Low Cost Airlines Move into More Big Cities
Although cutbacks are helping the big carriers’ bottom lines, they’re also opening up opportunities for the competition.
Cutbacks in flights by the big U.S. airlines may come back to haunt them. They moved aggressively last year to eliminate money losing flights, reducing the frequency on some routes and even abandoning service to some airports. That may mean trouble for them when the recession ends and more travelers look to return to the skies.
The low cost airlines are moving rapidly to fill the vacated space. Already, AirTran is moving into Milwaukee, where Northwest Airlines trimmed its schedules. The low cost carrier is adding service from there to Washington, D.C., as well as from Atlantic City, N.J., to Atlanta. In months ahead, Southwest Airlines will add Boston’s Logan International Airport and New York’s LaGuardia to its offerings.
“The real push will come when the economy improves. Legacy carriers that cut back or are seen as vulnerable will battle the low cost carriers for these opportunities,” says Kevin Mitchell, president of the Business Travel Coalition, a group of mostly large companies that advocates for business passengers. Increased competition on these routes from these low cost carriers should lead to lower ticket prices.
For now, though, last year’s deep cuts in capacity are paying off for the legacy carriers. The cutbacks in routes have helped U.S. airlines weather the steep drop in demand better than overseas competitors. As a whole, U.S. carriers will break even this year and possibly make a slim profit -- $100 million or so, compared with a $4-billion loss in 2008.
Their international counterparts will be envious. Asian carriers are expected to post losses of $1.7 billion, while European airlines may lose about $1 billion, according to the latest report from the International Air Transport Association.
Add-on fees are also proving a boon. Making customers pay for checking baggage, more legroom, meals, etc., will provide as much as $2 billion in revenue this year. US Airways alone expects to generate $50 million from these fees.
Much lower prices for fuel are a big help, too. When the price of oil rose to almost $150 a barrel, American carriers were hit much harder than many overseas carriers. European carriers were able to pay for oil with euros and were better hedged against the high prices.
Increased ticket taxes are likely to partially offset lower airfares from sales now or increased competition later. Airport officials say they need to raise fees to meet rising airport construction costs. Their proposal: $7.50 per leg, with a $15 maximum for a one-way flight. Current fees, last raised in 2000, are $4.50 per leg, up to a maximum of $9 for one-way fares. Congress is likely to go along with an increase when it passes legislation reauthorizing the Federal Aviation Administration. Congress also will consider an Obama administration proposal to increase the security tax, which currently is $2.50 one way.
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