Are Budget Airlines in Danger of Disappearing?

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On a recent flight, as we landed, the pilot cheerily announced, "Thank you for flying Southwest. We hope you enjoyed giving us the business as much as we enjoyed taking you for a ride." That joke has been recycled more times than the plane's cabin air.

Southwest is revered (and occasionally reviled) for its humorous cabin crews and boarding announcements. But what is no laughing matter is the turmoil airlines have seen in the last year, leaving passengers facing sudden surcharges, canceled routes, and reduced perks as even the most established airlines shift into survival mode.

But rather than going the way of the flightless dodo, budget carriers are instead meeting the challenges by undergoing an evolutionary adaptation. "They are morphing more toward traditional airlines," says industry analyst Vaughn Cordle of AirlineForcasts.com. "But just because they're moving toward that direction doesn't mean they'll change the cost structure."

Spin is everything in the airline industry where the word "budget" carries a pejorative connotation, suggesting cutting corners alongside costs. Which is why airlines like JetBlue prefer the more positive descriptor "value." But what constitutes value? JetBlue and other low-cost carriers Southwest, Virgin America, AirTran, Frontier, Spirit, and Allegiant have learned that passengers want not just cheap fares but a superior overall experience that includes courteous customer service, an above-average on-time arrival and safety records, and more innovative frills (whether they have to pay extra for them or not).

Which partly explains why these discount airlines experienced stratospheric growth in the past decade: They now control nearly one-third of the domestic air travel market, triple their share in 1999, according to M.I.T's Airline Data Project. To stanch the bleeding, legacy carriers such as Delta, American, United, Continental, US Airways have reduced flights in most markets, even going as far as closing hubs. Yet scaling back means less convenient schedules for their loyal customers and enables the low-cost carriers to expand their routes. The increase in available flights in addition to their low operating costs allows them to produce profits, which the mainliners can't do consistently.

While the airline industry lost $50 billion over the past decade according to the International Air Transport Association, Southwest alone earned $3.7 billion. Even though Cordle estimates that Southwest lost money in 2009 for the first time since 1972, he notes that the airline still increased its market share and added routes. The fact that they have the largest domestic fleet of any airline and the most daily coast-to-coast flights doesn't hurt either. "Their growth has allowed them to dictate ticket prices," says Cordle. "They're the price maker, the others are price-takers." It's a no-win situation for legacy carriers. If they don't follow Southwest's lead, they lose traffic, market shares, and eventually money. If they match, they lose money upfront. Any wonder they pile on the sky-high surcharges?

Traditional perceptions of the low-cost carrier as a basic no-frills airline have also shifted. Virgin America compensates for its small fleet and fewer routes with onboard technology: leather seats with power outlets, mood-lit cabins, inflight internet, and a video touch-screen in every seatback that provides movies, live TV, videogames, an iPod-worthy music list, and seat-to-seat chat. Their on-demand food ordering is the wave of the future, part of an à la carte pricing structure that enables fliers to choose which perks they want, satisfying both passengers and the board of directors' bottom line. VA also instituted premium coach seating, which includes a checked bag, all movies, food and beverages, even alcohol, and offers last-minute upgrades for mere peanuts. Besides in-seat televisions and unlimited snacks, JetBlue has wider-than-standard seats and three more inches of legroom than other airlines. Southwest lacks inflight entertainment - save the jocular crews – but is now testing inflight WiFi. They also installed leather seats with above-average pitch, albeit narrower than most of their low-cost competitors (see the PR stomachache that was director Kevin Smith's supposed air-besity incident).

"So-called value and budget airlines have certain advantages that allow them to offer perks that the 'legacy' carriers can't," says George Hobica, founder of airfarewatchdog.org. "They might have younger jet fleets and one or at most two aircraft types, which means fewer delays and mechanical problems." Indeed, Southwest uses only one aircraft type, the Boeing 737, which simplifies both maintenance and training, minimizing operating costs and increasing safety. JetBlue also has a fleet of new Airbus A320s and E190s aircraft, a more efficient model that keeps fuel and maintenance costs down. The focus on streamlined procedures allows low-cost carriers to maintain tight schedules. In fact, many of the top-ranked U.S. airlines for on-time service are smaller discounters, according to the U.S. Department of Transportation's Air Travel Consumer Report.

Also keeping prices down, a business model emulated by low-cost carriers around the globe, is the fact that these airlines fly multiple trips with rapid turnaround into the secondary airports of major markets (Midway rather than Chicago O'Hare, Love Field rather than Dallas-Fort Worth International, et al.), that usually charge lower "rental" fees. Smaller regional airports also allow shorter taxi times and fewer delays for landing slots.

And they keep their customers happy. Costs are upfront, straightforward. User-friendliness is emphasized. In 2009, JetBlue ranked "Highest in Customer Satisfaction Among Low-Cost Carriers in North America" by J.D. Power and Associates for the sixth consecutive year. Southwest has consistently recorded the lowest ratio of complaints per passengers boarded since the Department of Transportation began tracking Customer Satisfaction statistics in 1987. They also listen to their passengers. Countering criticism of the "cattle call" no-seat-assignment policy, Southwest implemented a tiered boarding structure and recently adopted a new system whereby passengers may pay an extra $10 for automatic "EarlyBird Check-in" 36 hours in advance. Southwest's current ad campaign also touts their no-charge policy for the first two bags checked, contrary to other airlines. "The $500 million in baggage fees Southwest could raise is offset by luring more customers and increasing load factors," says Cordle. "The strategy paid off."

But trade-offs still exist. Low-cost carriers can't compete with international routes and airline partnerships that increase frequent flyer appeal. Southwest's Rapid Rewards program makes it easy to earn a free flight, but points don't rollover from year to year. Few offer Business or First Class (only AirTran and Spirit do). And, despite expansion, their networks remain limited compared to the Big Five.

So are budget airlines disappearing? Maybe not, but with the increased pressure they put on the competition, maybe it will be passengers that have the last laugh. For now.

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