The New Jet Entrants Versus the Regional Partners?

Journal of Aviation/Aerospace Education & Research Volume 6 Number 1 JAAER Fall 1995 Article 2 Fall 1995 Battle 2000: The New Jet Entrants Versus the Regional Partners? Alan R. Bender Follow this and additional works at: https://commons.erau.edu/jaaer Scholarly Commons Citation Bender, A. R. (1995). Battle 2000: The New Jet Entrants Versus the Regional Partners?. Journal of Aviation/Aerospace Education & Research, 6(1). Retrieved from https://commons.erau.edu/jaaer/vol6/ iss1/2 This Forum is brought to you for free and open access by the Journals at Scholarly Commons. It has been accepted for inclusion in Journal of Aviation/Aerospace Education & Research by an authorized administrator of Scholarly Commons. For more information, please contact [email protected]. Bender: Battle 2000: The New Jet Entrants Versus the Regional Partners? FORUM BATTLE 2000: THE NEW JET ENTRANTS VERSUS THE REGIONAL PARTNERS? Alan R. Bender Editor's Note: Articles printed in the Fomm section are non-refereed and express solely the opinion of their authors. An airline economics war that will determine the future pattern of air service in many U.S. short- and intermediate-haul markets is under way. The megacarriers are eliminating mainline jet service on these routes due to their high costs, inappropriate operational patterns, and restrictive labor agreements. To the dismay of many passengers, regional partner carriers are filling the voids by raising fares and replacing jets with "undesirable" turboprop aircraft. This paper investigates the problem's underlying causes and describes the looming battle between new entrant jet carriers and regional partner airlines for dominance in these important medium-size markets. BACKGROUND argument in the mid-1970s deregulation debate and the Deregulation's promise of efficient, low-fare commercial inspiration for the founding of Texas-based low-cost airline service has been, to date, only partially fulfilled, leader Southwest Airlines. especially in U.S. second-tier markets. The proliferation Although the California crisis was primarily of new entrant jet airlines in the early 1980s was followed precipitated by the acquisition of historically low-cost by nearly as many bankruptcies. In addition, the well- PSA by high-cost USAir, the problem was mitigated in a known trunk, local service, and intrastate jet airlines that relatively short time by the major deployment of had survived the early deregulation years were themselves Southwest Airlines' equipment and other resources into the aggressors, or victims, in a massive consolidation of the California intrastate market. carriers that erased the names of some of the most well- However, most other U.S. states and regions have known jet airlines in North America (Western, Republic, not, until quite recently, been so fortunate; their low-fare Ozark, PSA, and Air Cal, among others). services have waxed and waned along with the fortunes By 1990, only a small number of deregulation- and, more typically, misfortunes of the new entrant jet spawned jet carriers had survived (Jordan, 1995). More operators. The abundant though now defunct startup importantly, most U.S. cities were left without any carriers of the 1980s have been supplanted in the 1990s unrestricted low-fare jet service, save the score or so by a new generation of low-cost, low-fare airlines cities in the southwestern United States served by (Jordan, 1995). Many cities that lost unrestricted low-fare Southwest Airlines. In fact, the situation in 1990 was so jet senice in the late 1980s are again receiving flights dire that the California State Senate seriously debated from low-cost airlines. In fact, the competition in many whether to sponsor a state-owned jet airline to return markets has become fierce. In late 1994 American California intrastate ticket prices to reasonable levels Airlines reported that it was competing with low-fare jet ("California Senate Unit," 1990). This predicament was carriers in 40% of its domestic markets, up from 25% in particularly ironic because successful and time-tested low- early 1994 and only 8% in early 1993 (O'Brien, 1994). fare California intrastate jet service was a crucial According to a 1994 study by the aviation consulting firm JAAER, Fall 1995 Page 7 Published by Scholarly Commons, 1995 1 Journal of Aviation/Aerospace Education & Research, Vol. 6, No. 1 [1995], Art. 2 Battle 2000 Simat, Helliesen, & Eichner Inc. (SH&E), low-fare for an airline ticket, any airline ticket. With respect to airlines were generating about 24% of the 200-400 mile travel for company business, the literature is replete with market available seat-miles (ASMs) in 1994, case studies of the thousands of U.S. companies that have approximately double their 1992 share (Moorman, 1994). cut middle management positions, begun close For the nine-year period between 1985 and 1994, low- monitoring of company travel, entered into negotiations cost carriers increased their share of total (all markets) with airlines for the lowest possible fares, and purchased U.S. domestic traffic from 3% to 13.5% (Banks, 1994). videoconferencing systems, all of which can severely cut The overall trend is unmistakable, portending, perhaps, air camer revenues (Apogee Research Inc., 1994; Bryant, a watershed in the deregulated air transportation 1994; Raphael & Starry, 1995). It is worth noting that industry. business travelers have traditionally accounted for 34% Others have studied the counter-cyclical nature of of the people flying on U.S.-registered airlines but an startup airline activity (Harraf & Vasigh, 1994). This estimated 70% of passenger revenues (Stephenson & theory states that when economic conditions are poor, Fox, 1992). In the 1990s these percentages have the public may be unwilling or unable to purchase full- apparently changed, and every major U.S. airline has fare airline transportation. The theory also claims that jet gotten the message: reduce operating costs and therefore transport aircraft are easily obtained and relatively cheap average fares or cease to exist. to purchase or lease during economic downturns. Finally, It is interesting to note that few if any "experts" the theory purports that since many commercial pilots predicted the current situation as recently as five or six are out of work during recessions, they may be willing to years ago. Warren Buffett's monumental 1989 investment work for relatively low wages at unproven companies in USAir is evidence of the prevailing and absolutely during such times. Conversely, the theory states that inaccurate wisdom at that time. One can only conjecture when economic conditions improve, the public will be that had U.S. corporations not been forced to more likely to purchase full-fare airline transportation; in dramatically trim their expenses and operate their addition, during such growth periods the supply of companies much more efficiently from approximately aircraft and pilots dries up. The result is the gradual 1990 forward, then American, Delta, United, and others demise of startup airlines during economic growth might have irrefutably won the deregulation battle with periods. their well-documented late 1980s practices: mega- Although this hypothesis adequately explains the mergers, hub airport creation and monopolization, surfeit of planes, pilots, and startup jet airlines during corporate ubiquity (servicing all 50 states), code-sharing, both the early 1980s and the early 1990s (plus, the frequent-flier bonuses, commission overrides, and dramatic contraction in new entrant services in the late sophisticated computer reservations and yield 1980s), it cannot account for the pro-cyclical pattern of management software. However, in the mid-1990s the mid-1990s. Between 1993 and 1995 significant environment some of these practices have apparently economic expansion was accompanied by tremendous been neutralized or otherwise successfully challenged by growth in low-cost service by new entrant jet airlines new competition, particularly in short-haul markets. (Jordan, 1995). Although only anecdotal evidence exists THE STATUS OF THE SOUTHWEST CHALLENGE to explain this trend, there is a virtual mountain of non- The outstanding financial performance of low-cost, low- scientific literature, virtually all pointing toward a secular fare leader Southwest Airlines during the recent change in air transportation's basic demand economic downturn, when the U.S. airline industry as a characteristics (Aviation Systems Research Corp. whole lost nearly $13 billion, is convincing evidence that [ASRC], 1993; Banks, 1994; Bender, 1993; Phillips, 1994). a major jet airline can attract new passengers and operate The upshot is clear: In the budget conscious 1990s, profitably even in a shrinking economy. Equally neither leisure nor business passengers may be willing to noteworthy is that Southwest has been financially pay any more than what they consider a very fair price successful while paying its employees salaries competitive JAAER, Fall 1995 https://commons.erau.edu/jaaer/vol6/iss1/2 2 Bender: Battle 2000: The New Jet Entrants Versus the Regional Partners? Battle 2000 with those of its larger brethren while also operating one significantly lower their costs for short-haul operations of the newest fleets of jet airplanes in the airline irrespective of direct competition from Southwest business. Airlines or any other low- cost, low-fare jet camer As has been reported in nearly every business (Phillips, 1995). There is strong evidence today that for publication in the United

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