Bargain Airlines

TOM BEARDEN:

The busiest domestic airport in South Florida today isn't mighty Miami. It's Ft. Lauderdale-Hollywood. A major reason this once-junior partner has gotten so big is the discount airlines, also once a junior partner in commercial aviation. The same week U.S. Airways filed for bankruptcy and United threatened to do the same, discount carrier Southwest Airlines was serving Ft. Lauderdale with 36 crowded flights a day. A few hundred yards down the concourse, a smaller discount carrier, Air Tran, was checking people in for some of its 12 daily flights. Ft. Lauderdale is also served by Frontier, another discount airline based in Denver, by Florida-based Spirit, and by Jet Blue, a two-year-old carrier headquartered in New York. Jet Blue has increased traffic so much that there are now more people flying between ft. Lauderdale and New York than there are between New York and Los Angeles. Ed Nelson is the airport's marketing chief.

ED NELSON:

When I first came here in 1989, there were 600 people a day looking to fly between Ft. Lauderdale and Atlanta, and at the time, it was Eastern and Delta. Now that Air Tran is in the market and they have the low fares that Delta, of course, has matched, the local marketplace is 1,800 a day. So along came this little upstart that kind of brought quite a few people, over a thousand people more, to the marketplace.

TOM BEARDEN:

But more is going on here than just more passengers. The discounters, which used to specialize in leisure travelers, are now carrying more and more business fliers.

J.C. PHILLIPS:

I'm in business for myself, so that's the only way that I can travel, that I can afford to travel.

TOM BEARDEN:

So price is the determining factor?

J.C. PHILLIPS:

Price is the determining factor, yes.

JOHN BILLACORTA:

I used to fly Delta, and I have Delta sky miles program, and I won't be getting that with this. But the trade off again is the convenience and the price.

TOM BEARDEN:

That critical shift of business fliers away from the major carriers began when the economy began going south in late 2000. The trend accelerated after September 11, as businesses cut travel expenses. It's now in the process of transforming the shape and direction of the whole industry. A few years ago, experts predicted there would soon be only three or four mega-carriers in the U.S. Instead, Southwest, once a scrappy upstart, is now a $5 billion business, and the low-fare segment of the industry has been more profitable post-9/11, than the majors. The Business Travel Coalition, an alliance of corporate travelers, surveyed 182 travel managers, and found they had cut their spending on air travel 16% last year. 68% said they planned to fly the low fare carriers more. Kevin Mitchell, who heads the coalition, says the big airlines weren't prepared for the shift.

KEVIN MITCHELL:

The airlines have believed a lot of their own rhetoric over the years, that the business traveler is inelastic, will pay anything to go anywhere at anytime. And there is something different going on this time, and it took the airlines a long time during this winter and during the first two earnings reports to really get an integrated and fuller picture that much of the premium business is gone forever. The $1,800 fare from Syracuse to Phoenix, there are going to be fewer and fewer people willing, and able, to pay that fare going forward.

TOM BEARDEN:

The major carriers make nearly all their profits from business travelers. That's why losing them has an impact far beyond the actual numbers of passengers they've lost. Leisure travelers, who buy in advance, pay relatively low fares. Business travelers, who often have to fly at the last minute, often pay three or four times as much. Bill Swelbar is an economic consultant to the airline industry.

BILL SWELBAR:

They have always built their system around that high yield business passenger, and certainly, you know, losing that $2,200 Transcon flier to an alternative airport, or to a low-cost carrier, you know, paying $400 or $500 for the same piece, you know, the value in that service is less.

TOM BEARDEN:

I've read the difference between profit and loss on a given flight is a couple people?

BILL SWELBAR:

I think it's... over time, it's been three people per airplane is the difference between profit and loss.

SPOKESPERSON:

Thank you for calling the airlines. Have a great day, sir.

TOM BEARDEN:

The low fares that are killing the major airlines are profitable for the discounters because they have much lower costs. Many, such as Spirit, have simple route structures that go only from point A to point B without the network carriers' banks of flights converging on expensive hubs. Another reason is that some fly only one type of aircraft, like Jet Blue with Airbus 320s, or Southwest with the Boeing 737. That dramatically reduces training and maintenance costs. Post-9/11, the low-fare carriers have moved aggressively. When the big carriers cut flights, they ramped up service, even moved into new markets. The Baltimore-Washington Airport is a good example. When U.S. Airways shut down it's own low-fare division, called Metro Jet, Air Tran jumped in. They now have 23 flights a day. Joe Leonard is Air Tran's chairman.

JOE LEONARD:

We keep our systems very, very simple, and as a result... and we're also very flexible, so we can spool up or spool down rapidly, as we did after 9/11. We took capacity out real fast, but with the cooperation of our unions and our employees, we kept everybody on the payroll but reduced our costs at the same time. That gave us the ability to ramp back up and start expanding as soon as we saw the opportunity to do so.

TOM BEARDEN:

Southwest was already at BWI. With its 138 flights a day, it had already moved the airport past longtime rival Dulles in domestic passengers. The parking garage is graphic proof of what analysts call the "Southwest effect"-- a low fare carrier attracting new passengers, who are willing to drive long distances for cheaper tickets. Geico Insurance travel manager Joe Dixon says the average ticket price dropped from $475 to $300 when his company's employees began flying Southwest, Air Tran, and Spirit.

JOSEPH DIXON:

We did a ticket for our CEO One day from Baltimore and he lives here in Virginia to go... I believe it was Cleveland, and he did a connecting flight to save the $50.

TOM BEARDEN:

Low-fare carriers are also moving into the big carrier's fortress hubs, going after markets the big guys weren't pursuing. For example, Frontier added non stops between Ft. Lauderdale and Denver, in February. Three months later, Spirit did the same. Spirit marketing chief Tom Anderson says it's all about finding new business.

TOM ANDERSON:

The largest ski club in the United States is here in South Florida. So Floridians like to ski. Well, not surprising-- or perhaps to some people it's a surprise-- that people from Colorado love Adventure Travel, and one of the largest scuba clubs in America is in Colorado. And you've heard, you know, some talk about and stories about how the larger carriers cut back their service and how smaller national airlines filled in the cracks. In a couple of occasions in the last year or so, we've been able to do that fairly effectively.

TOM BEARDEN:

The discounters are also finding success going head- to-head with the majors, something that was considered impossible not long ago. Air Tran is competing directly with Delta at Atlanta. Delta is matching fares and losing money, while Air Tran's cost structure allows it to remain profitable.

TOM BEARDEN:

Are you in any way involved in a war of attrition with Delta?

JOE LEONARD:

We... ( laughs ) Delta competes with us vigorously. We are competed against more... stronger by Delta than the other low-fare carriers seem to experience. But having said that, we've done very well; we've demonstrated that we can take what Delta throws at us and still be profitable.

TOM BEARDEN:

Low-fare airlines haven't always been this successful. There were a lot of startups in the '70s and '80s, but most eventually went bankrupt. At 12-year-old Spirit Air, which just carried its 15 millionth passenger, Tom Anderson says today's low-fare airlines have more staying power.

TOM ANDERSON; A lot of other airlines can lower their fares to our levels, but we know immediately once they get below a certain level with that fare, they're losing money on every passenger, every mile. Now some airlines have a scorched-earth policy, you might say, about staying out there and just waiting out that fare structure and hoping that eventually the fares will go back up, or that perhaps competitors will fall by the wayside. But we've proven to ourselves and to our competitors that we'll stay in the market.

TOM BEARDEN:

Some of the industry's behemoths seem to be getting the message that times have changed. After having lost a billion dollars last year, Delta recently announced a joint marketing agreement with continental and northwest, as a way of competing for more passengers. One airline that's never underestimated the discounters is American, which worried about lost passengers following the Gulf War in the early 1990s. When I spoke to American's CEO in 1994, he put it bluntly.

TOM BEARDEN (1994):

Do you fear Southwest and the new entrants?

DONALD. J. CARTY, CEO American Airlines (1994):

I fear them in the sense that their competitiveness, particularly their cost competitiveness, threatens the viability of American airlines. And in that sense, I do fear them, I guess.

TOM BEARDEN:

The biggest airline in the world is worried about Southwest?

DONALD J. CARTY:

Size is irrelevant.

TOM BEARDEN:

Despite those fears, American didn't change its business model or price patterns, and went on to make more than $5 billion profit when the economy began growing again. But this time, Carty recently told his employees: "The problems we're having…won't get better when the economy gets better. Low fare competitors are going to be with us for some time…" Carty cut the schedule and reorganized flights at Dallas-Ft. Worth to spread traffic out over the day. Employees can be more efficient with fewer peaks and valleys. American has also laid off 27,000 workers since September 11. That's about twice as many people as the entire work forces of Air Tran, Frontier, Spirit, and Jet Blue combined.