Majors Match, Buyers Save

<B>Majors Match, Buyers Save</B>
<I>Low-Fare Airlines: Second Of Three Parts</I>

By David Jonas

As low-fare carriers continue to tout the benefits of meaningful competition against the majors and draw more corporate buyers and travelers to their products, the effect on fares--and traffic--in many markets is clear.

Southwest aside, several carriers have made splashes in local markets, either by forcing majors to match or, as some claim, prompting them into predatory behavior.

Meanwhile, the industry still awaits competition guidelines from the U.S. Department of Transportation aimed at protecting new entrants from unfair exclusionary practices. The guidelines originally were released for public comment more than two years ago (BTN, April 13, 1998).

"The low-fare carriers outside of the East, and AirTran in Atlanta, seem to have a good business environment and have found a niche by staying out of the way of the bigger carriers. There seems to be more than enough traffic to go around," said Ray Niedl, airline analyst and director at ING Barings in New York. "On the East Coast, it appears that Southwest, JetBlue and maybe even Delta Express are having a very severe impact on US Airways."

Indeed, in its most recent annual report, US Airways stated, "The foremost competitive threat continues to be the low-cost, low-fare competition in [our] primary operating region, the eastern United States."

In many cases, US Airways' woes are AirTran's successes. The Orlando-based carrier in recent months has reported sound financial and operational results, secured hundreds of new corporate accounts and established itself as a key player in the markets it serves, notably in and out of its Atlanta hub.

"They are having record loads and can compete with the big boys, particularly with their business class, which is even less expensive than everyone else's coach class," said Onetravel.com airline expert Terry Trippler. "This is an airline to watch."

Some travel managers said AirTran's increasing credibility and deepening penetration has made it a viable option. "Where we can move traffic from Delta to AirTran, we do it," said one Atlanta area buyer with a total air spend near $25 million. "While Delta's pricing on long haul flights has become outlandish due to minimal competition, they have come down in pricing in places where AirTran flies."

In Chicago, for example, dominant United and American have been forced to alter pricing, according to Tower Travel Management president John Smith. "Airfares to Atlanta from both area airports are rock bottom," he said. "I can't think of any reason other than a response to what AirTran has brought to the market. They have carved out a niche here, no doubt about it."

"Atlanta is our hub and a big piece of our sales effort is in that market as more and more corporations are recognizing the savings and value," said Bill Howard, AirTran's director of sales. "On an annualized basis, we save Atlanta travelers more than $700 million by being a viable low-fare presence."

Chicago has been a hotbed of low-fare carrier activity, not only from smaller carriers flying in from their hubs, but also from American Trans Air's recent push to establish a mini-hub at Midway Airport. The Indianapolis-based carrier now flies nonstop to 19 destinations from Midway, with 53 flights a day.

"Its lower fares and hub orientation definitely is getting the attention of United and American," Smith said. "When you can fly unrestricted to the West Coast for about $400 at a closer-in airport versus $1,800, that is substantial." Smith added that a recent fare sale announced by United to several West Coast cities was "specifically and absolutely a competitive response to ATA," which had launched its own fare sale two days earlier. "You can see that ATA has made inroads in Los Angeles, for example, when United's fares from Chicago have come down to such low levels," he said.

"They match our fares for advance purchase but do not on the high end," said Bill McKnight, ATA's executive vice president of marketing. "For business travelers, however, our last-minute fares still are 50 percent lower."

Recognizing the need to offer frequency to the business market, ATA this year expanded its Midway-New York LaGuardia service, from three flights a day to seven, and still reports higher load factors.

"We have demonstrated the ability to grow east-west markets; from Midway into primary airports in major business destinations, including Boston Logan, Washington National, Los Angeles and, of course, LaGuardia," McKnight said. "Over the next few years, once the Midway renovation is completed, you'll see us and Southwest occupying a combined 70 percent of the gates at the airport. It undoubtedly will become recognized as a low-fare, high-value airport in the Chicago area."

Like ATA, Frontier Airlines in Denver prompted lower advance fares. "Competition brings that about, but when United is generating 46 percent of its revenue from 9 percent of its passengers paying the higher fares, those fares won't be lowered. It is their bread and butter," said Tom Allee, Frontier's national director of sales and distribution.

"However, we have found in the select markets we fly that United has chosen to become much more aggressive with discount levels," Allee added. "Also, we have had a travel agency ask us for an off-the-books deal because consumers are finding our prices to be more acceptable and the agency cannot meet its override agreement with United."

And, of course, United's well-publicized operational problems would be all the more disastrous for Denver travelers if Frontier was not around.

Several years ago, the effect of now-defunct Western Pacific's move to Denver from Colorado Springs prompted a dramatic and immediate fare freefall by United and others in the market. According to the American Express Domestic Airfare Index, the average typical business fare in Denver in July 1997--about the time Western Pacific shifted flights to Denver--was $599. The Index showed a rapid decline in the typical business fare--down to $273 in February 1998, when Western Pacific officially ceased operations. Seven months later, the typical business fare in Denver climbed back over the $500 mark.

The situation is similar in Minneapolis, where Sun Country Airlines is clawing to survive against Northwest Airlines and its alleged monopolistic tendencies. While Delta and United now coexist, to a degree, with their low-fare competitors and match fares when and where necessary, Northwest has moved aggressively to protect its dominance.

In a recent study by Paul Stephen Dempsey of the University of Denver, Northwest is accused of "engaging in massive price discounting in markets served by a low-fare carrier, while simultaneously maintaining monopoly driven prices in all other markets."

The report, "Predatory Practices by Northwest Airlines," charged the airline with several other monopolistic tactics used to weaken Sun Country, including capacity flooding, bonus frequent flyer offers, increased agency overrides and restricting access to ground facilities. "Far from being a revenue-enhancing strategy, such circumstantial evidence suggests a different motive--to dump capacity in the markets Sun Country has entered in order to drive it from the market, sustaining short-term losses in order to re-exert its historical monopoly," the report concluded.

Northwest repeatedly has denied any wrongdoing. To be fair, it should be noted that Dempsey is listed in financial filings as a director with Frontier Airlines and his study was funded in part by Sun Country Airlines.

"The most obvious thing Northwest does in response to Sun Country is matching fares on the same route in the one-time slot in which Sun Country operates," said Jim Ousley, chairman of St. Paul-based Syntegra USA, and a several-hundred-thousand-mile-per-year frequent flyer. "In all other time slots, Northwest charges five to 10 times more. The business community would love to see more of these smaller guys succeed, but the pricing of Northwest, for example, makes it quite challenging."

Nevertheless, Sun Country said traffic has grown on all routes it flies and that its effect on pricing amounts to savings on the order of $10 million a month in city pairs in which it competes against Northwest.

In fact, the Dempsey report said traffic by 4Q99 had jumped 50 percent since Sun Country's launch of scheduled passenger services and that fares in those markets were slashed by 45 percent, to 65 percent.

Indeed, the American Express Airfare Index showed average fares in Minneapolis have declined slowly since Sun Country's inception of scheduled service in June 1999. A month earlier, the average fare was $373, or 25 percent above the national average. The latest figures pin the average fare in the market at $328, just 5 percent above the national average and the lowest since February 1997.

While dramatically lower fares are a positive outcome for business travelers and consumers at large, Dempsey claimed such reductions are reversed completely once Northwest successfully eliminates a low-fare entrant in any of its markets, similar to the situation in Denver two years ago.

"The essential point is that a new entrant does not have network appeal and can only compete on price," said Business Travel Coalition chairman Kevin Mitchell. "Predatory action becomes clear when you see Northwest, which offered a little more than 1,100 seats under $75 one-way in the Detroit-Philadelphia market, boost that to 49,000 seats under $75 after Spirit began serving that city pair." Mitchell added that pricing and capacity flooding may be accompanied by changes in terms and conditions, such as Northwest's step to match ProAir's $25 change fees, which normally are $75.

Meanwhile, Buffalo, N.Y., is another prime example of how low-fare carriers can alter the competitive landscape in the region, especially now that New York-based startup JetBlue has arrived on the scene.

"We have seen quite dramatic evidence of the impact of these new airlines in the Buffalo market," said Doug Baldy, coordinator of corporate travel services at Eastman Kodak in Rochester, N.Y. "We have found that our travelers are willing to drive the 80 miles to Buffalo to get to Atlanta at $250 roundtrip when the same carrier charges a fare of $700 out of Rochester."

Indeed, Delta has matched the competition as has United, which dropped fares to Chicago when Vanguard began Buffalo-Chicago Midway service.

"We have arrived at the conclusion that if a startup has the right capitalization, the right plan and is well-managed, we will support it as much as possible to ensure they stay in this market," Baldy added.

JetBlue's arrival in Rochester with four flights a day to New York JFK means advance purchase fares as low as $49 each way, a 65 percent savings over fares previously available.

"JetBlue will eat everyone's lunch they go up against," said Darryl Jenkins, director of the Aviation Institute at George Washington University in Washington, D.C. "It is the only startup to generate as much excitement as Southwest. The business plan--emphasizing productivity, which equates to low costs-will change the environment for all start- ups in the future."

In Dallas, the much-publicized legal battle between American and Legend airlines ended earlier this year with the latter given full permission to begin long haul flights out of Love Field (BTN, Feb. 21). In one of the most obvious cases of a major responding to a new, lower-fare entrant, American began its own all-first class service from Love on routes launched by Legend. It also matched Legend's lower fares and named a new vice president for Love Field operations, despite its insistence that long haul flights to and from Dallas should be operated at Dallas/Ft. Worth, an airport much further from central Dallas.

"American is losing its shirt and doing terribly at Love," said Michael Boyd, president of the Boyd Group in Evergreen, Colo. "Legend should develop brand loyalty while American is looking like a bully and cannibalizing its own traffic."

Legend, which brought first class service at lower three-day and seven-day advance purchase fares to the Dallas market, said it is not paying much attention to their exponentially larger competitor and instead is focusing efforts on new corporate accounts in Los Angeles, Washington and New York. Said Lisa Bauer, Legend's vice president of marketing and customer service, "American must think we have a pretty good business plan to be matching our moves the way they have."

However, airlines may be toning down aggressive behavior against new entrants now that the federal government has opened a watchful eye. "Major carriers have throttled back the most extreme response to low-fare carriers to avoid scrutiny. That has been the overriding theme in the past year," Mitchell said. "Considering U.S. Department of Justice suits against American and Northwest, competition guidelines that are at DOJ for a final look-see and many concerned members of Congress, the major carriers are concerned about some sort of re-regulation."

The impact of the other low-fare carriers in the United States, namely Vanguard in Kansas City and National Airlines in Las Vegas, as well as several primarily serving leisure routes, has been less dramatic as those markets always have been fairly competitive and relatively inexpensive. However, National's transcontinental service connecting through Las Vegas--from Los Angeles and San Francisco to Miami, Newark, New York JFK, Philadelphia and Washington--is an attractive alternative for price-conscious travelers. Last-minute fares on those routes are as low as $374 one way, while advance purchase fares range near $174.

Meanwhile, low-fare carriers can play a different role in the marketplace--as pawns in the larger chess game between majors. American Airlines, for example, acquired Reno Air last December. Even though Reno itself posed very little threat to American Airlines, Reno's network gave American stronger presence out west where it has been battling United and the low-fare Shuttle by United operations.

Low-fare carriers are having an impact in regions outside the United States, as well. In Canada, both WestJet and Royal are expanding rapidly as alternatives to Air Canada, while Irish carrier Ryanair and U.K.-based EasyJet have posted strong growth numbers as two of the healthiest European carriers.

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Look for Part III: The Financial and Operational Health of Low-Fare Carriers in the next issue of Business Travel News.