Taking Off: Discount Airlines Transform Flying

EconSouth, Fall 2003 | Go to article overview

Taking Off: Discount Airlines Transform Flying


Americans' love affair with air travel has soured a bit since Sinatra crooned "Come fly with me." Even before the dramatic downturn set off by the 9/11 tragedy, major airlines were struggling to fill enough flights to remain profitable, and the recent economic doldrums have brought some airline Goliaths to their knees. But many of the smaller, economy airlines are thriving and are luring travelers back to the skies. The secrets of these discount carriers' success are likely to spell lasting changes for the airline industry, the infrastructure that supports it, and the customers it serves.

Emerging largely unscathed from an accumulation of woes that have pushed some major air carriers to the brink of bankruptcy and beyond, discount airlines in the United States are defining the shape of what's to come in the air transportation industry.

Major airlines, still reeling from the catastrophe of Sept. 11, 2001, have suffered further setbacks from the SARS epidemic, the Iraq war, high fuel costs, new security considerations and a sluggish national economy. Government reimbursement for airport security fees helped Delta Air Lines, Northwest Airlines and Continental Airlines post modest profits for the second quarter of 2003, but excluding these one-time sources of income, the three carriers collectively lost $421 million. United Airlines, the nation's second-largest carrier, is in bankruptcy, and US Airways has only recently come out of Chapter 11 bankruptcy.

In the meantime, economy carriers such as AirTran Airways, Southwest Airlines and JetBlue Airways have prospered. AirTran's net income for the second quarter, without government aid and one-time earnings, stood at nearly $22 million. Its revenues for the quarter were up 23 percent over the previous year's. Southwest posted gains of 23 percent over last year, not counting government aid, and JetBlue recently raised $129 million from a secondary stock offering.

The big carriers are scrambling to catch some of the market that fuels discount air travel, but how successful will they be?

The recent prosperity of the discount carriers and the seeming inability of most giant airlines to right themselves signal major industry shifts that industry experts believe will demand new approaches to the structure of air transportation. The hub-and-spoke system of organizing air travel that has been predominant in the industry since the 1970s seems destined to give way, at least partially, to the point-to-point system favored by most low-cost carriers.

But the logistics of getting air travelers from one place to another are daunting, and the economics of the air industry is complex. While changes are inevitable, they may not be simple and straightforward. The costs of dismantling the hub-and-spoke system would be considerable not only for major air carriers but also for the economy carriers that use a modified hub-and-spoke system. There would also be a significant impact on economies that have grown around hub-and-spoke operations and on the travelers who depend on them.

"Our industry is in the midst of a major crisis," said Delta CEO Leo Mullin in a recent speech to the Aero Club of Washington, D.C., "and the path from here is far from clear."

The new economy is luxury

For decades, flight amenities have been steadily declining. In an attempt to cut costs, the major airlines have progressively eliminated many of the niceties passengers associate with flying. Once-gracious in-flight service has devolved into a package of peanuts and a cup of soda as major airlines attempt to compete with no-frills economy carriers.

While some economy carriers have held costs down by offering few amenities, others are once again trumping the major airlines by restoring the amenities to flying, re-packaging themselves to provide a whole new set of perks. JetBlue and Song, Delta's new economy subsidiary, offer more leg room and leather seats. …

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