Low-cost airlines face new competition - each other

Discount airlines, also known as low-cost carriers (LCCs), have changed the way we fly and altered our expectations for air travel. When the first LCCs took flight some 30 years ago, most followed the same simple formula: no food or frills, just simple pricing, low fares and basic transportation. That business model helped fledgling LCCs compete against the much larger and well-established "network" or "legacy" airlines (like American, Delta and United Airlines) which dominated air travel for much of the 20th century.

Southwest Airlines popularized the most successful LCC model, subsequently emulated by many others. It kept costs low by operating a single aircraft type (the Boeing 737) on point-to-point, short-haul routes, with quick turnaround times between flights. This stood in contrast to the expensive-to-maintain, hub-and-spoke models operated by the major network airlines.

As other LCCs prospered and matured, some offered more amenities, while the major network/legacy airlines slashed costs and airfares in an attempt to level the playing field. Now LCCs are becoming even more specialized as they locate their ideal niche and differentiate their products from the majors as well as other LCC competitors.

While scores of LCCs have arrived on the scene following deregulation, most were ill-conceived or poorly managed and quickly folded. Gone are fabled brands like Air Florida, Midway Airlines, Skybus and Vanguard Airlines. Yet, at least ten true LCCs operate still within the U.S. today (see box at left), according to Airline Weekly.

Most communities welcome an LCC to their airport in the hopes that plummeting airfares will follow. Few large airports lack LCC service and LCCs are increasingly expanding into markets already served by others. According to Airline Weekly data, two or more LCCs compete directly in almost 100 U.S. city pairs today, and some routes, like Denver-Milwaukee and Baltimore-Boston, will soon have three competing LCCs. With these similar airlines increasingly butting heads, product differentiation is vital to their survival and growth. Here are some strategies they've turned to:

•Landing at major airports. Originally, small and vulnerable LCCs nibbled at major markets by flying into smaller cities or secondary airports, like Manchester, N.H., or Providence instead of Boston Logan Airport, or William P. Hobby Airport instead of George Bush Intercontinental in Houston.

Now LCCs have reached a critical threshold where they can hold their ground in a turf battle at primary airports. Two-year-old Virgin America jumped headfirst into the highly competitive transcontinental market by flying from Los Angeles and San Francisco International Airports to Boston Logan and New YorkJFK. Not to be outdone, jetBlue quickly added San Francisco and Los Angeles International Airports for transcontinental service after building a base in secondary airports in Long Beach and Oakland over the years.

Even Southwest has joined the primary airport parade, adding Boston Logan, Denver, Milwaukee, Minneapolis, New York La Guardia, Philadelphia, Pittsburgh, San Francisco and Washington Dulles Airports to its destination list in recent years. Southwest's ascent has been rapid and it is now the second largest airline at Philadelphia and Pittsburgh, and the third largest carrier at Denver and San Francisco International Airport.

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