12/02/12, 13:46:59 EST

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From Luxury to Bare-Bones: Discount Airlines Specialize

wsj.com

Together, high-brow Virgin America Inc. and low-brow Skybus Airlines Inc. show how the low-cost airline industry is maturing in the U.S.

One new start-up airline offers in-flight music videos, purple and pink mood lighting and flight attendants clad in chic all-black outfits. Another rolls up staircases to planes instead of covered jet-bridges, charges for water and puts its flight attendants in T-shirts advertising destinations.

Once, start-up airlines all tried to fly a similar path: just copy Southwest Airlines Co., with its short, frequent flights, open seating, simple pricing and friendly staff. But now being a Southwest clone isn't enough.

"Low-cost or new business models can come in amazing different variations and forms," says airline consultant Patrick Murphy, a former senior Transportation Department official. "I think there will be lots of new variants we haven't seen yet, for domestic and international service."

Low-cost airlines now carry more than 30% of domestic traffic in the U.S., and Mr. Murphy notes their growth rate has accelerated since 2000. More significantly, low-cost carriers compete with so-called "legacy airlines" -- the big network carriers that have been around for decades -- on about 70% of the domestic routes legacy carriers fly.

With so much discount-airline capacity in the skies, new entrants have to find a way to stand out -- either by offering fancy service at relatively cheap prices, or bare-bones service at ridiculously cheap prices.

"You either need to compete on price or compete on product. You can't do both," says B. Ben Baldanza, chief executive of Spirit Airlines Inc., a 15-year-old low-cost carrier that has recently recast itself as an "ultra low-cost carrier" that charges for virtually everything, including water. (Air is offered for free in the cabin, Spirit sometimes jokes.)

Virgin America, which flies mostly between California and New York, plies the high end by offering fancy leather seats and a first-class cabin at cheaper prices than incumbents like UAL Corp.'s United Airlines and AMR Corp.'s American Airlines. Like most airlines, Virgin America offers meals for sale in its coach cabin -- but you can order them on a touch-screen computer at your seat.

The heavy entertainment offering is also a revenue-generator for the airline. Virgin America, launched by British entrepreneur Sir Richard Branson, offers some 45 movie choices on demand on seat-back screens, at $8 each. The 20 music videos are free, as are some live television shows and music channels. But premium shows like "Heroes" and "The Office" are sold at $1.99.

Skybus has no entertainment system in the back of its seats -- it doesn't even put a pouch in the seat backs because they take time to clean (and having no seat-back pouch lets the airline squeeze seats closer together without taking up as much knee room). Skybus flight attendants roll carts down the aisle selling food, along with perfume, watches, chocolates -- anything to get a little more revenue. That allows the airline to offer 10 seats on flights for $10 a piece.

The evolution of Spirit provides a clear illustration of the industry trend, as the onetime nondescript discount carrier has remade itself into an ultracheap carrier with fares as low as a penny designed to get people on airplanes -- and then sell travelers additional goods and services.

Once a traditional start-up that flew older jets from Detroit and cities in the Northeast to vacation destinations, Spirit found itself in a no-man's land of low-cost carriers -- no better than the fifth- or sixth-largest discount airline in the U.S. So it decided a couple of years ago to try to become the biggest discount airline from the U.S. to Latin America and the Caribbean, where American dominates and faces little low-cost competition. Spirit still flies lots of people from New York, Detroit and other cities to Florida. But Spirit now also flies as far south as Lima, Peru. It phased out its older MD-80 jets and now flies a young, all-Airbus fleet.

With new owners moving in last year, Spirit also changed its approach to customer service to hold down costs -- it wants to be cheaper than other cheap airlines.

That means pinching seats closer together -- Spirit has 144 seats on its Airbus A319s, compared with 124 in the same airplane at US Airways Group Inc. or 132 seats in A319s at Frontier Airlines. Spirit charges extra for anything nicer or easier-checking bags, getting a bigger seat in the front of the plane -- even water.

On Oct. 1, Spirit stopped handing out free ice water to customers. Bottled water, coffee, soda, muffins, cookies and granola bars are available for $2; beer, wine and liquor $5. Checking one bag costs $10 ($5 if you buy in advance online); upgrading to what Spirit calls a "big front seat" costs about $45.

But the extra fees turn off some travelers. Gale Job was angry when Spirit charged her and her husband $40 to check four bags. "Checking bags is part of the service an airline should provide," she said, vowing never to fly Spirit again.

Spirit's average one-way fare is about $100, and it is collecting about $15 per passenger in extra revenue, Mr. Baldanza says. The airline believes it can push that a lot higher, charging for things like jumping the check-in line or expanding items for sale on board airplanes. Spirit is testing products such as aspirin, newspapers, magazines, crossword books, playing cards -- anything sold at a minimart.

"Customers will shift airlines over $5 or $10 when buying a ticket, but once they buy, they are willing to spend," Mr. Baldanza says. The whole idea is something like a movie theater, he says. Get people in, then sell overpriced popcorn. It's not nickel-and-diming, he says, if it comes with a really cheap fare.

The airline also sells memberships to a "$9 Fare Club," which costs $29.95 a year (you can join for an introductory $9). Spirit sends members email alerts about unadvertised cheap fares -- some $9, some even cheaper. Spirit says it has offered seats for only a penny each way (plus taxes and government fees) to various destinations. The program builds customer loyalty, brings in an extra $10 million a year in revenue and makes it harder for competitors to match Spirit's cheapest prices because they aren't published publicly. Yesterday, for example, Spirit launched a sale of $8 seats each way between Fort Lauderdale, Fla., and Grand Bahama on some off-peak travel days in December and January. The sale ends at midnight today.

Some customers don't mind Spirit's gimmicks as long as the fare is cheap. "The price was much lower than even JetBlue," said Jeff Markovich of Brooklyn, N.Y., who paid $178 round-trip for a recent flight from New York's La Guardia Airport to Fort Lauderdale. "I was a little shocked," he added, "that they wouldn't give you a glass of water for free."

Mr. Baldanza knows that his airlines no-frills policies will take some adjustment for customers. "We realize we're either trendsetters or jerks, depending on your view of the world," he said.

 Printable Version  | published Oct 16, 2007