Fare Frenzy Tries to Lure More Travelers Into Skies
Smaller, low-cost, no-frills carriers are serving more markets
IT'S fare-war season. The airline industry's summer ritual of attempting to lure leisure travelers out of their cars and into the skies is back.Skip to next paragraph
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In many cities, the competition goes beyond milking the most business out of peak vacation months. Smaller carriers with low-cost, no-frills styles are serving more and more markets. Southwest Airlines, which has become the model for rivals large and small, this year introduced service from Seattle to Spokane, Wash., for regular prices of $78 round trip, $39 one way.
``The next fare war to your city could be permanent,'' states a recent headline in ``Best Fares,'' a trade publication in Ft. Worth, Texas. ``The upstarts, such as Midway, Valujet, Kiwi, Reno Air, National Airlines, Mark Air, and American Trans Air, have cut airfares permanently in the markets where they fly by as much as 70 to 80 percent below the major airlines' standard fares,'' the article says.
This trend, which started with Dallas-based Southwest, has been spreading gradually north and east, though a number of markets have not been affected.
While the fare frenzy hasn't been good for industry profits, it has been great for consumers, who could set a new record by taking 140 million United States trips this summer, slightly more than in 1992, says David Swierenga, economist for the Air Transport Association, which represents airlines.
``Consumers have never been more bargain-conscious,'' says industry analyst Lee Howard of Airline Economics. This is as true for businesses with big travel budgets, such as IBM, as it is for leisure passengers, adds Cheri Kight of Best Fares.
Though the upstarts are only a small fraction of the US market -
Southwest accounts for less than 4 percent - they are causing bigger airlines to cut costs and abandon less-profitable routes.
IN a closely watched decision tomorrow, UAL Corporation shareholders will vote on a deal that could make United Airlines majority-owned by its union employees in exchange for wage concessions. The Chicago company plans to form a low-cost subsidiary, dubbed U2.
Another big carrier, Houston-based Continental Airlines, has already turned heads with its CALite program, which offers ``Peanuts Fares'' with no restrictions such as a required Saturday stayover. The program offers full refunds and covers all seats on applicable routes, eliminating distinctions between advance purchases and tickets bought right before a flight. Each flight offers a two-for-the-price-of-one deal called ``Add a Penny, Add a Pal.''
It remains to be seen how far such simplified, cut-rate service will go in capturing industry market share. Continental says it expects a payoff as its tactics ``stimulate the market and generate much higher demand.''
Mr. Howard says he expects US airlines to eke out a modest profit this year. Helped by lower fuel costs, operating income before interest payments could be about twice last year's total of $1.5 billion, he says.
Big carriers face several challenges to get their costs down to what passengers are willing to pay. One factor is their expensive ``hub and spoke'' system, whereby many flights arrive at once at a hub airport where the carrier has bought a number of gates; passengers then switch planes and head off in new directions. This system is a useful one for the industry, says Mr. Swierenga, but he adds that it costs the airlines dearly to maintain so many gates compared with point-to-point fliers like Southwest.
Another key issue is labor costs, over which the big carriers are bargaining with unions. Swierenga explains that, while labor constitutes about 35 percent of operating expenses, it amounts to about three-fourths of ``controllable'' costs (excluding fuel and capital cost of airplanes).
Larger carriers are also modifying their frequent flier programs, which the no-frills airlines don't offer. Companies such as United are boosting the required mileage from 20,000 to 25,000 before a free ticket is earned.