From Florida to Maine the story is the same - the US east coast is booming. Airports are growing capacity; airlines are adding frequencies; new services appear each month. But how long can the growth be sustained and, ultimately, will there be victims in such a fiercely competitive marketplace?
The newest livery to appear on tarmacs up and down the east coast is the red and grey of MetroJet, the no-frills, airline-within-an-airline launched by US Airways in June. Having been itching for years to bite back at other low-fare airlines - including Southwest Airlines and Delta Express - that have eaten into its traditional east coast territory, US Airways finally became free last year to proceed with plans for MetroJet after securing a palatable pay deal with its pilots. The company is wasting no time in its catch-up efforts. MetroJet was launched on 1 June with a frugal five Boeing 737s serving four cities out of Baltimore-Washington International, and US Airways says customer response has been breathtaking. The airline is confident of plans to ramp up to as many as 54 aircraft in 1999, or perhaps even earlier.
Southwest, meanwhile, which broke into the east coast market in September 1993 using BWI as its key base, insists it can handle the new challenge posed by MetroJet. The east coast market has 'over exceeded all our expectations,' says a spokesman. Although Southwest will approach further expansion plans in this region with its characteristic caution, the airline clearly sees many other opportunities and says it is being courted by airports and cities up and down the coast.
There are similar cries of enthusiasm from Delta Air Lines, which launched its low-fare little sister, Delta Express, in October 1996 and describes the venture as 'one big success story.' The pattern is familiar. The Delta Express network puts a dedicated fleet of 737s to work connecting the northeast and midwest US with Florida, avoiding conflict with Delta's key hubs by flying over Atlanta and Cincinnati. From Boston to Fort Lauderdale, Delta Express has exploited a pentup demand for reliable and frequent service between the east coast cities at a relatively low price.
Some independent small carriers are also establishing niches for themselves along the coastal corridor, attracting not just the tourist heading for a weekend in Florida, but also the business traveller looking for the best walk-up deal to the prime cities that are clustered in the northeast corner, including Boston, New York, Philadelphia and Washington DC. AirTran Airlines, the former ValuJet, has moved its headquarters to Orlando and is spanning its reach as far north as Albany, Boston and Rochester via its old base in Atlanta. ProAir, launched in July 1997 with two new 737-400s, is feeding traffic between its base in Detroit City to BWI, New York/ Newark and Philadelphia. It has its eyes also on Boston and New York/LaGuardia. Through the winter it will set up additional weekend service to three Florida cities to maximise use of its aircraft.
Airports up and down the coast are scurrying to handle the new traffic. Philadelphia saw its number of passengers in 1997 increase to 22.4 million - a 16.2 per cent increase over 1996 that made Philadelphia the fastest growing airport in the US. The airport expects to see growth continue at around 16 per cent in 1998. 'We are going at breakneck speed,' says the airport's director of aviation, Dennis Bouey. A commuter terminal will open by early 2001, while a new international terminal should be finished by the middle of that year with both projects to be completed within four years of launch. Bouey says the surge of interest has its roots in two realisations. 'The city did not realise until recently what a nugget of gold it had here and the airlines didn't realise the volume of high-yield traffic that exists,' he says. Since the city made the decision to '. . . put out the welcome mat,' growth has soared. With some 75 per cent of Philadelphia's traffic being origin and destination, Bouey believes much of that growth can be sustained. 'We expect above average, but less phenomenal, growth over the next few years, and then another jump in 2001 after the new concourses open,' he says.
Philadelphia's success might come, however, at the expense of New York/Newark - the airport just 100 miles to its north. A Lehman Brothers study points out that, while much untapped growth potential exists at both airports, Newark's pace of growth may be slowed by operational constraints that do not hamper Philadelphia. Also, unlike Newark, Philadelphia does not have to compete against two other airports in the same city.
Some 100 miles south of Philadelphia, growth continues unabated at each of the main airports in the Washington DC metropolitan area. The new Ronald Reagan/Washington National Airport opened in 1997 and Washington Dulles International opened a new concourse this year. At Baltimore-Washington, where Southwest and MetroJet now meet head-to-head, concourses are being expanded and renovated to cope with the increased demand. Ted Mathison, executive director of the Maryland Aviation Administraton, says annual growth in passenger traffic is predicted to average 3.8 per cent between 1997 and 2000, but adds that there has been a jump well above that average in recent months.
The second quarter traffic figures showed a 6 per cent increase over the previous year and the months of April, May and June each saw new records being set, with 1.4 million passengers handled in June. Freight traffic growth is even higher. Air cargo for the 1998 first quarter was up by 36 per cent over 1997 and in June was up by 40 per cent over the previous June. 'That trend is looking pretty solid,' says Mathison. Airport managers are now poised to bring forward plans for an additional parallel runway if that proves necessary.
Managers at Raleigh-Durham Airport in North Carolina are facing similar decisions. A new terminal wing was completed in July, but with an annual increase in passenger growth of 8.5 per cent over each of the past three years and O&D traffic shooting up by 62 per cent since 1992, a second new wing may soon be necessary. A decision for go-ahead is expected in the next few months. 'We are riding an economic boom,' says Teresa Damiano, the airport's marketing director. 'It's a challenge to keep pace with the growth.' Since 1995, eight new airlines have begun service at Raleigh-Durham, including Air Canada, AirTran, Continental Airlines, Delta Express, Midway and Midwest Express. Positioned almost exactly in the middle of the north east corridor and benefiting from the recent development of the area's high-technology industrial base known as the research triangle, Raleigh-Durham has gained a reputation for providing high-yield traffic that also enjoys weekend-away special deals. 'The saying around here is "we're young, we're rich, we're smart and we fly",' comments Damiano.
For the airlines themselves, burgeoning interest in the region is showing up not just in increased frequencies to the key cities, but also in entry to emerging markets, such as Providence and Manchester in the far north. Southwest now serves both of these cities. 'We looked at BWI as an under-served and high-priced destination with opportunity gatewise and without some of the air traffic control problems that you find in other areas of the east coast,' says Richard Sweet, senior director of marketing at Southwest. 'The strategy was that as we got airplanes, we threw some of them at BWI and tried to connect some dots in our existing network. It has over exceeded our expectations.'
But Sweet admits that BWI, in the few years since Southwest arrived, has become 'much more crowded', especially since the arrival of MetroJet this summer. 'From a business point of view, however, we are still chugging along very well,' he says. Sweet says there has been no fall off in business since MetroJet launched service and Southwest says it gets a high proportion of business traffic in the area, especially from small companies and entrepreneurs.
Ramping up frequencies - the BWI to Providence service will increase from eight to 10 daily flights in August - will help to protect that business traffic. Although Southwest's core strategy remains shorthaul, high frequency, point-to-point service, entering the east coast has enabled it to launch some long-haul, coast-to-coast services. In early August the company launched a Providence-Kansas-Los Angeles service, emphasising in its promotional work that the one stop in Kansas will be typical of the Southwest way - a 20 minute turnaround.
'We will be doing more on the east coast,' acknowledges Sweet. 'There are other cities and regions that we are looking at and which are courting us. There is such a huge population base in the north east and so many pockets with millions of people that offer opportunities - provided there are no air traffic problems.'
US Airways, however, is not going to make it as easy as before to exploit those opportunities. Last year the company's chairman anf chief executive officer Stephen Wolf laid out the stark choices for the airline's future. Either it could be grown into a global carrier that would be the carrier of choice in its prime market - the US east coast region - or it could be shrunk into a second-tier regional if the unions did not agree to pay deals that would allow costs to be contained. Many months of hard negotiations finally led to the breakthrough with pilots last year that put the carrier on the first course. Now a five-point business plan is steaming forward that is changing the culture of the company, addressing the cost structure, rationalising the fleet and expanding the network.
Rakesh Gangwal, president and chief executive officer of US Airways, says progress in the last few months has been 'spectacular'. Consolidation of the company headquarters in Virginia has not only helped to save costs, he says, but has also made the company 'smarter and much more nimble.' The launch of low-fares, no-frills MetroJet is just one element of the rebuilding work that is going on at US Airways, but it is a critical element. According to the Lehman study, during 1997 US Airways' schedule pull down resulted in an 8.5 per cent point drop in market share, with Southwest the chief beneficiary. 'Launching MetroJet was a must-do scenario,' admits Gangwal. 'We had to do it to survive and to cover our flanks. Now it's done, I don't lose sleep anymore.'
Gangwal says that the launch of MetroJet has been 'flawless', with good on-time performance and 'very high' load factors. 'Customer response has been breathtaking. It's a great success story that is unfolding,' enthuses Gangwal.
There is work to be done, however. Gangwal admits that costs need further attention. Southwest, Delta Express and AirTran all set tough standards in this area. Gangwal says the company has so far achieved 'about 80 per cent' of its cost targets. MetroJet also needs to build mass - a key way in which to further reduce costs. The company is well on target to have 20 jets in place by the end of 1998, as it originally hoped, but it would also like to speed forward with plans to have 54 aircraft operating by the end of the initial phase, which Gangwal defines as 'by 1999.'
Gangwal says that some three quarters of MetroJet operations will not be expansions into new markets, but conversions in existing east coast cities from the mainline company to MetroJet. He insists, therefore, there is not a real head-to-head with Southwest. 'We don't see MetroJet as an onslaught, or as taking on Southwest directly,' he says. 'There is a marketplace for them and us. They can carry the low yield and we will take the high yield. Our's will be a richer mix of traffic that is more comfortable with US Airways.' Gangwal admits, however, that US Airways was losing some of its core traffic to Southwest and MetroJet is a weapon for retrieving not just the leisure traveller, but much more importantly, the business traveller. 'For instance, between Baltimore and Providence, if we had left that market the business traveller would have gone to Southwest. Now we can say, "stay with us",' he says. But the MetroJet story goes 'a little beyond that,' adds Gangwal. The airline is also reaching down to Florida destinations such as Jacksonville, Miami and Tampa. 'Now we can also go after the infrequent traveller as well,' he says.
The contract that US Airways has struck with the pilots' union allows for up to 25 per cent of operations to be ultimately converted to MetroJet, which amount to some 100 aircraft. Gangwal clearly sees this as growing into a 'sizeable operation' that will be a key part to reaffirming US Airways's dominant position in the east cost. 'We started a few decades late, but with our fundamental strength on the east coast we will more than make up for this shortfall,' he says.
Like Southwest, Delta is playing down the potential effect of MetroJet. Robert Coggin, executive vice president of marketing at Delta, says that the launch of low-fares Delta Express in 1996 was a major milestone. 'It has been extremely successful by any yardstick you want to use,' he says. 'The operating margins are very healthy - perhaps the best in the industry. It has been a very successful strategy to protect our franchise in Florida and it offers a better product at a very, very competitive fare with Southwest.'
Load factors at Delta Express, which connects cities from Boston down to West Palm Beach, have been in the 70 per cent and higher range. Unlike Southwest and MetroJet, Delta Express uses Washington/Dulles rather than BWI in the Washington metropolitan area, but Coggin acknowledges there is now fresh competition in the area from MetroJet. 'But we will be a very strong competitor,' says Coggin. 'I believe there will be a lot of traffic stimulation, so there is room enough for both of us in the marketplace.'
AirTran's president and chief executive officer, Joseph Corr, also dismisses the notion that all these low-fare carriers might find themselves uncomfortably crowded along the east coast. Corr is building up frequencies between strong business cities in the region, such as Atlanta and New York/La Guardia and Atlanta and Washington Dulles. AirTran now also connects Orlando directly with a host of northeast cities, including Boston, Islip, and New York. But AirTran is also expected to take a breather in its growth programme over the next few months - some analysts believe this could last into 1999, just as MetroJet is expanding.
'Growth across the region is forging ahead, without a doubt, but competition is also really digging in,' says a New York analyst. 'Southwest will face stronger competition and higher costs from now on. Neither Delta Express nor MetroJet are likely to beat Southwest at its own game, but they will cut into its margins. Although the product overlaps are quite small now, that could grow and make the market even more competitive.'
Other analysts also point out that, in some eastern cities, there are now dozens of competing airlines ploughing the same routes and so, even with anticipated average annual growth of 5 per cent or more over the next five or 10 years, there is likely to be some fall-out.
Atlantic Coast Airlines, which operates as United Express on the east coast, is yet another example of an airline that has been building up service in recent months, in this instance out of its Washington/Dulles hub. From 9 September, it will increase its service between Washington and Newark from 13 daily flights to 16 - effectively creating an hourly service similar to the Shuttles operated by Delta and US Airways.
And new entrant ProAir, although just one year old and resource-strapped with only two 737s, is seeking to expand its operations from Detroit to the east coast. The airline hopes to add LaGuardia to its schedule, even though it already serves Newark, and has requested slots under the Department of Transportation's slot reallocation programme to new entrants. 'It's a critical region in our growth plans,' says ProAir president and chief operating officer Craig Belmondo. 'These are excellent markets. You have huge population centres in which people are travelling throughout the week.'
They are markets that have attracted the increased attention of many in the industry recently. It remains to be seen whether this lucrative pie will be large enough for all to feast upon.
Source: Airline Business
