment areas of low-cost carriers and network carriers." Serpen also predicted low-cost carriers "will leverage their strength regionally and in north-south flying," leaving the bulk of east-west routes to incumbent majors. That, he said, further could pressure the majors as they lose chunks of their short-haul revenue base.
After years of focusing on how, when and where to capitalize on major carrier weaknesses, however, the low-cost carriers gradually will find themselves locking horns with each other as the market saturates. Southwest and JetBlue already are battling in California. "As we all grow, if there is overlap in markets it simply will create more competition," said JetBlue's Courtney-Wilds. "The more people are out there with low fares, the more travel is stimulated."