Instead, the major carriers can see something potentially distressing: a swarm of alien aircraft invading the domestic market. These planes belong to the latest wave of upstart airlines hoping to succeed where so many predecessors--161 in the 18 years since deregulation--have plowed under. During that time, the economics of the industry has been tossed around like so much paper in jetwash. And airfares have followed suit. Prices have taken off in "fortress" markets like Denver, where one or two majors have pounded competitors; in California, where the terminals are more crowded, the fares have sunk low enough to give the bus company fits--and ensure losses for nearly everybody.
Twenty-five airlines have started up in the past seven years, and eight more are awaiting clearance from the Department of Transportation. They sport such names as Frontier, ValuJet, Air 21, Vanguard, Nations Air, KIWI and Western Pacific, and they promise that the competition is going to be different this time. They have staked their survival on two basic strategies. First, fly into a place, like Fresno, California, that the major carriers have largely abandoned. Second, don't pick the big guys' pockets; use low-fare, no-frills flights to expand the market. The idea isn't to steal market share but to create a bigger, two-tiered market.
So far, there's been airspace for everyone, although not without a few elbows being thrown. Lee Howard, president of Airline Economics International Inc., an industry consulting firm, estimates that 15% of domestic air traffic is now hauled by low-cost airlines, up from 10% little more than a year ago. According to Glenn Engel, an airline analyst at Goldman Sachs, the no-frills upstarts had revenues last year of $6 billion (out of an industry total of $75 billion to $80 billion), in contrast to $3 billion in 1991.
The upstart airlines are merely sweeping up the crumbs abandoned by the majors, carrying 15% of the passengers for less than 10% of the gross. But at some point, perhaps this summer, the fledglings' growth will run smack up against the majors' need to protect or expand revenues. When that happens, says Michael Boyd, president of Aviation Systems Research Corp. in Golden, Colorado, the skies may grow turbulent again. "If the majors find their core market being taken [by the upstarts]," he says, "they will turn on them." Already Northwest and American have started to discount. Rising fuel prices could turn summer into a season of melting profits.
Executives at the upstarts cross their hearts and deny any intention of stealing business from the wary giants. "We're not pulling traffic away from anyone," says Mark Morro, chairman of Air 21, which last December began flying Fokker F.28 4000s, leased from USAir, out of Fresno. "We're bringing passengers back to the airport." Lewis Jordan, president of ValuJet, which bases its 47-plane fleet in Atlanta, says Delta, its looming neighbor at Hartsfield Airfield, has nothing to fear. "We stole people from their living rooms and automobiles," he insists, not from Delta flights. Maybe, but ValuJet earned $67.8 million last year on sales of $367.8 million, nearly triple its sales in 1994.
ValuJet's low fares undeniably attract customers who would otherwise have had to pay Delta's prices. Art Gilbert, 42, an insurance consultant from Baltimore, Maryland, recently traveled the 48 miles to Dulles Airport in northern Virginia to take a ValuJet flight to Atlanta. "I live closer to Baltimore's BWI Airport, but this flight is $400 cheaper than the other carriers," says Gilbert. "My round trip ticket cost $189."
Thanks to a surplus of planes, starting an airline has been relatively affordable in the past couple of years. A Boeing 737 can be leased for about $15,000 a month. Put together a couple of planes and a pinch-penny operating plan, and you've got your wings.
The supply of idling aircraft is matched by a supply of idling airline executives. "The airline business is tough," says ValuJet's Jordan, "but it's all we really know." Jordan is a former president of Continental. KIWI CEO Jerry Murphy spent 24 years at Pan Am; Western Pacific's chairman, Ed Beauvais, started America West; and Air 21's chairman, Mark Morro, co-founded and was president of Wings West Airlines. They have seen, up close, airlines struggling and going under.
What makes these guys think they can avoid the same fate? The answer begins with the 100,000 or so employees jettisoned by the airlines during the restructurings of the past six years. They constitute a formidable pool of skills itching to get back into action, at a cut-rate price. Air 21's Morro hires pilots for $40,000 a year, as opposed to $100,000-plus at the majors. First officers get $24,000, and flight attendants start at $18,000.
The theme extends to corporate overhead. At ValuJet, Jordan conducts business from a $100 desk he bought at Home Depot. Air 21 operates from a vintage Army Air Corps barracks at the Fresno airport. The furnishings are Holiday Inn castoffs and a pawnshop TV. In-flight meals are a rarity, and other economies are visible. Air 21 doesn't buy paper napkins; it gets them free from restaurants in Fresno that thereby gain advertising for their names.
Surprisingly, this sort of penurious ingenuity yields only a slight edge over the majors, who have been frantically cutting costs as well. Using a basic industry yardstick--operating expense per seat, per mile flown--analyst Engel figures that last year American, Delta and United averaged 8.76[cents] a mile; the upstarts averaged 7.64[cents].
These numbers alone suggest that some unscheduled landings are in the offing, especially if the majors are forced to slash their fares on routes where the upstarts are trying to compete. Says David Castelveter, a spokesman for USAir: "If necessary, we respond competitively and aggressively, and we've done that with Southwest, ValuJet and Nations Air, which have visited our markets." Notes Engel: "If the big boys cut their prices, the customers will go there."
There are other ways the established carriers can make life tough for the startups. ValuJet believes it was hoodwinked out of precious landing slots at New York City's LaGuardia Airport by a midnight move on Delta's part. ValuJet thought it had an agreement with TWA to lease 10 slots for $480,000 a year, only to discover that at the last moment Delta swooped in and nabbed them. ValuJet is suing TWA and Delta on antitrust charges. Nations Air Express, which operates out of Atlanta, almost didn't get off the ground when USAir backed out of an agreement to sell the fledgling operator a couple of jets. The reason, says Nations Air president Mark McDonald, is that Nations Air planned to fly into the carrier's fortress hub in Pittsburgh, Pennsylvania. A USAir spokesman says, "We never had a final agreement to sell them aircraft."
Most first-time passengers on these new carriers are understandably worried about the ability of an airline they have barely or never heard of to move its planes safely from point to point, particularly ones with weird paint jobs. In fact, the upstarts have an excellent safety record, but the stress of operating on true grit and high hopes may be beginning to show. Only last week ValuJet announced it was voluntarily cutting back plans to increase the number of planes in its fleet this year in response to the Federal Aviation Administration's investigation of five nonfatal mishaps involving its aircraft. In two recent incidents a ValuJet plane's landing gear collapsed on touchdown at Nashville, Tennessee, and one of its planes rolled off a runway in Savannah, Georgia.
At the very least, the new kids have added some adventure to flying. A TIME reporter traveling ValuJet from Washington to Atlanta had to wait 90 minutes for her baggage--not an uncommon problem, according to regulars. But consumers tend to be more willing to forgive service inconsistencies when they are saving big bucks in the process. On a recent Air 21 flight from Colorado Springs, Colorado, to Fresno, the Carrs, William, 82, and Virginia, 76, returning from a visit with their children, expressed themselves sold on discount air travel. Their $238 for two round-trip tickets was far less than the $935 they would have been charged by a major carrier. "We may give up the train and keep coming this way," said Mrs. Carr, whose husband is a retired railroad conductor.
Can the upstarts remain profitable by luring the Carrs off the train? A few can, says Michael Boyd, if they stick to their niches and avoid the delusions of grandeur that have led to so many smoldering ruins over the past 18 years. "What kills airlines is rapid growth," Boyd says. "It is not an arithmetic equation. When you go from two planes to four, it's not just doubling the difficulties. It's two to the fourth power in terms of the management requirements to run an airline."
Simplicity is what has made the upstarts successful in the first place--no complicated ticketing rules, no fancy service and no ads promising dreamy travel. The upstarts, like their passengers, accept the fact that flying today is usually a chore and at worst a nightmare. If, as they grow, they can continue to minimize complexity and hold down ticket prices, both parties will stay happy.