The Big US Carriers Are Just Begging for Competition


Every time I hear airlines talk about capacity constraint, my mind drifts to small town England. It’s not a real small town, actually. It’s the fictional small town of Sandford from the movie Hot Fuzz. The local Neighbourhood Watch Alliance there is a secret society that does despicable things all to support (say it with me) the greater good. (If you haven’t seen it, you really should. And don’t stop there, watch the whole Cornetto trilogy.) For the last few years, the US carriers, while not actually having done anything truly despicable, have acted in a similar way in trying to create a healthy industry. But if they aren’t careful, this is going to bite them hard.

The Greater Good

The mantra of capacity constraint has been in full force for nearly a decade. The old saying goes that you’re only as smart as your dumbest competitor. And there were plenty of dumb competitors out there who threw a ton of capacity into a market only to make everyone unprofitable. The end result was a sea of red ink and a lot of airline disappearances. But in the last decade, we’ve seen very few airlines start. (Virgin America is the only high profile startup in the US that’s really done anything.) At the same time, we’ve seen consolidation which has helped weed out those dumbest of dumb competitors.

Today, we have the remaining big carriers in the US all having found religion. And that religion says that these capacity-dumping market share-grabs generally don’t make sense. Do not add seats for the sake of growth. Be conservative and slow it all down.

This has been true for American (only since the US Airways merger), Delta, United, and yes, even Southwest. Southwest used to be an airline that grew like a weed. That’s no longer the case. JetBlue has slowed itself down dramatically since the explosive growth days of David Neeleman. Even Virgin America has paused its growth. With the economy doing well, this has allowed airlines to get healthy. Fares have gone up and margins have actually approached that of a normal business. (Shock! Horror!) With this kind of stability, workers are getting back some of the money they gave up during the dark times after the turn of the century. At the same time, US airlines are investing more in their products than they have in years. Sounds great, right?

The problem is that this mantra of capacity constraint can only last for so long. At some point, opportunity arises. So far, the big moves we’ve seen with the big carriers are more strategic than anything. You see Delta trying to build its hub in Seattle. And you have American and Delta slugging it out in LA. In the scheme of things, those are minor turf wars.

What should be more troubling to these airlines is the rise of the ultra low cost carrier. If you’re looking for growth in the US industry, that’s where you should look. Spirit, Allegiant, and now Frontier are the airlines that are adding seats at a rapid pace. With costs as low as they are and fares on other carriers so high, the sky appears to be the limit for these airlines. Travelers love cheap fares, and nobody is delivering cheap fares like these guys.

But they are also offering a different product than the other carriers. While everyone is using a la carte fees, none of the traditional US carriers have taken it as far as these guys by charging from everything from water to a carry on bag. In general, their operational integrity is worse than the traditional airlines. (Spirit is notorious for never canceling but delaying quite often.) And the general view that there is no customer service available at all from these carriers has kept some people away. That’s fine. This experience should be primarily for the price-sensitive. There is room for competitors using different models.

For that reason, the other carriers have been watching closely but they haven’t seemed all that scared. Perhaps they should be considering how many flights are being added by ultra low cost carriers, but so far, it’s more about providing new low fare options to cheap travelers than it is about stealing market share. So the big guys watch and react in different ways.

The problem for the traditional carriers, however, is that they’re all playing it very conservatively. More than one airline said in the last earnings call that they were going to continue to run their airlines as if oil were at $100 a barrel even though it’s at half that.

That sounds prudent since oil has been prone to spikes over the last decade. But the fundamentals right now show a relentless Saudi government that has no problem flooding the market with cheap oil. Some people are expecting years of oil at these lower prices.

The more confident people become that oil will stay within a lower range, the bigger the opportunity for another airline to come in and profitably add capacity. A lot of capacity. Could it be an existing airline like JetBlue or Virgin America? Virgin America still seems to be messing around with silly ideas like Austin to Dallas, but maybe there’s more coming.

Or could it be that money will start flowing back into start-up airlines that think they can take advantage of the opportunity? We all know how that usually turns out. The traditional carriers will fight back with fire if they feel threatened. But the bigger the opportunity appears, the more determined others will be to take advantage.

At some point, the traditional carriers are going to have to start adding capacity and bringing fares down or someone else is going to do it. That is, unless oil goes back up to $100 a barrel again…. But do they really want to play that game and hope?

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27 comments on “The Big US Carriers Are Just Begging for Competition

  1. I will never fly an ULCC having been spoiled too much for too long by Alaska. But get halfway there, let’s call it a LCC, with lower fares and the basics included, and you might get my leisure travel. It would have to be a pretty compelling price though because I like being AS MVP.

    I am pretty sure Delta is going to “lose” Seattle. They keep being tone deaf to the needs and tendencies of this market. They made some noise about new Airbus aircraft. Do they know where they are? LOL We DO look out the terminal windows to make sure we’re on 7-something metal… many of our friends work on those planes.

    I think oil will stay cheap for a while because of the Saudis, fracking, and other sources of short- and medium-term oversupply. But this is the last gasp. We’re past peak oil and at some point, the folks flooding the market are going to snap back to higher prices because there’s not much of the stuff left. I’ve already moved on to a BEV and pay a little extra to have all my electricity come from sustainable sources; we’re looking into solar. Pretty soon, my only major direct petroleum use will be on airplanes. :-)

    1. I agree I won’t fly on a ULCC. I like having personal space and not having to pay for the extra legroom section and baggage by being elite on an airline.

      As for DL/AS winning SEA? I don’t think either airline is trying to win the city. DL is building an international operation with some feed. Some of that feed can connect to other feed, but that’s about it. For AS to “win” SEA they would need to fly to Asia and Europe and they won’t. DL would have to dominate the domestic operation there and they won’t. As for the Boeing/Airbus argument, most passengers have no idea what type of plane they are on even when they are on the plane. Personally, I prefer airplanes that have an 18″ width seat and that is mostly Airbus products.

      1. Enjoy your 18 in seat, while the peto tube freeze over and pilots that don’t know how to fly, because the aircraft is over automated; send you crashing to earth.

        Iam aware of what I fly on and prefer a pilots in craft from Boeing.

      2. You missed my point entirely. Boeing is a major employer in the Seattle area. More than most towns, people here ARE aware of the aircraft that’s about to take them to their destination.

        What you’re saying is about like someone in Nashville responding to “Who’s that on the radio?” with “Some country singer.”

        1. While certainly I can see corporate contracts connected to the aviation industry and Boeing, to go with airlines that fly mainly their own product, it is hard to see it becoming a huge issue for the vast majority of individuals. Seattle is being flooded with new people to the city, most of whom are not tied to Boeing or to the aviation sector.

          Again for Alaska to be comparable they would have to fly routes that they not only don’t currently, but an extensive international presence they don’t have. Part of the drawdown of NRT is to shuffle flights to SEA.

        2. I still don’t think most people in Seattle care if it is a Boeing or an Airbus. Anyway, DL’s main internatinoal widebody is still a 767-300.

          But, I don’t think the DL growth in SEA is really having an effect on the capacity control mantra. If AS wanted to get competative and buy some 787s, they could upset the apple cart. Of course, that will NEVER happen becasue AS is usually very conservative in its growth.

  2. While international carriers expand routes with new high efficiency airplanes, cabin crew training to deliver personalized service and enhance ground services experiences; US carriers present no viable growth plans. If the US adopted open skies, no one would choose to fly old aircraft maintained in countries with little government supervision. CEO pay should be adjusted to reflect the lack of any strategies to compete in the global stage.

  3. The ULCC’s might attract the leasure flyer in a small way, but they won’t have a serious impact on the big five. Also to assume that crude oil prices will remain at $45 per barrel for greater than five years is a ridiculous folly.

  4. Wall Street and JetBlue have shown us that the “hybrid” model in between a ULCC and a traditional Network carrier is a niche that is hard to be in.

    If a carrier has a bigger network and better frequency, it is hard to argue against things like loyalty tiers and revenue maximization. If you don’t have the network, then you want to put as many seats on a plane as possible to lower costs and exploit individual route advantages.

    The hard part of the competitive balance is that the ULCCs are currently stimulating the market more than pulling customers away so it is not worth it for legacies to fight them. Look to UA and VX on EWR-SFO/LAX for the reason these fights aren’t worth it (and even less so if competing against a worse ULCC experience vs a arguably better VX). The question is at what point that changes, and will it be too late for network carriers to respond?

  5. I don’t think the legacy carriers (Southwest in that league) will be damaged by ULCCs as those smaller airlines are picking up the scrap routes they are leaving behind along with picking up the kind of infrequent flier who can gum up the system.

    As I’m transitioning to a regular flyer for business, I’ve decided to lock on to one particular legacy which so far has given me good service, clean aircraft and on time service even during recent poor weather conditions. My back up airline is not for price, but providing maybe a better schedule, location and known service is Southwest. I’ll never fly enough to get elite, medallion, or some form of Jewel status.

    I will avoid flying ULCCs like Allegiant, Spirit and Frontier because I really cannot afford to lose time based on their possibly one flight a day to a location. If they have a mechanical (like Allegiant did with their 757s in Hawaii which hung up their whole system) or a complete weather hang up, time is lost and hotel/rental car expenses may grow.

    I like to know what I’m getting when I go with an airline. With my legacy expectations, when I book coach, I want to be able to check in a bag (thank you credit card program), get an aisle seat, have a cup of coffee or soda and get there without being nickel and dimed to death.

  6. Cranky, I get your thesis and generally agree but have to side with the commentators that I won’t be flying a ULCC anytime soon. For business travel they simply do not offer the network or schedule. Time is money and one flight a day (or less) just doesn’t cut it. For leisure travel I’ve crunched the numbers and often don’t find the ULCC’s much cheaper when you factor all the nickel and diming they get you for. I can fly DL relatively cheap on their cheap non-refundable fares and carry-on only. Sometimes I’ll fly SY or WN but both of them aren’t really ULCC territory.

    As for local turf wars, I do see opportunity for the ULCC’s in the fortress hub cities like ATL, DFW, IAH, DEN, MSP, ORD, CLT, etc. Then again, as per above, that would be only for the leisure traveler…unless someone like Spirit truly built a hub and spoke system. STL is pretty empty these days…opportunity?

    1. ” For leisure travel I’ve crunched the numbers and often don’t find the ULCC’s much cheaper when you factor all the nickel and diming they get you for.”

      Yeah, I don’t see how people can be so dumb. You don’t save enough money with the so-called ULCCs to put up with their excessive nicel-and-diming and poor customer service. I suspect that there is a growth opportunity for Megabus here.

      1. ULCC such as Spirit do have niche markets where they can excel. While I would not want to fly Spirit on a 5 hour transcon, I would (and have) flown them from Ft. Lauderdale (FLL) to Mexico and other Caribbean destinations. Most of those flights are no more than 2 hours, and I will happily squash myself into a smaller seat for $50+ per hour (savings vs AA or JetBlue).

        Share 1 large checked bag with your travel partner and bring some gummi bears to enjoy on the flight.

      2. Last year I took a short vacation to Denver. I figured I would be taking United because I had a $50 United giftcard, but it ended up being cheaper for me to take Frontier (including a checked bag) than United, even taking the giftcard into account. It was around $175 round-trip, including the checked bag fee. So, yes, it is possible to save significant money on ULCCs.

    2. A – Maybe my thesis wasn’t entirely clear. Yes, the ULCC space is growing quickly but my point is that there’s room for others to come and grow in the legacy carrier’s space if the legacy carriers don’t make a move. The margins are just too big right now.

      1. Cranky I see a couple of problems with your thesis here.

        First the barrier to entry for a new carrier is incredibly high. Getting a certificate is much tougher these days and the capital markets are far less likely to throw money at an airline startup than in the past. You have only to look at VA’s troubles to see how hard it is to get going in this business.

        Second yes oil is cheap. Oil is cheap because OPEC is throwing it into the system to drive a lot of the new entrants (Shale, tar sands etc.) out of the market. Once they get back the market position they want (and a lot of the “new” oil is utterly uneconomic at current prices) the supply is going to get cut and prices are going to rise again. An airline would be foolish to make a long term bet on cheap oil right now. Especially in the very very capital intensive business that is Part 121 Operations in the US.

        Third the mega carriers aren’t stupid. They have a HUGE market presence and the ability to throw airplanes and cash at a new entrant if they so desire.

        All in all when you consider the risks, barriers to entry, and formidable entrenched competition I don’t think your going to see any new entrants jumping into this business. The bigger threat is of course the ULCC’s but it remains to be seen how that will play out in the US.

  7. Don’t forget all the up-gauging which the big carriers are doing. That has to have a measurable impact on capacity, if Delta capacity is up 5-6%, it is almost a Spirit, Frontier or Virgin.

  8. We’ve talked about the legacy carriers and ULCCs. Virgin American and Hawaiian seems to form a third category: No huge network but non-elites will have a better experience on these airlines than they would on legacy carriers. When I fly from the West Coast to Hawaii in economy I don’t bother to price Allegiant because I wouldn’t consider flying them over Hawaiian. As more and more Americans get wider and taller (and older and less flexible) more and more of us, even for leisure travel, and without the lure of elite status on a legacy carrier, are going to shun ULCCs trying to stuff as many as possible into as little space as possible.

    1. “Virgin American and Hawaiian seems to form a third category: No huge network but non-elites will have a better experience on these airlines than they would on legacy carriers. ”

      I’ve seen this fiction before, and have to call “BS.” Flying VX, you get the same nickel and diming that you get on UA. Having flown each airline on one leg of a December 2014 SFO-FLL round trip, I can attest that there’s no substantive difference between the two carriers for “non-elites.” Both airlines have those pesky fees for meals and bags and those wonderful new seats in coach. Oh, VX has trendy mood lighting but for me that’s no reason to select an airline.

  9. Cheaper oil is great and the foreseeable fundamentals are positive but there are too many black swans in the shadows. We are one crisis away from boots on the ground in X or seeing X, Y and Z In fully engaged combat. One flash point in an already smoldering near east/north Africa and oil goes to $200 in days.

    The one-two punch of the dot com bust followed by 9-11 is still fresh in management minds. That includes the current leadership teams at LCCs & ULCCs who were fighting for survival at legacies at the turn of the century.

    My second argument against a high capacity growth binge is the nature of the business cycle. Airplanes take time to procure and it takes time to hire and train. This US economic “recovery” is probably at its peak and no one wants capacity coming online when things soften.

  10. Brett – By the way, I have seen “Hot Fuzz”. Great movie that hits way too close to home for me as I live in Santa Barbara County where the political mantra is about “for the greater quality of life”.

  11. This is the way the marketplace is supposed to work. It’s a from of discipline that can’t be achieved any other way.

  12. It’s pretty obvious that if oil stays at current prices for several more months, something is going to change. Heck, the majors themselves will start adding seats. Current profit margins are, arguably, obscene.

    I’m skeptical that our current crop of ULLCs are a major threat to the big boys. Largely because they suck. I thought Frontier would differentiate themselves from Spirit — perhaps try to be the Easyjet of America (ironic, because Easyjet was modelled on the “old,” cheap, Southwest). But, nope, they want to suck, too. JetBlue is probably the carrier most likely to fill the void, and perhaps Virgin America, if they strengthen their management and focus. But until you can get something roughly equivalent to what the major offer (which shouldn’t be that tough, because they don’t really offer much) at a comparable price, I think the good times are going to continue to roll for the big guys.

    1. I agree on JetBlue actually being a threat in this very odd, and possibly transitory market.

      The one I am curious about is Virgin. I love their product, pricing is mostly acceptable (except on trans-con, a little high) but their network is terrible for me and “Elevate” is crap.

      I live in DFW, use DAL most of the time, and although going to AUS from DAL is good for me, the very limited number of flights is a problem. That, and considering what a great perk Companion pass on WN is, I dont see me switching anytime soon.

  13. First, the carnage going on in Seattle is, I believe, less about Delta trying to horn in on Alaska and more about making sure it’s less palatable as an easy merger target for American.

    American has a medium-sized hub in LA, but there’s lots of competition there, and the airline doesn’t have much space to grow. Buying Alaska would give AA a ready-made hub in the Northwest that would align very well with LA and Phoenix. Delta is protecting against that by building their own hub there.

    With regard to ULCC’s, the problem is that the coach experience on the majors really isn’t that different, especially on regional jets. The experience on a CRJ or ERJ is to me no different from sitting squashed into a Spirit or Allegiant seat (and I’ve flown them all). And the majors (except Southwest) charge the same bag fees and seat upgrade fees that Spirit does. If you are an elite, it’s better, but if you aren’t, it’s not.

    The legacies have discovered that business travelers are very profitable, but you don’t make money just on them. If you want to have the kind of frequency biz travelers want, you will have lots of seats available that you want to fill with regular coach travelers. Those are the ones that will be picked off by ULCCs if the big boys aren’t careful.

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