Low-Cost Airlines Can't Compete With Majors

<H1> Low-Cost Airlines Can't Compete With Majors</H1>By Michael Boyd

In the past 18 months, we've been told time and time again that a new day was dawning for the air traveler: Low-fare start-up airlines were on their way-a financial cavalry that would pummel the gates of fortress hubs and rescue travelers from the grip of high airline fares.

The general story went something like this: Major airlines like United and American were vulnerable to new competition. Their high operating costs, driven by nasty unions and archaic work rules, had created a gigantic new market opportunity for new jet airlines. The discount carriers' low costs and low fares would sweep the nation, benefiting consumers and loosening the near-monopolistic grip held by the majors.

Last March, this school of thought was endorsed by Secretary of Transportation Federico Pe&ntilde;a, who published a study, "The Low Fare Revolution," in which he touted the huge benefits these new carriers had lavished on the consumer-billions in savings due to lower fares and more competition. And, he noted, these airlines are just as safe as the big guys. Not uncharacteristically, he also gave himself a lot of the credit for this.

But we need to return to reality. For the business traveler, the revolution is not coming. New airlines are not going to save us from the allegedly greedy paws of the likes of United, American and USAir. The unfortunate fact is that we are in an age where air travel will continue to be dominated by today's mega carriers, and there is not much market room for new airlines that could give them any real widespread competition.

Some new airlines have made inroads here and there, but they have not and will not become major players. For the business traveler, the effects are even less, because most of these carriers are interested only in high-density markets like Florida. For somebody wanting to get from Omaha to Albany, it's take a mega carrier or don't go.

Like so many other things in an election year, start-up airlines have been used as a political trumpet. When Pe&ntilde;a's data was given a hard look, it was found that start-up airlines actually were as safe as the majors. Except for one carrier-the one that accounted for over half the traffic: ValuJet. It clearly had a record much worse than the other new airlines. But the study did not mention this, because it would have thwarted the entire political value of the analysis.

What is most surprising is the effect-or non-effect-on the consumer of this low-fare airline "revolution." Looking at the traffic for 1995, the impact of these new carriers is one that could only be found under a microscope. These new airlines account for a minuscule portion of the nation's air traffic-less than 3 percent. Even if you toss in Southwest, which is not new, the total is less than 10 percent of the market.

To be successful, every business must meet and satisfy a market need. It seems that the cheerleader analysts on Wall Street also forgot to question whether any of these airlines had a snowball's chance of making money in the real world. ValuJet apparently made money, but we know now that its operations were such as to be shut down by the FAA, and its employees were paid wages that embarrass a Third World bus company. But the other new start-ups? In a summer when these high-cost, union-saddled majors made money hand over fist, these start-ups have had a very difficult time. A couple are on the verge of collapse. None are making anything resembling high profits.

This is what a lot of the analysts miss. It's very nice to offer low-cost seats. It's quite another thing to get enough people to sit in them.

What about all these people still planning to start new airlines? Surely they must have solid plans that will identify a market need. But maybe not. Humans learn slowly. If we have learned nothing else in thousands of years of civilization, we know that there are two actions that lead to near-certain financial disaster. One is to send an insulting letter to the IRS; the second is to start an airline.

We know that of scheduled passenger airline start-ups between 1978 and 1993, only five out of 36 are still here. This does not include charter airlines or cargo airlines, but only those whose primary objective was to go head to head with existing major carriers. In most cases, it turned out to be like a moose charging a locomotive-daring but stupid.

A few of these were acquired by other carriers, but most simply have gone out of business. One of these, UltrAir, failed once, tried again, and failed a second time. What is truly a wonder is that there are allegedly stable businesspeople at this moment still planning to start airlines.

Of those airlines still operating (see chart below), only two are now consistently profitable. But neither of them-America West and Midwest Express-are low-fare, no-frills airlines. In fact, Midwest Express has ASM costs 70 percent higher than Southwest, yet it has been profitable year after year.

We could discuss the current flock of start-up carriers since 1993 that now are trying to break into the marketplace, but they come and go too quickly. Instead, suffice it to say that only three have significantly more than a snowball's chance of survival. These are AirTran, Frontier and Western Pacific.

AirTran is a tightly niched airline, serving only Orlando, with one flight daily to several smaller, secondary cities. Next is Frontier, which can survive if it remains a very limited player at its Denver home base. Western Pacific has established service at Colorado Springs and is benefiting from the estimated 400,000 consumers who are now fleeing from the high fares and consumer inconvenience of Denver's airport.

Despite wishful thinking, the airline industry has become one in which the barriers to new competitive entry, and the cost of that entry, are no longer viable investments. Don't toss out your Mileage Plus or World Perks cards. The start-up airline revolution is a fizzle. More correctly, it never existed.

Michael Boyd is president and co-founder of Aviation Systems Research Corp., a Golden, Colo.-based company that tracks air service trends.<h3>Who's Still Flying? </H3><h4>New Passenger Airlines, 1978-1993</h4>1. Air Atlanta
2. Air One
3. Air Niagara
4. American International
5. America West*
6. Best
7. Braniff
8. Discovery Airlines
9. Frontier Horizon
10. Florida Express
11. Jet America
12. Hawaii Express
13. Kiwi*
14. Leisure Air
15. MarkAir
16. MGM Grand (NLC)
17. McClain Air
18. Mid-Pacific
19, Midway*
20. Morris Air
21. Midwest Express* (NLC)
22. Muse Air
23. Northeastern Intl.
24. New York Air
25. Pacific Express
26. People Express
27. Presidential
28. Private Jet
29. Pride Air
30. Regent Air (NLC)
31. Reno*
32. Royal West
33. Sunworld
34. USAfrica
35. UltrAir
<font size=2>*Carriers still operating
NLC=Not Low Fare/Low Cost
<b>Source: Aviation Systems Reseach Corp.