Detroit News
Low-fare airlines' prices challenge major carriers
Discount lines take 28% of U.S. tickets
By Joel J. Smith / The Detroit News
When Melanie Golden was looking to buy an airline ticket to fly to San Diego to attend a friend's wedding, she had three criteria for selecting her carrier: price, price and price.
"I chose Southwest," said Golden, 31, of Plymouth, a recent Walsh College graduate. "I couldn't find a ticket any cheaper. Every airplane is basically the same. One seat fits all. I don't care whose logo is on the plane. I just want a cheap ticket."
Golden is like hundreds of thousands of other cost-conscious travelers nationwide. Whenever possible, they're ignoring big name carriers with pricey tickets in favor of low-cost, no-frill airlines.
Travel on discount airlines is soaring at the expense of the major carriers. About 28 percent of all domestic tickets are now purchased from low-fare carriers, while just 13 years ago that number was less than 3 percent.
Major airlines recognize the threat imposed by the discounters and are struggling to dramatically lower their operating costs before they lose more customers.
Richard Anderson, CEO of Northwest Airlines, said that Northwest is forced to cut operating costs so the airline can afford to match low-fare airlines or risk losing more passengers.
"Low-cost carriers are having an ever-increasing impact on our fares," Anderson wrote in an employee newspaper. "Just as many people today are more likely to go out of their way to shop at chain discount stores such as Wal-Mart or Costco, so are our customers prepared to trade some of the conveniences of network carriers for the lower prices of discount carriers."
"As a general rule, we need to meet low-cost competitor prices or lose business," Anderson wrote.
Northwest, which handles 75 percent of the passengers at Detroit Metropolitan Airport, is particularly concerned because 70 percent of its domestic routes also are served by at least one low-cost carrier.
The flying public certainly has benefited from the influx of low-fare carriers. When Spirit Airlines began offering a nonstop flight between Detroit and Los Angeles a year ago, it forced Northwest to drop its last-minute purchase price from $418 to $198.
The same thing happened when Spirit began service to Myrtle Beach, S.C. Without a weekend stay, Northwest's price was $545, but today it's less than half that price.
"There's an increasing threat of the growing low-cost market share and the pricing pressure that causes," said Doug Steenland, Northwest's president. "The challenge is going to be for the network carriers to get their costs in line so they can be fully price-competitive with low-cost carriers. When that happens, I think you'll see a stall in the growth of low-cost carriers."
Not everyone believes the big airlines can match the discounters' operating costs.
"The major airlines will never be able to get their costs as low as the discount carriers," said Darryl Jenkins, director of George Washington University's Aviation Institute in Washington, D.C. "You can only reinvent yourself so much.
"The sleeping giants are the low-fare carriers that are starting out and don't have to work with all the restrictions that the legacy carriers are faced with," Jenkins said. "This won't be a pretty battle."
Currently, Metro Airport is dominated by Northwest, which operates its largest hub there through a new $1.2 billion terminal and has more than 500 daily departures.
But Metro also has three low-fare carriers operating daily flights: Spirit, Southwest and America West. Others, such as Jet Blue and Frontier, are considering operations there. Spirit is the second biggest carrier at Metro, handling about 5.4 percent of the passenger traffic; Southwest is third with 2.8 percent.
Spirit is growing rapidly in Detroit, expecting to double its size in the next five years. Passenger traffic has jumped nearly 20 percent in the last 12 months, while Northwest and its affiliates have grown less than 5 percent.
"We're growing and doing very well," said Ned Homfeld, chairman of Spirit Airlines, which originally started in Detroit, but now is based near Ft. Lauderdale, Fla. "We are as good as the majors. We want to give consumers a product that meets or exceeds that of the major carriers. They now see they have to compete with us."
Some critics argue that once the major airlines finish cutting costs and can compete one-on-one with the discounters that the low-fare carriers will be the losers.
"What people have missed is they think Northwest is this great big dinosaur that is just sitting there letting people eat them," said Michael Boyd, president of the Boyd Group, an aviation consulting firm in Evergreen, Colo. "That's not true. Northwest is a lot more efficient today than it was two years ago."
Northwest has implemented $1.4 billion in cost cuts so far by closing up facilities, laying off more than 5,000 employees and cutting back on some routes.
With such budget-trimming moves, "The low-fare carriers market share could very well level off and shrink," Boyd said. "You're going to see that because the Northwests of the world are going to come back swinging."
Spirit's Homfeld disagrees.
"I don't think the low-cost carriers will be driven out of the industry," he said. "The low-cost carriers have grown and matured and have a strong foothold now. We have a good product and it's not as simple as just pushing us out."
Southwest officials believe the only way major airlines can compete with discount carriers is to drastically cut operating costs, something that would face stiff opposition from the labor front.
Northwest is an example of that. Last spring, the airline announced it was seeking $950 million in concessions from its seven labor unions, hopefully by early summer. To date, no concessions have been approved.
"The major carriers are just going to have to cut their costs because customers are voting with their pocketbooks," said Gary Kelly, executive vice president and chief financial officer at Southwest, which has been operating 32 years.
"We would be foolish to think our competitors will continue with very high costs. We have to be prepared for that," Kelly said. "But in a sense, we will be better with improved competition from the majors. It will cause us to be motivated to improve ourselves even more."
Currently, operating costs for the top six major airlines -- Northwest, American, Continental, Delta, United and US Airways -- averages about 10 cents per available seat mile. The same cost average for seven discount carriers is about 25 percent lower or 7.4 cents an available seat mile.
Bernie Han, Northwest's chief financial officer, said that 40 percent of the cost per available seat mile (CASM) is made up of employee wages and benefits. The remaining 60 percent consists of other operating costs, such as fuel, aircraft facilities, maintenance and travel agent commissions.
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