Low-Cost Airline Startup Sees Promise in Smaller Airports

Last week brought news of another new U.S. airline startup, the brainchild of Andrew Levy, United’s former chief financial officer who before that co-founded and ran Allegiant. This follows David Neeleman’s return to the U.S., with a startup targeting secondary airports with newly ordered Airbus A220s.

Levy’s new airline, too, will be an ultra-low-cost carrier. Last summer, he purchased a small charter airline called XTRA Airways, which already has an FAA operating license and a team of operations and safety executives in place. That means the new business model can be ready to launch as early as the fourth quarter of this year, according to an investor solicitation document seen by Skift Airline Weekly.

What exactly is the new business model? It will indeed be ultra-low-cost, a term that’s come to imply densely configured airplanes, quick aircraft turn times, intense aircraft, and airport gate utilization, high labor productivity, heavy outsourcing, few onboard amenities, low base fares, and heavy reliance on ancillary revenues. Levy’s new airline, more distinctly, will target all categories of travelers, which implies not just leisure and family-visit travelers but also those journeying for business. It cites successful low-cost carriers in Europe that have targeted multiple customer segments, an apparent reference to Ryanair and easyJet, both of which carry a lot of short-haul business fliers.

The new airline will be “utilitarian but reliable,” arguing that incumbent ultra-low-cost carriers in the U.S. have “a poor reputation for customer service and reliability. This leads them to compete largely against each other for a relatively modest segment of the market characterized by highly price-sensitive leisure and discretionary travelers who have no other affordable air travel options.” They lack, furthermore, the appropriate products, service, and flight schedules for all but the most highly price-sensitive fliers.

XTRA thinks the U.S. low-cost carrier sector is undersized. But its hints at targeting business fliers seem to suggest its vision is some sort of combination of Southwest and Allegiant, with the former’s appeal to short-haul business travelers but a less extreme version of the latter’s approach to cost-cutting and ancillary selling.

Ignored by Big Three

Where will the new airline fly? It’s not revealing any network details yet, other than highlighting an emphasis on secondary airports, echoing Neeleman’s approach. These airports will be in large metro areas, which in Neeleman’s initial business plan means airports like Providence, Rhode Island (in the Boston metro), and Gary, Indiana (near Chicago). Secondary airports, of course, have more room for expansion, experience fewer delays, and schedule disruptions, and are easier for travelers to navigate.

They’re also largely ignored by the Big Three carriers American, Delta, and United, which have in recent years retreated to their primary-airport mega-hubs.

Secondary airports are also less costly to serve, not just because fees and charges tend to be lower but also because it’s easier to execute fast-aircraft turns. The cost of serving primary airports, meanwhile, will likely increase as congestion worsens and bills come due for big expansion and modernization projects.

Consistent with its apparent targeting of business fliers, XTRA (which will have a new name) won’t be too aggressive when it comes to ancillary charges. Yes, it will charge for assigned seats and in-flight concessions. But it won’t have excessive charges for these items and won’t have any “gotcha” charges. It stresses convenient flight schedules, operational reliability, customer service, and “ease of use” — making it simple and straightforward to book a ticket.

Use of secondary airports is one way in which XTRA plans to quickly achieve unit costs equal to or lower than those of other U.S. low-cost carriers. That means, by inference, unit costs far below those of non-low-cost carriers. XTRA’s workforce will be non-union. It will make use of information technology. And it will charge passengers — including what they pay for ancillaries — roughly 40 percent below on average what they’re paying now.

Neeleman’s new airline will likewise look to undercut rivals, if not with an ultra-low-cost model, then one nevertheless heavy on cost efficiencies, including service from secondary airports. Both startups, indeed, identify a common opportunity born of primary airport congestion. In the eyes of both Neeleman and Levy, this congestion, following years of heavy traffic growth but limited airport expansion, has led to roadway congestion, overcrowding, flight delays, and an overall degradation of the passenger experience. Just as important, this congestion is increasingly costly for the airlines that fly there.

Opportunity on Labor

Incumbent U.S. airlines, meanwhile, are also seeing their labor costs increase substantially, with the Big Three on the verge of another round of pilot negotiations. That suggests an opportunity for a startup with a junior workforce and a rapid expansion plan, one that quickly gains economies of scale. What’s more, load factors are at record highs, fares are rather high following five giant mergers since 2008, and every major U.S. airline is profitable, collectively generating $18 billion in operating profits last year alone, good for a 10 percent operating margin.

In four years to 2017, as Neeleman argues, the U.S. economy grew 34 percent, but the number of domestic airline seats didn’t grow at all. At smaller airports in smaller markets, seat counts shrunk, in some cases sharply. Consolidation, his business plan notes, has reduced options while creating a “comfortable oligopoly” of carriers with high fares and higher-than-ever profits. No wonder why even notorious airline skeptic Warren Buffett now owns a big chunk of the U.S. airline business. Surely there’s room for other airlines.

Or is there? It’s still an open question whether enough passengers want to fly from secondary airports. They might be less congested, but they also have fewer amenities (lounges, rental car options, and restaurant concessions). They’re also by definition less convenient for people living and working close to city centers.

Incumbents have massive economies of scale and a high tolerance for short-term losses on limited portions of their giant networks — in other words, no second thoughts about dumping lots of low-fare seats into markets the startups choose to attack. Another challenge for the startups: a tight labor market in which even junior pilots won’t come cheap.

Aircraft Conundrum

And then there’s the similarly tight aircraft market. For Neeleman, that’s no longer a concern. Early this year, he finalized a deal first announced at last year’s Farnborough Airshow, involving 60 A220-300s. The first won’t arrive until 2021, though its original business plan calls for flights to launch no later than summer, 2020, presumably with leased planes. And XTRA? It currently has a lone B737-400.

But its business plan envisions a fleet of five planes at the end of this year, 14 planes at the end of next year and 45 planes at the end of 2023. By then it hopes to be flying 12 million passengers a year and earning net profit margins exceeding 20 percent. Levy tells NPR’s Here & Now that he’ll use “new or nearly new” aircraft. According to Bloomberg News, the choice might be B737-800s, densely configured with 189 seats.

XTRA’s fate, under whatever name it calls itself, will be influenced by factors beyond its control, including aircraft prices, fuel prices, and the health of the U.S. economy. The ferocity of incumbent counterattacks will likewise be a wild card. The bet on its success though, is a bet on the $100 million war chest it plans to build before launching, Levy’s impressive credentials from Allegiant, and the mere fact that Spirit, Frontier, and Allegiant are today three of the most profitable airlines anywhere in the world. If you’re going to start a new airline, one might reasonably conclude, start an ultra-cost carrier in the U.S.

The apparent attempt to capture business traffic, perhaps at Southwest’s expense, is an additional wrinkle with less of a track record. It’s also true that the success of Spirit, Frontier, and Allegiant all rest heavily on the Florida and Las Vegas markets — markets that are getting crowded. Neeleman’s new airline might have a heavy Florida presence too.

Should incumbents be worried? Maybe not by either of these two startups in isolation. But their roughly simultaneous launch really does seem to signal a new era of fragmentation, at the same time JetBlue prepares to fly transatlantic and as Southwest grows its Hawaii presence. JetBlue itself its bracing for Neeleman’s entrance into transcontinental markets.

The low-cost carriers are increasingly battling each other, not just in Florida but also cities like Raleigh-Durham, N.C., and Austin, Texas. Southwest and Alaska are still bloodying each other in California. Boston is another battleground. The Tokyo market is about to see lots of new capacity with new slot availability. Not that there was ever a time without bruising competitive battles. But as the new decade approaches, there’s a feeling of fragmentation.

Editor’s Note: This is a version of a story that was first published in the April 8 edition of Skift Airline Weekly.