NYTimes.com Article: Budget Airlines Threaten United

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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



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