he lexicon in the world of passenger
air transportation is catching up with reality. As Raymond James
& Associates analysts James Parker and Samantha Panella point
out in their recent Growth Airline Outlook, what used to be
referred to as low-fare, no-frills airlines have lots of frills.
For instance, JetBlue, AirTran, Frontier and Atlantic Coast all
are in various stages of incorporating on-the-air programming
(LiveTV and/or XM Satellite Radio) in the air.
While I would have lobbied for this group of carriers to be
renamed collectively as "the cheap frills," the financial community
has instead opted for the more dignified acronym of LCC, or
Southwest remains truly no-frills, but the analysts think that
competitive pressures will change that before too long. Does that
mean that low-fare, no-frills airlines will soon be a thing of the
past? Not at all, say Parker and Panella. Since 9/11, fares have
fallen so dramatically that legacy carriers can today accurately be
described as low-fare, no-frills carriers.
Analysts are as bullish on LCCs as they are pessimistic about
legacy carriers. The James analysts scoffed at United's launch of
Ted: Why do this when United's entire domestic system is already
low fare? Their most interesting scenario for the legacies is, in
their own words, "far-fetched" but intriguing: They speculate that
legacy players may evolve into primarily international airlines,
dependent upon feed from the LCCs.
At a meeting of the Association of Travel Marketing Executives
last week, Ray Neidl, an airline analyst for Blaylock &
Partners, gave credit to American for gaining labor concessions and
worried aloud that soaring costs for jet fuel are occurring at a
But he also suggested that the legacies are acting against their
own interests. Why, he wondered, are they in such a hurry to
increase capacity by returning planes to service every time they
see loads inch up? In an era of abundant supply, why add supply in
direct proportion to incremental growth in demand? That only keeps
costs high and yields low.
To add to the atmosphere of pessimism about the legacies,
another aviation analyst, Bob Mann of R.W. Mann and Co., noted that
there have been three down cycles in the airline industry since
deregulation, and that each one has been worse than the last for
the legacy carriers.
Neidl offered a ray of hope for the legacies in the example of
America West, which appears to have transformed itself from an
unsuccessful, legacy-type carrier into a promising LCC. But he
points out that, in some ways, America West was actually a low-fare
carrier that had adopted some of the bad habits of legacy carriers.
By simplifying fare offerings and being experimental in its
marketing, the airline is turning itself around.
America West's scale may have been an important factor in
helping it do what larger carriers cannot. In 2002, Maurice
Flanagan, group managing director of Emirates -- which predicts it
will be among the five most profitable international airlines in
the world in 2004 -- told Travel Weekly that "small, efficient
airlines are more efficient than big, efficient airlines. After a
certain point, unit costs go up."
This suggests an interesting paradox: Airlines that don't grow
aggressively tend to go out of business, while at the same time
there may be a point at which growth weakens, rather than
strengthens, an airline.
If it's true, it may help explain why, since the day the Wright
Brothers took flight 100 years ago, the aggregate profit of
commercial aviation is ... zero.
The analysts are all in agreement that, for the foreseeable
future, the skies belong to the LCCs. What is unknown is whether,
as they grow, they will be able to maintain their low-cost
advantage and their service and amenities cache. Once they cross
Flanagan's threshold and see increases in unit costs, cost-cutting
becomes the name of the game and before you can say, "Where's my
hot meal?" -- the frill is gone.
And a new generation will inherit the skies.