There is much at stake in the lucrative north-east corridor of the USA. Salomon Smith Barney analyst Brian Harris sums it up thus: "There's a lot of revenue to be had there. Unfortunately, everyone's come to the same conclusion."
Despite the fierce new competition in the market, the north-east corridor is still seen as a potential gold-mine, which explains the surge of interest by airlines and railway companies. According to the Port Authority of New York and New Jersey, the region makes up 15% of the total US domestic air travel market.
The Department of Transportation's 1998 passenger origin-destination survey found that this corridor contained three of the USA's 25 densest air markets, led by New York-Boston with 2.7 million people flying each year. There are another 2.4 million on New York-Washington and some 1.3 million between Boston and Washington.
Those sorts of numbers are enough by themselves to draw attention, but there is a bonus: these are also high-yield routes, packed with business travellers racing between three key US cities. But analysts are beginning to question whether the glut of new competition might erode yields - especially as some of the competition comes in the form of low-cost carrier Southwest Airlines and also in a new high-speed train service that is planned to link these same cities.
Rail service upgrade
As part of an upgrade of all its service in the north-east corridor, Amtrak will next year launch its new rail service, to be called Acela, from New York through to Washington and Boston. The trains, to be built by Bombardier at a cost of $800 million, will cut the 3h trip time to Washington by at least 15min, while the current 4.5h travel to Boston will be reduced to 3h. The new trains will offer both business and first-class service, computer power-outlets at each seat, audio programming, a cafe car and food service in first class.
Amtrak, which is retraining all Acela staff , is upgrading the infrastructure at stations in the north-east, including South Station in Boston, Penn in New York City, and Union in Washington. Joseph DiVincenzo, Amtrak's senior director of marketing and sales, claims the north-east corridor generates half of all Amtrak's revenues, while Metroliner, Amtrak's current fastest service in the corridor, generates a quarter.
None of the airlines serving the north-east corridor - Delta Air Lines, Continental Airlines, Southwest Airlines, United Airlines and US Airways - admits to feeling threatened by the Acela service launch. Delta, for one, claims its New York-Washington shuttle flight takes just over 1h between airports compared to Acela's trip of 3h, although that is between city centres. Delta also points out that its New York-Boston shuttle flights take just over 2h, compared to the new Acela service of 3h40min.
Travel agents also question Acela's prospects against the established shuttle carriers. Paul Metselaar, chairman of New York's World Travel Specialists Group, believes Acela's presence will have most impact on the New York-Boston market where the cut in train travel times is most marked. He also points out that delays at New York LaGuardia have become "close to intolerable", making it a good time for Acela to open the market to frustrated shuttle travellers. But he concedes that while Acela may steal some share from the airlines, it is unlikely to prove "significant".
Michael Boult, vice president of supplier relations for Philadelphia-based corporate travel agency Rosenbluth International, predicts Acela will dobetter outside the main Boston-Washington-New York services - giving Philadelphia-Washington as an example. "I don't know if it will add a great deal in shuttle markets. If people fly the shuttle, they'll continue to fly it," he says. But that could change if Acela gets a reputation for a top-notch service at reasonable fares. "If it proves reliable and it saves time, perhaps people will take it," Boult suggests.
But he warns that Acela will still need to be as aggressive as market leaders Delta and US Airways in creating volume discounts for best shuttle customers. Industry officials say high-volume corporate users of the shuttles get discounts between 10% and 60% off published one-way fares of $202. Amtrak says it is prepared to fight back, however. DiVincenzo says his company will be competitive with carriers in the corporate arena.
Corporate Discounts
Improved train services are not the only new options to business travellers in this market, however. Other carriers are also stepping up their presence in the region, offering increased frequency and shuttle-type services from various "alternative" airports, including Baltimore-Washington Airport, Washington Dulles and New York's Islip. Some airlines have strengthened such services by putting their newly acquired regional jets (RJs) on these routes. United, for example, which earlier this year increased its east coast hub at Dulles to 117 daily flights, is hoping the high-frequency RJ service it has instituted from there to LaGuardia and Boston will feed its longer-haul flights out of Dulles.
Longer term, United might set up an east coast version of its United Shuttle operation at Dulles if business grows sufficiently. Dan Walsh, United's vice president, eastern region, says: "We would want to launch it to the consumer when the product is properly positioned. We'd need more consistent aircraft size and we'd also have to get the frequencies right. There's no urgency to introduce the United Shuttle, but I could see us bringing it in when the timing is right."
Southwest is also gradually expanding its presence on the east coast, with new routes and increased service on existing routes from Baltimore, now the ninth largest city in its system. Southwest says its service into New York Islip, launched this year, is going "extremely well". Unlike most Southwest markets, traffic on these Baltimore-Washington International routes is mostly business rather than leisure, Southwest says. But Salomon's Harris believes the carrier's increased east coast presence marks one of the most severe challenges to other carriers because of the downward effect on fares. "Over time, Southwest's cost advantage will allow it to win most markets, unless it goes into someone else's hub," he says.
Established shuttle providers Delta and US Airways, meanwhile, are answering the challenge with improved services and new aircraft. US Airways, which has lagged behind Delta in shuttle market share because of older equipment and frequency problems, is phasing in eight new Airbus A320s by early next year to serve as a dedicated fleet for traditional shuttle routes. Eventually, all shuttle aircraft will be A320s, which will be quieter, more efficient and more reliable than the Boeing 727s used today. Michael Scheeringa, vice president of shuttle and Metrojet for US Airways, describes his company's strategy as "an investment in our best customers".
Protecting market share
Delta is also moving to protect its market share. The airline is spending over $700 million on a new fleet of 16 Boeing 737-800s, which from July will start to replace the 727-200s now serving its shuttle routes. The new aircraft will have seats with special head-rests, power outlet access for laptop computers and more overhead locker space. Last June, Delta increased its non-stop Washington-Boston service to 10 round trips daily. Delta has also installed high-tech ticketing kiosks at all shuttle airports as part of a $12 million investment to improve shuttle facilities.
Bill Huisman, manager of marketing programmes for Delta Shuttle, says the shuttle generates 10% of Delta's total revenues. Avitas statistics for 1998 placed Delta in the lead, in passenger market share, for both the total New York-Washington and New York-Boston markets, with 48% and 47% respectively.
But no-one believes that it is going to be easy maintaining that kind of market-share in a region which now has so many players. Rosenbluth's Boult, like many industry observers, foresees a glut of capacity in the north-east corridor, particularly out of Washington. "Everybody wants to own Washington, but it's very murky about who will win," he says. "There are going to be more assets than travellers, which is good for consumers, but not for the airlines.
The major players
Brief details of the current extent of East Coast shuttle services among the major US airlines.
Continental Airlines: 12 daily flights between New York Newark and Washington National; 17 daily flights between Newark and Boston.
Delta Air Lines: Delta Shuttle has 16 daily flights between New York LaGuardia to both Boston and Washington National, using a dedicated fleet of 16 727s. It also offers limousine or boat service to downtowns for an extra fee. It will upgrade aircraft to 737-800s from next July.
Southwest Airlines: Began service from Baltimore-Washington with eight daily flights in 1993 and was due to operate 95 flights daily as of October 31, 1999. It offers 11 round trip flights daily to Providence, and eight each to Manchester, New Hampshire; Islip, New York; and Hartford, Connecticut.
United Airlines: As part of its effort to boost its Washington Dulles hub from 73 to 117 flights daily, United now offers 13 round trip flights daily to Boston and 16 round trips daily to New York LaGuardia, half on its own Boeings and half on United Express regional jets.
Source: Airline Business
