U.S. low-cost carriers used to be loath to compete against each other. After all, there were plenty of easy pickings to choose from: routes served by no one or only a higher-cost legacy carrier, where they could come in to stimulate demand and steal market share with their lower but still profit-producing fares.
But the U.S. low-cost carrier market is the world’s most mature, and now — by choice or necessity — the carriers increasingly find themselves competing against each other. This raises questions about what will happen in those markets, and could prove to be instructive for LCCs worldwide that someday will confront the same situation.
Crunching numbers with Oliver Wyman’s PlaneStats.com analytic tools reveals that in the fourth quarter of 2005, U.S. LCCs competed against each other on only 23 routes, but by 2009’s fourth quarter, they competed on 139. The number is continuing to grow, and in some places three LCCs compete on the same route. The competition is most evident, and dramatic, at Baltimore-Washington International Airport (BWI) and in Boston, Denver and Milwaukee, but it is not limited to those locations.
At BWI, Southwest Airlines and AirTran Airways have been competing for years. AirTran filled a void created in late 2001 when US Airways gave up on the Metrojet-branded lower-cost service it created to take on Southwest there. AirTran’s BWI expansion has been more aggressive in the past few years because it wanted to become less dependent on its Atlanta hub.
AirTran and Southwest compete directly on only about 10 BWI routes, and they seem to have found a way to profitably coexist. However, JetBlue Airways stepped into the mix last September with service between BWI and Boston Logan International Airport, igniting fare and frequency wars with Southwest and AirTran on that route, which many analysts consider unsustainable. The route’s average fare fell from $130 in the fourth quarter of 2008 to $102 in last year’s fourth quarter, U.S. Transportation Department data shows.
At Boston Logan, Southwest started operations in August 2009 because so much low-cost service—primarily JetBlue’s—had become available there. That lessened the attraction of Southwest’s alternative services via Providence, R.I., and Manchester, N.H., both about 50 mi. away. Meanwhile, JetBlue keeps growing at Logan, where it is now the largest carrier.
Three and a half years earlier, Southwest similarly launched services at Denver, a market served by low-cost carrier Frontier Airlines and United Airlines. Southwest expanded there while Frontier was weakened, but Frontier revived itself under a bankruptcy restructuring that ended last Oct. 1 with its acquisition by Republic Airways.
In Milwaukee, an intense three-way competition is underway between Southwest, AirTran and Midwest Airlines, a Republic Airways subsidiary that is becoming part of its Frontier subsidiary’s brand. AirTran expanded in Milwaukee when, after failing to acquire Midwest, it perceived weakness in Midwest’s high-end service abandonment and network shrinkage, but now Midwest is rebuilding its network as an LCC. Southwest, undaunted, entered the market last November.
Rivalry between LCCs also is slowly increasing outside of these markets, such as from other cities to Florida and on some transcontinental routes. LCCs are not directly competing on many Caribbean nonstops, but JetBlue, Spirit and now AirTran are connecting to some of the same destinations via different Eastern U.S. gateways.
Even Allegiant Air, a niche carrier providing low-frequency service from small U.S. communities to major U.S. leisure destinations, has not escaped the trend. In a presentation this month, Allegiant boasted that it faces competition on only 10 of its 143 routes. What it did not mention is that it had competition on only one in October 2008 and five in 2009; AirTran’s encroachment has caused most of the increase.
When asked about the increasing competition, LCCs often shrug off the question. LCCs still operate most routes free from low-cost rivals, and some can share a route because they target different customers. AirTran says simply that it is entering routes where it believes it can make a profit. Spirit CEO Ben Baldanza believes LCCs can survive the Caribbean competition, but that a higher-cost network carrier like American Airlines might not. Network carriers might cede even more domestic routes to focus on LCC-free international ones.
But many analysts do not expect three LCCs to survive in Milwaukee, or Southwest, Frontier and United to co-exist at current levels in Denver, and sustaining three LCCs on a route like Boston-BWI seems unlikely. Somehow, for someone, this trend is going to have some consequences—and casualties.