LCC business model in BOS, what are the implications down this way?
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LCC business model in BOS, what are the implications down this way?
I am not a pilot, however am involved in the aviation industry. I'd like to hear peoples comments on how a paradigm shift of this magnitude in other parts of the world affects cultural and industry norms in Australia.
Thanks!
Next week Southwest Airlines Co. will do something that Herbert Kelleher, its legendary former chief executive, said would never happen: The airline will offer flights at Boston’s Logan International Airport.
Long viewed as a congested, expensive big-city airport, Logan is now the darling of discounters, boasting a new terminal, new runway, new parking and easy access through a new harbor tunnel. JetBlue Airways Corp. is now the biggest airline there in terms of flights and nonstop destinations, and has been gobbling up customers from American, Delta Air Lines and other airlines. Virgin America, AirTran, Sun Country and Spirit all land at Logan, as well.
“JetBlue changed the whole image of Boston as a place where discount carriers could do well,” says Thomas Kinton, chief executive of the Massachusetts Port Authority, which operates Logan. “It sends a signal to the rest of the air-carrier world.”
Logan’s transformation coincides with a major shift in the airline industry. Discount carriers once favored secondary, suburban airports that were cheaper and easier to serve. Customers were willing to drive farther for lower airfare.
But cheap fares have become the norm, not the exception. As discounters have grown– Southwest is now the largest domestic airline in terms of passengers–incumbent airlines have to match prices and live off discount airfares on most domestic routes. And now discounters are increasingly flying into the heart of cities, landing where customers are instead of expecting them to drive to cheaper airports.
Associated Press JetBlue’s arrival at Logan sent a signal.
This summer, Southwest also began service at New York’s LaGuardia Airport, which has a limited number of takeoff and landing slots and is plagued by horrendous delays. LaGuardia was another on Mr. Kelleher’s “no-fly” list that Southwest decided it better buckle up and serve.
“Some things in the industry have changed and some things about Southwest Airlines have changed,” says Bob Jordan, executive vice president for strategy and planning. “Twenty years ago the low-fare carrier side of the market was a niche. Today, the airline industry is a low-fare industry.”
Southwest previously tried to ring Boston, serving Providence, R.I., and Manchester, N.H., and paying to become the official airline of the Boston Celtics basketball team. But that wasn’t enough—too many Bostonians preferred Logan, especially after the mammoth “Big Dig” construction project made driving to the airport far easier and a modernization program at the airport renovated terminals, increased parking and reduced flight delays.
“We were the beneficiary of the Big Dig,” says Ed Freni, aviation director of the Massachusetts Port Authority, which operates Logan.
Fred Graff flies every week for his pharmaceutical company and now is loyal to JetBlue. He likes the low fares, in-flight live television, chance to buy extra legroom and customer service. And he likes Logan better, too.
“Logan has really changed. It’s much more convenient now. It was always a hassle before,” he says.
Making Room for JetBlue
After the 2001 terrorism attacks, as air travel declined rapidly, Massport decided to go ahead with plans to knock down and rebuild Terminal A, the old Eastern Air Lines terminal. The travel downturn created room to move airlines out of Terminal A to other terminals. Moving them back to the new facility created room for JetBlue to expand, growing from two gates in 2004 to 13 gates today. It has an eye toward a lot more expansion in a concourse where UAL Corp.’s United Airlines has been retrenching.
“Southwest’s decision vindicates the decision we made to go in there five years ago. The lion’s share of the traffic comes from the Boston metropolitan area,” says Martin St. George, JetBlue’s senior vice president of marketing and strategy.
Mr. St. George, who grew up in Boston, says JetBlue is starting to gain traction with corporate accounts in Boston, and has pushed its way into the hearts and minds of Bostonians by becoming the official airline of the Boston Red Sox baseball team.
“We call Boston our second home,” he says.
In terms of passengers, JetBlue grew to 14.3% of traffic at Logan in 2008, close behind American, Delta and US Airways, according to Massport. American and Delta both had about 22% of the market in 2003, before JetBlue entered, but by last year American had fallen to 16.5% and Delta to 15.5%. (Acquiring Northwest gives Delta an added 5.7% of passengers.) US Airways dipped slightly to 15.3% of passengers from 15.7% over that period.
At American, executive vice president Dan Garton says Boston is a “fragmented but still quite vital market” that’s key to the airline, especially because there’s a high concentration of business travelers. Delta spokesman Kent Landers says that with Northwest, it serves more customers than any other airline “and we expect that to continue.” Delta’s strategy is to focus on feeding passengers to seven different hubs plus the New York shuttle and a few cities with enough local traffic to support direct flights, he says.
Pulling Together the Plan
The JetBlue battle plan was actually the airport’s idea. Mr. Kinton says JetBlue founder David Neeleman approached him before 2001 about flying between Boston and JetBlue’s home base, New York’s Kennedy International Airport. But with rampant delays and shuttle service to New York every 30 minutes, “the last thing this airport needed was another service to New York,” Mr. Kinton says. Logan had no available gates, and JetBlue dropped the idea.
After 2001, Logan went to JetBlue with hat in hand—and a plan developed with aviation consultants Simat Helliesen & Eichner Inc. “I went down with a proposal and said, ‘You can be king in Boston. There’s no low-cost carrier here,’” says Mr. Kinton.
Fares Fall in Line
In terms of fares, Boston passengers historically have paid well more than the national average, according to the Department of Transportation. Fares got as high as 40% over the national average in the third quarter of 1997, but fell dramatically after JetBlue arrived in 2004. By the third quarter of 2004, fares at Logan equaled the national average.
“Legacy carriers had to become discount carriers, too. JetBlue causes American and United to bring prices down,” says Mr. Kinton.
More recently, fares have climbed a bit relative to the rest of the country. In the first quarter this year, Boston fares were 9.1% higher than the national average. Logan officials expect fares to decline further as Southwest ramps up.
Southwest’s Mr. Jordan says the airline realized it wasn’t pulling nearly as many passengers as it could from the city of Boston proper, and lots of Southwest customers in other cities wanted to fly to Logan instead of the smaller outlying airports. So far, Manchester and Providence bookings have been holding up since the carrier opened up bookings for Logan flights, he says.
“There are places on the map that are just hard to ignore,” Mr. Jordan says. “If we want to serve the market, we need to be there.”
Write to Scott McCartney at [email protected]
Thanks!
- THE MIDDLE SEAT
- AUGUST 6, 2009, 11:00 A.M. ET
- By SCOTT MCCARTNEY
Next week Southwest Airlines Co. will do something that Herbert Kelleher, its legendary former chief executive, said would never happen: The airline will offer flights at Boston’s Logan International Airport.
Long viewed as a congested, expensive big-city airport, Logan is now the darling of discounters, boasting a new terminal, new runway, new parking and easy access through a new harbor tunnel. JetBlue Airways Corp. is now the biggest airline there in terms of flights and nonstop destinations, and has been gobbling up customers from American, Delta Air Lines and other airlines. Virgin America, AirTran, Sun Country and Spirit all land at Logan, as well.
“JetBlue changed the whole image of Boston as a place where discount carriers could do well,” says Thomas Kinton, chief executive of the Massachusetts Port Authority, which operates Logan. “It sends a signal to the rest of the air-carrier world.”
Logan’s transformation coincides with a major shift in the airline industry. Discount carriers once favored secondary, suburban airports that were cheaper and easier to serve. Customers were willing to drive farther for lower airfare.
But cheap fares have become the norm, not the exception. As discounters have grown– Southwest is now the largest domestic airline in terms of passengers–incumbent airlines have to match prices and live off discount airfares on most domestic routes. And now discounters are increasingly flying into the heart of cities, landing where customers are instead of expecting them to drive to cheaper airports.
Associated Press JetBlue’s arrival at Logan sent a signal.This summer, Southwest also began service at New York’s LaGuardia Airport, which has a limited number of takeoff and landing slots and is plagued by horrendous delays. LaGuardia was another on Mr. Kelleher’s “no-fly” list that Southwest decided it better buckle up and serve.
“Some things in the industry have changed and some things about Southwest Airlines have changed,” says Bob Jordan, executive vice president for strategy and planning. “Twenty years ago the low-fare carrier side of the market was a niche. Today, the airline industry is a low-fare industry.”
Southwest previously tried to ring Boston, serving Providence, R.I., and Manchester, N.H., and paying to become the official airline of the Boston Celtics basketball team. But that wasn’t enough—too many Bostonians preferred Logan, especially after the mammoth “Big Dig” construction project made driving to the airport far easier and a modernization program at the airport renovated terminals, increased parking and reduced flight delays.
“We were the beneficiary of the Big Dig,” says Ed Freni, aviation director of the Massachusetts Port Authority, which operates Logan.
Fred Graff flies every week for his pharmaceutical company and now is loyal to JetBlue. He likes the low fares, in-flight live television, chance to buy extra legroom and customer service. And he likes Logan better, too.
“Logan has really changed. It’s much more convenient now. It was always a hassle before,” he says.
Making Room for JetBlue
After the 2001 terrorism attacks, as air travel declined rapidly, Massport decided to go ahead with plans to knock down and rebuild Terminal A, the old Eastern Air Lines terminal. The travel downturn created room to move airlines out of Terminal A to other terminals. Moving them back to the new facility created room for JetBlue to expand, growing from two gates in 2004 to 13 gates today. It has an eye toward a lot more expansion in a concourse where UAL Corp.’s United Airlines has been retrenching.
“Southwest’s decision vindicates the decision we made to go in there five years ago. The lion’s share of the traffic comes from the Boston metropolitan area,” says Martin St. George, JetBlue’s senior vice president of marketing and strategy.
Mr. St. George, who grew up in Boston, says JetBlue is starting to gain traction with corporate accounts in Boston, and has pushed its way into the hearts and minds of Bostonians by becoming the official airline of the Boston Red Sox baseball team.
“We call Boston our second home,” he says.
In terms of passengers, JetBlue grew to 14.3% of traffic at Logan in 2008, close behind American, Delta and US Airways, according to Massport. American and Delta both had about 22% of the market in 2003, before JetBlue entered, but by last year American had fallen to 16.5% and Delta to 15.5%. (Acquiring Northwest gives Delta an added 5.7% of passengers.) US Airways dipped slightly to 15.3% of passengers from 15.7% over that period.
At American, executive vice president Dan Garton says Boston is a “fragmented but still quite vital market” that’s key to the airline, especially because there’s a high concentration of business travelers. Delta spokesman Kent Landers says that with Northwest, it serves more customers than any other airline “and we expect that to continue.” Delta’s strategy is to focus on feeding passengers to seven different hubs plus the New York shuttle and a few cities with enough local traffic to support direct flights, he says.
Pulling Together the Plan
The JetBlue battle plan was actually the airport’s idea. Mr. Kinton says JetBlue founder David Neeleman approached him before 2001 about flying between Boston and JetBlue’s home base, New York’s Kennedy International Airport. But with rampant delays and shuttle service to New York every 30 minutes, “the last thing this airport needed was another service to New York,” Mr. Kinton says. Logan had no available gates, and JetBlue dropped the idea.
After 2001, Logan went to JetBlue with hat in hand—and a plan developed with aviation consultants Simat Helliesen & Eichner Inc. “I went down with a proposal and said, ‘You can be king in Boston. There’s no low-cost carrier here,’” says Mr. Kinton.
Fares Fall in Line
In terms of fares, Boston passengers historically have paid well more than the national average, according to the Department of Transportation. Fares got as high as 40% over the national average in the third quarter of 1997, but fell dramatically after JetBlue arrived in 2004. By the third quarter of 2004, fares at Logan equaled the national average.
“Legacy carriers had to become discount carriers, too. JetBlue causes American and United to bring prices down,” says Mr. Kinton.
More recently, fares have climbed a bit relative to the rest of the country. In the first quarter this year, Boston fares were 9.1% higher than the national average. Logan officials expect fares to decline further as Southwest ramps up.
Southwest’s Mr. Jordan says the airline realized it wasn’t pulling nearly as many passengers as it could from the city of Boston proper, and lots of Southwest customers in other cities wanted to fly to Logan instead of the smaller outlying airports. So far, Manchester and Providence bookings have been holding up since the carrier opened up bookings for Logan flights, he says.
“There are places on the map that are just hard to ignore,” Mr. Jordan says. “If we want to serve the market, we need to be there.”
Write to Scott McCartney at [email protected]
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Interesting question. The article seems to refer to two paradigm shifts.
The first is a shift of airports within a city from a central airport to airports closer to people's homes and destinations. This can only occur when multiple airports serve a city/region. Hence this shift relies on there being multiple airports serving commercial flights something many Aust and NZ cities lack (eg Auckland and Sydney). Avalon is best example I can think of in Aust, though the Gold Coast is a similar example as flights there often are an alternative to Brisbane.
Having said that the introduction of direct flights from Sydney to Rotorua by AirNZ today could be seen as an example of more direct flights replacing flights to the larger airports. In this case it allows tourists to get directly to a tourist destination. My guess is that these routes need a minimum number of high yield customers who value the benefit of the alternative airport to be profitable (eg Queenstown or Boston). On the other hand Air NZ/Freedomair found it hard to make suitable profits out of some other regional ports on the trans Tasmanand and in my view this could be partly due to the fact that those routes relied on price sensitive outbound traffic which would gladly drive to a larger airport to get a special.
I would expect that for short haul flying (ie A320/737) in Aust/NZ there will be more point to point flights replacing routing both to and through hubs eg Canberra to Auckland or Wellington to Samoa, rather than the development of secondary airports within major cities. For the trans-Tasman a reduction in immigration will accelerate this shift. This sort of routing will favour the second shift.
The other shift is the shift to new entrant airlines with new business models in the Boston case Jetblue (not a true LCC but from a product offering perspective more a hybrid) and Southwest (LCC but with good service ethos). I would argue that the fact Aust. already has Virgin with 30% market share and Jetstar with around 12% indicates that shift has already set in in OZ. To get the sort of customers in the article you need some service ethos like Jetblue, which is different to Ryanair or Tiger.
The first is a shift of airports within a city from a central airport to airports closer to people's homes and destinations. This can only occur when multiple airports serve a city/region. Hence this shift relies on there being multiple airports serving commercial flights something many Aust and NZ cities lack (eg Auckland and Sydney). Avalon is best example I can think of in Aust, though the Gold Coast is a similar example as flights there often are an alternative to Brisbane.
Having said that the introduction of direct flights from Sydney to Rotorua by AirNZ today could be seen as an example of more direct flights replacing flights to the larger airports. In this case it allows tourists to get directly to a tourist destination. My guess is that these routes need a minimum number of high yield customers who value the benefit of the alternative airport to be profitable (eg Queenstown or Boston). On the other hand Air NZ/Freedomair found it hard to make suitable profits out of some other regional ports on the trans Tasmanand and in my view this could be partly due to the fact that those routes relied on price sensitive outbound traffic which would gladly drive to a larger airport to get a special.
I would expect that for short haul flying (ie A320/737) in Aust/NZ there will be more point to point flights replacing routing both to and through hubs eg Canberra to Auckland or Wellington to Samoa, rather than the development of secondary airports within major cities. For the trans-Tasman a reduction in immigration will accelerate this shift. This sort of routing will favour the second shift.
The other shift is the shift to new entrant airlines with new business models in the Boston case Jetblue (not a true LCC but from a product offering perspective more a hybrid) and Southwest (LCC but with good service ethos). I would argue that the fact Aust. already has Virgin with 30% market share and Jetstar with around 12% indicates that shift has already set in in OZ. To get the sort of customers in the article you need some service ethos like Jetblue, which is different to Ryanair or Tiger.
Last edited by windytown; 7th Aug 2009 at 10:46.
The recent announcement by Cathay Pacific of a profit (but admittedly a 'paper profit' only by gains in fuel hedging) has also had their Chief Executive, Mr.Tony Tyler saying that they are seriously considering the overall direction of the airline. As Cathay relies heavily on Front End First Class and Business Class passengers to boost profit, that market has been shattered over recent months, and of course this has drastically hurt CX's bottom line.
The statements made by Mr.Tyler are saying that the airline is waiting to see if these Front end passengers will return (i.e. it is just cyclical) or there is a fundamental shift away from Premium Class Travel. If this is the case, Tyler has stated that they may have to resructure the Business model of Cathay Pacific as a whole, (to what extent time will tell, but there are more and more LCC's coming into Hong Kong everytime I look).
b.
The statements made by Mr.Tyler are saying that the airline is waiting to see if these Front end passengers will return (i.e. it is just cyclical) or there is a fundamental shift away from Premium Class Travel. If this is the case, Tyler has stated that they may have to resructure the Business model of Cathay Pacific as a whole, (to what extent time will tell, but there are more and more LCC's coming into Hong Kong everytime I look).
b.
