Florida has never produced high yields for carriers like USAir and Delta Air Lines, whose east coast bases demand a large presence in the state. But the numerous leisure travellers flying to and within the state have long lured carriers into thinking that traffic numbers would compensate for the low fares needed to satisfy passenger demand.
Enter Southwest Airlines. In January it began serving intra-Florida markets and connecting them with some of its previously established points further north, like Nashville, St Louis and Baltimore. For the first time, Southwest is combining its long established low fare, short haul, high frequency approach to markets with a low fare, longer haul, lower frequency operation (to and from Florida).
This new element adds to the presence of a menagerie of niche players: Atlanta's highly successful low fare, low frequency ValuJet, which last October established a 'focus city' hub operation in Orlando; struggling Newark-based Kiwi International, feeding traffic from Atlanta into Orlando; charter-like operators American Trans Air and Carnival, which are picking up traffic majors like American are leaving behind as they scale down their Florida operations; and small startups like Orlando-based AirTran, a carrier which operates 10 Boeing 737-200s once a day in 20 secondary long-haul markets like Orlando-Dayton. Airtran's low fares produced a year on year traffic growth rate of 400 per cent for January. As if that wasn't enough, officials at Delta, where pilots agreed to wage concessions to support the creation of a lower cost, low fare operation, are seriously considering targeting the 100-seater initiative (using 25 aircraft) in Orlando.
It seems that airlines are finally coming to terms with the fact that Florida will never be anything but a destination for the discretionary traveller. This raises concerns for regional players like ComAir and FloridaGulf, however, over the negative effect that strong, low fare jet competition will have on them. And it is worrying for players like USAir and Delta: if Southwest is successful in Florida it could well mean that the encroachment of low fare carriers like ValuJet throughout the eastern US was simply the beginning of an extremely serious competitive threat.
Whatever Southwest's potential, recent history has not been kind to airlines trying to crack Florida. It is a market that some compare to California, where competition has been so fierce that, at the end of 1995, 88 per cent of the market was controlled by Southwest and United Airlines. Like California, Florida has seen an exodus of competitors, most recently Delta, which in 1994 began downsizing its Orlando hub, nearly halving its daily flights. Startup carrier Air South recently fled north after a bruising battle with ValuJet. And after withstanding the onslaught of Continental's Southwest-like Lite product in 1994 and early 1995, USAir pulled jet aircraft out of intra-Florida service, giving the mandate to its Express commuter affiliates. After realising an estimated loss of $6 million a month on flights to and within the state, Continental withdrew from the market last year.
But it is not only the intra-state fracas that has resulted in the exit of competitors. Traffic flows into Florida are becoming less attractive to the majors, a phenomenon that some say is giving rise to a broad array of niche players. Ed Nelson, marketing director for Ft Lauderdale International airport, looks back on 1995 as a year when new competitors replaced the old guard: American Airlines' traffic was down 35 per cent over 1994 as the carrier downsized service from Chicago last summer and pulled down services from hubs in Raleigh-Durham and Nashville; Continental, having pulled out of Jacksonville, Tampa and Orlando, cut capacity by 28 per cent; TWA capacity was down 42 per cent and Delta's was also lower. All of this has been mitigated at Ft Lauderdale by Southwest's 15 new daily frequencies. Carnival also grew its Fort Lauderdale capacity by 52 per cent; ValuJet service to Atlanta went up 56 per cent and ATA grew 41 per cent.
But can the low fare players really make it in Florida? According to one executive familiar with the failure of Continental Lite, the problem with Florida is symbolised by the fact that the busiest time of travel in the state is in the middle of the day. 'That says it all,' he says. 'What Continental found is that this whole concept of stimulation will work in Florida, but that nothing justified such low fares. This is not California. These are leisure travellers.'
Southwest is hardly laying down its hand but sees a market in Florida that is 'good because a lot of people want to go there,' says Gary Kelly, Southwest's CFO. He readily admits that intra-Florida 'does not have the huge traffic flows of California, is heavy on leisure and has a developing business market.' But there is potential, especially as traffic is flowed in from the north, to feed the high-frequency intra-state services, he adds. Matching capacity carefully with demand and, importantly, maintaining a consistent and disciplined presence in intra-state markets helps. Combined with its low costs, Southwest believes it can profitably run 20 daily departures from Orlando - a market that, with ValuJet, Delta, ComAir, Kiwi and AirTran, may soon become swamped with capacity.
But Ponder Harrison, Valujet's vice president marketing, believes there is 'plenty to go around' in the region and that a low fare Delta incursion would affect weaker carriers like Kiwi or new entrants like Airtran. Valujet has the advantage of operating longer haul services from its other 'focus city' operations at Washington-Dulles and Boston. So if Delta tries to attack its Florida traffic out of Atlanta, 'we'll just cut some frequencies and enter other markets,' says another Valujet executive.
If Kelly is right and low fares can equal profits for the low cost carriers, it stands to reason that those with the highest costs will be most vulnerable. Unfortunately these players also happen to be the commuter/regional airlines, which are disadvantaged by the fact that their equipment is small and less favoured by passengers.
Indeed many believe commuter and regional airlines like Florida Gulf, a United Express affiliate, and Comair, a Delta Connection carrier, will be the most affected as the low fare competition in Florida develops. The problem for the smaller carriers is multifaceted. First, as partners to larger carriers in a highly competitive environment, they either feast or starve depending on the partner's whims. Second, even if they wanted to compete, their smaller turboprop - or for some, like ComAir, their jet - aircraft often serve tag routes that passengers have been known to shun in favour of a car journey to the city out of which the low fare carrier flies.' There are two schools of thought,' says Kit Darby, president of Atlanta-based Air Inc. 'One says that the regional will move to routes that jets can't fly, the other says that they stay where they are - in the way - and die. The battle won't take place if the regional is smart.'
WestAir's experience in California is an example of the regional's plight amidst low fare battles between majors. The Mesa Air Group affiliate feeds United at San Francisco, but when the larger partner launched the Shuttle by United to compete with Southwest, it is estimated that the commuter carrier lost upwards of 35 per cent of its markets directly to the Shuttle. Indirectly, but significantly, such markets as Fresno-San Francisco were hit hard when budget-conscious passengers passed up the WestAir commuter connection that fed the Shuttle in favour of driving to San Francisco to get the cheap United or Southwest fare. Though many of these conditions were exacerbated by what one observer calls 'poor management decisions' regarding flight equipment, the overall result came close to bankrupting WestAir.
Mesa's Florida Gulf operation partners with USAir and was one of the main beneficiaries of USAir's pullout of jet services within the state last year. Now, as Southwest builds its presence and others begin to threaten to do the same, Florida Gulf could see a similar drop in yield analogous to WestAir's recent problems. However a Mesa spokeswoman disagrees: 'It's a whole different scenario in Florida. We are feeding a lot of small markets, and the leisure traveller will want to get all the way to, say, Naples [from Tampa].'
ComAir, meanwhile, will face a new dilemma if Delta does enter the Orlando markets with a low fare jet service to counter Southwest. The regional, based in Cincinnati, generates a third of its total revenue in Florida and 10 per cent of its profits. For the nine months ending in December,these amounted to $113 million and $4.3 million respectively. Last year, ComAir compensated for the diminished yields resulting from competition with Continental Lite by picking up the jet traffic Delta abandoned at Orlando (though it did get out of several markets, like Tampa-New Orleans, where there was direct competition with Lite). Also, with the aid of Canadair RJs, the carrier has successfully marketed itself as catering to business passengers. But if Delta initiates low fare services the carrier could be forced out of its markets with nothing to compensate for the loss of traffic. Nor would a Southwest expansion bode well for ComAir if it needs to look for new markets: the carrier's costs of 14.8 cents per available seat mile are nearly twice as high as Southwest's.
Though Florida's highly competitive environment is filled with portent for regional carriers like ComAir and Florida Gulf, more alarming for the likes of USAir is the potential for the state to be a testbed. Indeed the recent appearance on the scene of Southwest has industry executives considering Florida as the opening low fare gambit for what may well spread right along the US east coast. Though USAir has launched some preemptive pricing initiatives apparently aimed at Southwest, this is not a long-term solution to what comes down to the industry's highest cost structure abutting the lowest. Says a spokesman: 'We're waiting to see how things evolve. The question is, "What are the implications if Southwest moves [up north]?" That's where we are doing a lot of work.'
Delta, however, may be ready to respond with its low fare product sometime after Atlanta hosts the Olympics in July. Historically, intense competition in the US southeast for Delta has been more the norm. Before Kiwi International there was People Express, and before ValuJet there was Delta's hometown nemesis, Eastern Air Lines, which succumbed in 1991. The battle between Delta and Eastern peaked in 1990 when Eastern was in its final throes and Delta's passenger count for the year fell 15 per cent in the Atlanta-Orlando market alone.
The difference today is that the new brand of competition has done what it advertised: stimulated new traffic. A year after ValuJet and Kiwi began serving Atlanta at the end of 1993, traffic to Orlando jumped 80 per cent, while Delta's base increased 36 per cent, according to figures supplied by Back Information Services. Though this was mitigated by a steep yield decline - Delta saw a 33 per cent drop in Atlanta-Orlando revenue per passenger mile, from 38.01 cents to 25.51 cents between 1993 and 1994 - the interesting part is that the carrier's yields have since recovered. In the first three quarters of 1995, revenue per passenger mile climbed back to 34.5 cents, a rise that Michael Allen, executive director of Back, terms 'standard' after a low fare airline has established itself in a market. Delta's 40 per cent share of the 482,000 or so passengers flying between Atlanta and Orlando during those nine months represents the high yield sector of the market.
It is this premium that experts point to when speaking of Delta's ambitions with its '100-seat initiative, a premium which will make it difficult for the airline to contemplate trying to take back the traffic that Kiwi, and to a lesser extent ValuJet, have taken as their own. Surprisingly, Kiwi has become the second largest airline in terms of enplanements in the Atlanta-Orlando market, taking up 37 per cent of the market in the first nine months of last year. However, Kiwi is under financial strain, and some observers believe Delta's 100-seat initiative could be aimed more at Kiwi and vulnerable carriers, USAir included.
Whatever happens over the next year, there is a sense in the US airline industry that Southwest is the carrier that could tame the extremely volatile Florida markets. This, of course, would be good for Southwest. But what about the competition? 'It's a brutal business,' observes Kelly. 'Someone could get hurt.'
Whatever happens over the next year, there is a sense in the US airline industry that Southwest is the carrier that could tame the extremely volatile Florida markets. This, of course, would be good for Southwest. But what about the competition? 'It's a brutal business,' observes Kelly. 'Someone could get hurt.'
Source: Airline Business
