Given the airline industry's fundamentals--rising prices and full planes--low-priced airlines should be in first-class condition. They're not. In the aftermath of the ValuJet disaster last year, air travelers began to redefine "no frills" airlines as "no safety" airlines. In the six-month period after the crash, their bookings went into free fall, taking their stock prices along for the ride.
Launching a carrier into this turbulence isn't much more difficult than flying a kite in a hurricane. Yet Martin Shugrue, no stranger to troubled airlines, insists that Pan American World Airways, a new carrier with an old name, can compete as a low-cost, full-service discount carrier. "We'll make money with a high-quality product at an affordable cost," Shugrue says. Pan Am's promise is cheaper fares without the cramped seats and the bag of peanuts masquerading as in-flight service. Says he: "It's not rocket science."
No, rocket science is predictable, and there aren't other rocket companies waiting to shoot yours out of the sky, as is happening to the discounters. Of all the newer crop of start-ups (those in business since the early 1990s), one of the few winners is Reno Air Inc., which posted a net profit of $2 million last year. The five sizable publicly traded discount airlines lost a combined $58 million in the first quarter of 1997, while most big carriers enjoyed sky-high profits. "You have to find a niche and stay with it," says Bob Reding, Reno's president and CEO. "A lot of start-ups try to grab too much, and they overextend themselves."
Despite the robust economy, the discounters are facing a dual predicament that is stalling their development. With a small number of planes flying limited routes, the upstarts can't tap the lucrative business-travel market. Instead, they're forced to low-ball fares to attract leisure travelers, a strategy that works only when planes are flying full--and their bigger competitors will do anything to make sure that doesn't happen. "It's very hard to make money feeding at the bottom of the barrel," says Perry Flint, executive editor of Air Transport World, a trade paper.
And those discounters who fly fearlessly into business markets risk heavy counterattacks. Giants like American, United and Delta are becoming increasingly aggressive in defending their hubs, even though their planes are running at more than 70% of capacity. The idea is fundamental and ruthless: don't let a competitor get a toehold in your most profitable turf.
How tough is it? Western Pacific, a two-year-old company based in Colorado Springs, Colo., is a good example. Last year Western Pacific chalked up a $23.7 million net loss and in the process jettisoned both its management and its business plan. The company tried to avoid a head-on battle with United Airlines in its Denver hub. But Western Pacific was also missing out on the flush business market that connects there. "A lot of low-fare carriers make the mistake of trying to hide in the weeds," says Western Pacific CEO Robert Peiser, former CEO of FoxMeyer Drug Co., who took over last December. "But in the end, you always get found."