This article from NYTimes.com has been sent to you by psa188@juno.com. Budget Airlines Threaten United December 11, 2002 By EDWARD WONG CHICAGO, Dec. 10 - One of United Airline's biggest challenges as it restructures itself under bankruptcy protection is to stanch the flow of passengers to profitable low-cost carriers, which have steadily eaten away at its market share. In the last two days, United has hinted at strategies it might adopt: taking another stab at starting its own low-cost carrier, for example, or overhauling its fare structure to match the simplicity of the pricing offered by Southwest Airlines and its kin. "The business will change so dramatically," Glenn F. Tilton, the chief executive of United, said in an interview. "There will be more people like the people who created JetBlue coming into the industry. I am expecting a much more competitive landscape." But industry experts say that United and the other carriers with hub-and-spoke networks - including Delta Air Lines, which expects to start running a new low-cost carrier next spring - will continue to have a much harder time competing against the low-cost airlines than they are willing to admit. . For one thing, United is bound to shrink in bankruptcy, in part by cutting flights, possibly creating more opportunities for low-cost carriers to increase service and steal market share. On a more basic level, industry experts say, the big airlines have simply never shown the business acumen and flexibility - nor created the kind of excitement over their products - that have worked so heavily in favor of Southwest and the carriers it spawned. Those experts also say that no matter how much the major airlines are able to cut costs, they will never pare their expenses as much as the low-cost carriers have. What is more, as United toys with cutting back service to save money in Chapter 11, it could look more and more like the low-cost carriers, but without the same cheap fares, some experts say. A filing in bankruptcy court showed that McKinsey & Company, a strategic consultant for United, had recommended that United make deep cuts to its corporate travel contracts, which could give companies incentive to book more passengers on low-cost airlines. United has begun its cost-cutting efforts by starting talks with its unions. Executives met today with union representatives in Boston to go over operations in bankruptcy, although contract talks might still be some time away, said Joe Tiberi, a spokesman for the machinists' union. United's largest unsecured creditors will also be meeting in a Chicago hotel on Friday in preparation for the court's assembly of the 12- to 15-member creditors' committee, which will oversee the company's major business decisions. The low-cost airlines, meanwhile, are unlikely to give United much room to recover. In recent years, they have moved quickly into markets that were abandoned by larger rivals during financial belt-tightening. Some carriers say they are watching what happens at United to see if there will be an opportunity to add some routes. "As the people at United have their current troubles and they look to downsize, what will happen is they will pare back routes, they will retire equipment, and that will create market opportunities for carriers like AirTran," said Tad Hutcheson, the marketing director at AirTran Airways, a low-cost carrier based in Florida. "We will evaluate the markets. We will look for underserved markets where the fares are too high." At one of United's hubs, Washington-Dulles International Airport, AirTran already competes indirectly with United on flights to Florida. If United were to curb service on those routes, then that could create "tremendous opportunities" for AirTran, Mr. Hutcheson said. AirTran, which expects to increase its capacity by 20 percent this year over 2001, has had a history of swooping into a market when larger airlines retreat. A year ago, it acquired five gates at Baltimore- Washington International Airport that US Airways had used for MetroJet, a failed low-cost division. AirTran now runs 25 departures from that airport because it was "able to capitalize on the passengers that US Airways had," Mr. Hutcheson said. After US Airways filed for bankruptcy protection last August, AirTran added flights from Baltimore and from Philadelphia and Pittsburgh, two US Airways hubs. In Denver, another United hub, Frontier Airlines will be watching United closely. A nine-year-old low-cost airline, Frontier has the second-largest market share at that airport, behind United. Airport statistics show that as United's market share in Denver shrank from 62.3 percent in October 2001 to 55.5 percent in October this year, Frontier's share increased by 4 percentage points. This year, Frontier opened service to 13 cities and expects to increase its overall capacity by 10 percent to 15 percent this year compared with 2001. "No carrier has ever built a great business plan on the back of another carrier's bankruptcy," said Elise Eberwein, a Frontier spokeswoman. "That said, yes, you're going to look at things United does." United even faces a threat from Southwest at United's home hub, at O'Hare International in Chicago. United flies into O'Hare, but Southwest's operations at Midway Airport are close enough for that airline to draw passengers who might defect from United. Southwest increased operations there before when a competitor went bankrupt: It added gates in 1991 when Midway Airlines filed for bankruptcy protection, and soon had more than 100 daily departures. JetBlue, the second-largest low-fare carrier, said it did not expect United's reorganization to have a big impact on its business. Unlike some other low-cost carriers, JetBlue generally does not directly overlap with United at any hubs. And JetBlue's expansion is limited by the number of new Airbus A-320's it is scheduled to get - 36 this year, and 50 next year. But United and JetBlue do compete directly on flights between Dulles and Oakland, Calif. "They might decide that's a fruitless endeavor," said David Neeleman, JetBlue's chief executive. Mr. Tilton, United's chief executive, said that his company's parent, the UAL Corporation, might start another low-cost carrier, even though its last attempt at low-cost service, Shuttle by United, failed. Shuttle by United tried to compete with Southwest in California, but it consistently lost money, largely because its executives never ran it with the same cost advantages that bolstered Southwest. Delta Air Lines, which has been running a similar low-cost service called Delta Express, plans to introduce a new low-cost subsidiary next spring, one that will initially use 36 Boeing 757's to compete with AirTran and JetBlue on routes between four cities in the Northeast and Florida. But industry experts remain skeptical that such efforts can succeed. "Competing against these guys is very, very difficult," said Darryl Jenkins, director of the Aviation Institute at George Washington University. "They will always have lower costs. Their people don't have surly attitudes. The more we paid employees at network carriers, the more disgruntled they became." Even if low-cost airlines expand as United struggles, however, they may run into problems. Generally, the more profitable an airline, the more its employees ask for pay or benefit increases, especially if those workers are unionized. Newer airlines like JetBlue will also incur higher costs as their fleets age. And as the low-cost carriers expand, they could begin competing directly against each other on routes. Still, they can always appeal to the overriding priority of many passengers: low fares. "We've seen all the low-cost carriers pick up market share over time," said Thom Nulty, chief executive of Navigant International, the corporate travel management company. "The major driver is price." http://www.nytimes.com/2002/12/11/business/11AIR.html?ex=1040620696&ei=1&en=8f8fe8864563d99f HOW TO ADVERTISE --------------------------------- For information on advertising in e-mail newsletters or other creative advertising opportunities with The New York Times on the Web, please contact onlinesales@nytimes.com or visit our online media kit at http://www.nytimes.com/adinfo For general information about NYTimes.com, write to help@nytimes.com. Copyright 2002 The New York Times Company