The Cheap Seats : Americans who like flying for peanuts are helping a new generation of low-cost carriers reshape the industry from the ground up.
Retiree Bee Newman knows what she wants in an airline: “No frills. No nothing. But cheap.”
So the choice was easy when the New Hampshire resident visited California last fall. She flew on Leisure Air, a year-old carrier offering a $198 round-trip fare between Boston and Los Angeles.
Newman endured a five-hour flight delay, a bus ride from the terminal to the plane and an identical on-board meal going home as flying out. “The same lousy turkey sandwich,” she said as she was cwaiting for her luggage at Boston’s Logan Airport. “But what do you expect?”
Leisure Air is one of a raft of new carriers catering to travelers’ demand for rock-bottom fares. They keep costs down by offering few amenities and by snapping up bargains--manufacturers’ and other airlines’ surplus planes, along with flight crews idled during the recession and now willing to work for lower wages.
How long the airlines can fly on that formula is hard to say.
“History will tell you it’s hard to do, because there are hundreds of carriers that tried and failed,” said Thom Nulty, a former Continental Airlines vice president who now is president of Associated Travel Management, a chain of travel agencies based in Santa Ana. “You might have better luck going to Las Vegas and putting your money on the roulette table.”
The airlines that have sprung up in the past two years rouse memories of the early 1980s, when dozens of low-cost carriers were born in the wake of 1978 legislation that deregulated the industry.
Many of those carriers eventually folded, some because they never became profitable, others because they expanded too fast. Among the best known was People Express, which revolutionized air travel with $99 coast-to-coast flights in packed Boeing 747s. It ran into financial problems and was bought out by Continental Airlines in 1986.
This time there are key differences.
For one, the idea of discounting has gained wide acceptance among consumers. Low-price retailer Wal-Mart Stores Inc., for example, is now the nation’s largest department store chain. And generic products, especially foods and cigarettes, are making inroads against well-known brand names.
Also, the new upstarts have a role model: Southwest Airlines, the Dallas-based carrier that perfected the low-cost, low-fare formula and was the only major U.S. airline to remain profitable during the recession.
Following Southwest’s example, carriers with low-fare, few-frills service are growing briskly, especially for short trips. Cut-rate airlines now compete on an estimated 60% of the most popular short-distance routes, up from 27% in June, 1993, according to American Express Airfare Management Unit.
The new discounters insist that they are not wooing passengers from established airlines. Rather, they say, most of their customers are leisure travelers who would not fly if not for low fares.
“Seats on an airplane are a commodity, and, if priced right, people will travel,” said Katie DeNourie, spokeswoman for fast-growing ValuJet Airlines in Atlanta.
Analysts agree. “Let’s face it, American consumers have said either they are going to get low fares or they are not going to go,” said Candace Browning, who follows the airline industry for Merrill Lynch in New York.
Compared to the ‘80s, the cut-rate carriers have another advantage: Most major airlines, crushed by the recession, lack war chests for fighting back. Though the industry will post a profit for 1994, it lost a total of almost $13 billion during the previous four years. As a result, the big carriers have dropped marginal short routes to concentrate on their more profitable long-haul flights.
“Airlines are preoccupied with their own restructuring and survival,” said Harold Shenton, vice president of Avmark Inc., a consulting group in Arlington, Va. “They don’t react where they don’t have to. Previously, they would have tried to drive an airline out of business.”
Discounters, because their costs are lower, can eke out profits from abandoned markets. With a few million dollars in capital and some leased planes, former airline executives are forming syndicates to offer jet service on routes where the big players have pulled out or where they think they can beat the going prices.
“I think it is coming closer to the vision of the proponents of deregulation than ever,” said Edward R. Beauvais, the founder and former chairman of America West Airlines. Beauvais, who left America West in 1992, has put together a group of investors to start a carrier, dubbed Commercial Air, based in Colorado Springs, Colo.
Another upstart was founded by a handful of executives of the former Frontier Airlines, which was bought by People Express in 1985 and later merged into Continental.
Headed by M.C. (Hank) Lund, who had been president of Frontier, the new airline--also named Frontier Airlines--began flying in July with five jets. It offers service to small western cities such as Fargo, N.D., and Great Falls, Mont.--destinations abandoned by Continental as it reduced its operations in the Denver market, leaving regional air service to commuter carriers flying slow-moving propeller-driven planes.
“We are restoring jet service to these markets,” said Bob Schulman, Frontier’s vice president.
The discounters are picking their flights carefully so as not to invite price wars by encroaching on the main routes of the major carriers.
Sun Jet International Airlines, a Florida-based carrier that started flying last year, has taken care not to offer more than two flights a day on any of its routes. And using a strategy that also holds down operating costs, it flies to smaller airports, such as Long Beach in Southern California.
“We hope we can stay below the radar of the majors and have our little niche,” said Scott Bacon, a Sun Jet vice president. “I think when you approach a certain level of frequency is when you attract attention.”
Leisure Air, based in Winston-Salem, N.C., initially offered just charter service but quickly branched out.
“We fit a nice pattern of scheduled service around the charter flying,” said Harold J. (Hap) Pareti, who started Leisure Air after having founded People Express an airline generation earlier.
Selling coast-to-coast seats for as little as $99 one way, Leisure Air holds costs down by contracting out its reservations service and renting airport counter space from other carriers for $150 a flight.
The carrier hit turbulence in November, suspending all its flights after a Federal Aviation Administration inspection turned up numerous violations. Pilots were flying longer than allowed by law, for example, and planes were using equipment that lacked the required federal safety documentation.
The airline was back in the air a week later, but not before leaving many Thanksgiving holiday travelers in the lurch.
Another discounter, New Jersey-based Kiwi International Air Lines, stopped flying Dec. 15 after federal inspectors discovered that virtually all of its flight crew members lacked documents certifying that they had the proper training.
The airline, which serves seven cities in the South and East, had all of its 45 daily flights back in the air by Dec. 23, but still missed out on one of the busiest travel periods of the year.
Such shutdowns will be inevitable, aviation experts say, as long as the newest carriers are flying some of the nation’s oldest aircraft. If carefully maintained, those planes are just as safe as recent models, experts say. But they require constant attention, because they are susceptible to cracks and other stress problems.
The average age of ValuJet’s fleet is 24 years--twice the industry average. Spokeswoman DeNourie said the carrier “may have to put a little more money into day-to-day operations” to maintain its fleet.
But buying used jets rather than new ones, which can cost $30 million apiece, enables ValuJet to offer deeply discounted fares.
In a market dominated by giant Delta Air Lines, ValuJet is winning over passengers with an average one-way ticket price of $64. Delta’s typical fare on the same routes was $174 before it lowered some of its prices to be more competitive.
ValuJet, which started service in 1993 with only eight daily departures, now has more than 110. Part of the carrier’s appeal, DeNourie said, is its freewheeling style. Flight attendants dress in shorts and T-shirts. They lead on-board games, such as asking passengers to come up with the oldest penny or judging who has the ugliest driver’s license photograph.
“We have not siphoned off their traffic,” DeNourie said of Delta. “We have generated our own.”
Stock market analysts aren’t so sure. They say that the growing presence of discount airlines on short- and medium-hop routes inevitably cuts into the earnings of big carriers.
Although airline profits increased last year, “as long as this low-fare carrier trend continues, it will not be what we hoped,” said Paul P. Karos, an analyst who follows the industry for CS First Boston in Minneapolis.
The flying public, however, seems determined to save money on plane fare, despite the occasional inconvenience. And with the upstarts, the inconveniences can add up: Their small fleets are stretched so thin that a single aircraft grounded due to a malfunction or weather-related delay can mean lengthy flight postponements or cancellations across the system.
Gregg Sanders of Redondo Beach said the cancellation of his Leisure Air flight to the East Coast in November almost cost him a job.
Sanders, a carpenter, was going to Connecticut to help with the construction of a movie set. He waited eight hours to catch another plane from Los Angeles International Airport.
“If I hadn’t had a buddy of mine who was a boss, I probably would have been replaced,” said Sanders, who had paid $268 for a round-trip ticket.
But he wouldn’t have done things differently.
“I could have gone out on another airline,” Sanders said, “but it would have cost twice as much.”
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Flight Patterns
Tough times in the airline industry have spawned a growing number of new carriers that obtain idle aircraft and crews at low prices, then offer discounted fares. Here are some of the more prominent among them:
Carnival Air Lines
Owned by Micky Arison, chairman of Carnival Cruise Lines. Flies primarily between the Northeast and Florida. Started “nonstop” service to California with planes that had to make a refueling stop in Phoenix when headwinds blew hard. Has since replaced those with long-range wide-bodies.
Headquarters: Dania, Fla.
Started flying: 1988
Employees: 1,200
Daily flights: 40
Planes: 22
Gimmick: Frequent flyer program for pets
Frontier Airlines
Started by executives of the Frontier Airlines that disappeared in the mid-1980s. It aims to capitalize on Continental Airlines’ retreat from serving small Western cities, mirroring the old Frontier’s route system. It is adding service to some larger cities.
Headquarters: Denver
Started flying: 1994
Employees: 330
Daily flights: 28
Planes: 5
Friday close: $3.25 on Nasdaq Small Cap
52-week high: $4.25
52-week low: $2.75
Gimmick: Hot nuts
Kiwi International Air Lines
Employee-owned, privately held airline with service on the East Coast. Formed primarily by former employees of Eastern Airlines and Pan American World Airways who believed they could provide good service while offering discount fares.
Headquarters: Newark, N.J.
Started flying: 1992
Employees: 1,000
Daily flights: 53
Planes: 13
Gimmick: Flowers in the restrooms
Leisure Air
Privately held charter carrier that also has some scheduled service to major cities. Holds down costs by contracting with other companies for services such as reservations and marketing.
Headquarters: Winston-Salem, N.C.
Started flying: 1993
Employees: 650
Daily flights: 10
Planes: 7
Gimmick: To keep costs low, every meal consists of turkey sandwiches
Reno Air
Trying to fill the breach left by the withdrawal of American Airlines from short-distance routes on the West Coast. Fares generally a little higher than those of primary competitor Southwest Airlines, but it claims to offer more service.
Headquarters: Reno, Nev.
Started flying: 1992
Employees: 1,500
Daily flights: 135
Planes: 20
Friday close: $4.50 on Nasdaq
52-week high: $9.00
52-week low: $3.63
Gimmick: Gives American Airlines frequent flyer miles
Sun Jet International
Privately held airline offering service--usually no more than two flights a day--to secondary airports in major cities, to avoid direct competition with the majors.
Headquarters: Largo, Fla.
Started flying: 1993
Employees: 150
Daily flights: 10
Planes: 5
Gimmick: Cookies baked on board
ValuJet Airlines
One of the most successful of the new airlines. Serves primarily Southern routes in low-fare competition with Delta Air Lines.
Headquarters: Atlanta
Started flying: 1993
Employees: 1,700
Daily flights: 134
Planes: 22
Friday close: $20.88 on Nasdaq
52-week high: $25.25
52-week low: $13.75
Gimmick: On-board contests for passengers
Low-Fare Flying Takes Off
Over the last 18 months, the number of short-haul U.S. air routes on which low fares are widely available has more than doubled. Much of the low-cost service is provided by new airlines that keep frills to a minimum.
% of Top 1,000 short-haul markets with low-fare service:
June 93: 27
Sept. 93: 30
Dec. 93: 34
March 94: 41
June 94: 47
Sept. 94: 53*
Dec. 94: 60*
* Estimates
Source: American Express Airfare Management Unit
