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.

In contrast to the aforementioned airlines, AirTran has embarked on a completely different strategy, adding mostly smaller cities, like Allentown and Harrisburg (Pa.), Asheville (N.C.), Branson (Mo.) and Charleston (W.V.) to its network.

•Pursuing business travelers. Once the mainstay of budget-conscious leisure travelers, LCCs had limited appeal to business travelers, but this is quickly changing as LCCs increasingly add more business destinations and modify their products to target a more discerning customer.

Southwest Airlines recently changed its unreserved seating policy to facilitate priority boarding for full-fare and very frequent travelers. In addition, all Southwest passengers now receive their boarding priority at check-in, eliminating the need to queue up an hour before flight time. Southwest is also courting business travelers with new seats at its gates with electrical power outlets and USB connectors.

Though Southwest maintains its longstanding single-class service, AirTran offers business class and Virgin America has a luxurious first class product. Even in economy class, jetBlue and Frontier have a greater seat pitch than most other U.S. airlines.

•High-tech in flight. With limited capital, most LCCs originally flew older second-hand aircraft, but this is changing fast. Years of sustained profitability have allowed most LCCs to acquire new aircraft while financially struggling network/legacy airlines have been unable to replace aging airplanes. As a result, AirTran, Frontier, jetBlue and Virgin America boast fleets less than five years old, while the average age for network airline fleets is ten to 15 years. Newer airplanes allow LCCs to offer the latest onboard technology, like the satellite radio and television offered by Frontier and jetBlue.

Targeting the growing number of younger business travelers, Virgin America airplanes are outfitted with mood lighting and a computerized entertainment system with iPod hook-ups, touch-screen food and beverage ordering, texting capabilities between passengers on board, and hundreds of hours of music and videos. Virgin America also targets their audience by flying such routes as the high-tech corridor between San Francisco and Seattle.

•Serving international markets. Once confined to domestic travel, LCCs are now expanding beyond U.S. borders. Frontier has stepped up service to Mexico, while jetBlue has opened up an extensive route network in the Caribbean and Latin America. Even the most unlikely candidate for international travel, Southwest, now has codeshare agreements with partners in Canada and Mexico and is gearing up for its own foray into the international arena within the next few years.

LCCs will continue to face new challenges as they evolve. Rising labor costs and volatile fuel prices impact all airlines, but perhaps the biggest challenge for LCCs is competition from similar airlines. It is no coincidence Frontier's bankruptcy coincided with Southwest's expansion into Denver. Similarly, Midwest Airlines has been hurt by AirTran's expanding operations in Milwaukee. In this highly competitive environment, product differentiation becomes increasingly important, so here's hoping that amenities such as high-tech entertainment, comfortable coach cabins and more convenient airports are only the beginning.

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Send David your feedback: David Grossman is a veteran business traveler and former airline industry executive. He writes a column every other week on topics of interest and concern to business travelers. E-mail him at travel@usatoday.com.