Seat 2B By Joe Brancatelli
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Where Are the Airline Upstarts?
February 12, 2015 --If you think U.S. airlines and the (mostly) white men who run them are smug and arrogant when things are rotten, you should see them now when the good times are rolling.
The windfall profits coming in 2015 from lower fuel prices, perhaps $10 billion or more? No lower fares for you. Every dime of the energy savings is headed to the bottom line, say the airline powers that be.
More flights to reverse the historically shrunken commercial networks? Not gonna happen, say the gentlemen who control the skies. The so-called legacy carriers have told Wall Street analysts in recent weeks that they won't expand in any substantial way. One-time upstarts such as JetBlue Airways and Southwest Airlines are capping the size of their respective fleets. Even low-fare/high-fee operators such as Spirit and Frontier are talking merger.
More comfortable seats? Nope. In fact, the flying bosses conspire to make chairs smaller and squeeze more of them onto every flight. It's just good business, say the Sky Gods.
How about, if absolutely nothing else, a little inter-airline competition? You know, one carrier fighting another for market share on a juicy route or an airline creating new customers at an underserved airport? Sorry, pal, there'll be none of that tinkering with the competitive balance. Besides, U.S. airline bosses have asked the Obama Administration to restrict overseas competition.
From the business traveler's view, it's time for some new airline blood. Some fresh thinking. A wave of disruptive innovators who will shake up the skies.
Sadly, no airline faces are among the Upstart 100 released this week by the trend-trackers at Upstart Business Journal. Pretty actresses peddling "honest" products? Check. Geeky inventors? Check. Rappers turned reps? Check. But airline entrepreneurs? Not so much.
Still, I have hope for new players in the skies and not just because even I can create a compelling airline on the back of an envelope. But because business conditions are perfect for upstarts, history shows that the aviation market doesn't remain stable for long and the allure of starting new airlines never seems to fade.
What makes this an opportune time to launch some competitive thunderbolts in the market?
Cheaper oil is an airline aphrodisiac
As crude oil soared to its all-time high near $150 a barrel in the spring of 2008, four airlines folded in the blink of a business traveler's eye. Now that crude is closer to $50 a barrel, there's a financial incentive to be in the airline business again.
It's a matter of math. Energy is by far the largest cost for any commercial airline, accounting for upwards of 40 percent of the ticket price. When oil prices are high, many routes are unprofitable and are dropped. When oil prices fall, many once-losing domestic routes become profitable again. But since existing carriers are proudly managing as if oil is still $100 a barrel--at least two airline CEOs have said as much in recent weeks--there's untapped opportunity in the middle ground between the current cost of energy and the inflated assumptions.
We need more seats
As the economy has roared back to life, the nation's airlines have responded by crimping the supply of seats. The current carriers are reporting an average load factor of around 80 percent. That is operationally a sell-out on an almost-daily basis. And since there's no appetite at the existing airlines for expansion, some smart entrepreneurs will seek to fill the untapped demand.
Planes and airports are available
Although some airports run at capacity, most do not. Abandoned hubs are everywhere and they can easily serve as wayports for any start-up airlines. Even close to that nation's largest markets there is room to grow. San Jose, Sacramento and Oakland are desperate for a greater share of the San Francisco/Silicon Valley market. In the New York Metropolitan area, Stewart in New York's Hudson Valley and Islip on Long Island are potentially prime airports. (Not to mention that United Airlines is sitting on dozens of unused slots at Newark.) Trenton's Mercer County airport could steal traffic from both the New York and Philadelphia airports. Greater Los Angeles has many airports not operating at capacity or working under arbitrary flight limits. And literally dozens of smaller airports in or near major metropolitan areas are desperate for flights and willing to offer good deals to start-ups.
Aircraft? The California and Arizona deserts, where older planes go when they are cast off, is full of them. Many weren't suitable in a world where oil cost north of $100 a barrel. Many of those same planes are perfectly serviceable in a world with double-, not triple-digit, energy costs.
Oligarchies are ripe for plucking
My friend David Rowell recently pointed out an embarrassingly obvious fact: While the U.S. market has concentrated and constipated, the once-torpid Europe airline market is alive with new competition and players.
Why is the U.S. market so turgid? Lack of competition. After years of mergers and combinations, just four carriers dominate. Together with their vassal commuter carriers, almost 75 percent of the nation's traffic is concentrated in the hands of Delta Air Lines, United Airlines, American/US Airways and Southwest Airlines. With the exception of New York, Chicago's O'Hare Airport and Los Angeles International, they don't even fake head-to-head competition between each other. In fact, at most major U.S. airports, one airline operates a fiefdom. In Atlanta and Salt Lake City, for example, Delta commands more than 70 percent of the traffic. At Miami, American and US Airways control more than 80 percent of the passengers while they capture 70 percent at Dallas/Fort Worth and Charlotte.
And the bottom line...
Compare airfares over the last decade to the cost-of-living calculator and you'll find that base ticket prices are roughly in line. But where airlines blow up the comparison is the a la carte pricing regimens they have imposed in recent years. Carriers now generate billions of dollars in "ancillary fees" such as ticket-change and baggage charges.
Even more than the base fares, those extra charges infuriate business flyers and leisure travelers alike. That's the wedge new airlines can use to pry open the market. Fat, happy and oblivious to their unpopularity, the existing airlines have left the door open for new competitors.
When the newbies and upstarts arrive is anyone's guess. But I'm betting sooner rather than later.