U.S. skies may grow crowded with discount airlines

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U.S. skies may grow crowded with discount airlines  =

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Sunday March 2, 12:05 PM EST =


By Jonathan Stempel

NEW YORK, March 2 (Reuters) - Airline passengers are on the prowl for goo=
d deals, but with a handful of U.S. carriers seeking to enter the discoun=
t market, even the cheap seats may prove tough to fill.

Unless the discount airlines can find ways to stand out from the crowd, e=
xperts predict they might blur together in passengers' minds, and some mi=
ght ultimately be doomed.

"The effective way to compete strategically is to position yourself diffe=
rently," said Roland Rust, a professor at the University of Maryland's bu=
siness school in College Park.

"When Southwest (Airlines Inc. (LUV)) came along, it cleaned up because i=
t had no competition," he said. "The problem is that if everybody (now) d=
oes that, you're entering a 'me-too' environment."

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Bankrupt UAL Corp.'s (UAL) United Airlines, Delta Air Lines Inc. (DAL) an=
d Midwest Express Holdings Inc. (MEH) have unveiled plans to start low-fa=
re carriers to compete with rivals that have gobbled up market share.

AMR Corp.'s (AMR) American Airlines Inc. also has said it was mulling the=
 idea.

But experts worry that even if more travelers buy cheap tickets, the new =
discounters might cannibalize each other's sales or fall short of Southwe=
st, JetBlue Airways Inc. (JBLU) and AirTran Holdings Inc. (AAI).

Joseph Schwieterman, a professor and transportation expert at DePaul Univ=
ersity in Chicago, expects less than 4 percent annual passenger mileage g=
rowth through 2010.

"Existing discount airlines are already expanding, and that limits the op=
portunities for new start-up airlines to quickly carve a niche," he said.=


PAYING PEANUTS

Delta's low-fare subsidiary, called Song, and United and Midwest Express'=
 concepts -- as yet unnamed -- face a daunting challenge.

The history of large U.S. airlines forming low-fare units is littered wit=
h the carcasses of Continental Airlines Inc.'s (CAL) Continental Lite, ba=
nkrupt US Airways Group Inc.'s (UAWGQ) MetroJet and United's own Shuttle =
by United, which was scrapped after Sept. 11.

But with passengers weary of tight security, hub airport bottlenecks, bad=
 food and skimpy legroom, airlines are recognizing that more travelers no=
w insist on paying peanuts -- even if they will not get any once on board=
=2E

"The customer base is furious (and) trying budget carriers in increasing =
numbers because the majors are not delivering price-for-performance on al=
most any dimension," said Robert Lamb, a professor at New York University=
's business school and expert on airline strategies.

By 2005, more than twice as many American and European travelers -- or ab=
out 40 percent of them -- might be flying low-cost carriers, Lamb said.

Michael Boyd, an airline consultant in Evergreen, Colorado, said the low-=
cost model works best only in big markets where airlines schedule many fl=
ights with quick turnarounds.

"The low-fare model can't be expanded ad infinitum," Boyd said. "If every=
one were like Southwest, 75 percent of the United States wouldn't be serv=
ed."

An abundance of low-fare carriers and dearth of premium service might als=
o turn off business or leisure travelers willing to pay extra for perks.

"Airlines are being very foolish," Rust said. "Someone, eventually, is go=
ing to have the guts to counterposition against this trend and be the 'hi=
gh-service' airline, charging a little bit more."

BIG CHALLENGE

Analysts have said United could have a tougher time than rivals in launch=
ing its low-fare unit, particularly because it will compete on some route=
s with United's mainline service.

Southwest Chief Executive Jim Parker said Delta's Song might succeed but =
would not threaten Southwest, while United's carrier might struggle. "It =
is certainly a big challenge to try to manage two cultures within a singl=
e company, to manage two sets of customer expectations," he said.

Schwieterman, however, was more optimistic about United's plan because of=
 its broad route network and ability to negotiate lower labor costs throu=
gh the bankruptcy process.

Low-fare travel does not have to mean bare-bones and still leaves room fo=
r experimentation, experts said.

Midwest Express, known for serving meals on real china, said its discount=
 carrier will not do the same but will still offer its signature fresh-ba=
ked cookies.

Yet cookies alone will not ensure success for the new discount airlines, =
NYU's Lamb said.

"It can work if the unions and the government effectively allow a two-tie=
r strategy, you subsect the market and you choose your shots," Lamb said.=
 "If everyone goes head-to-head, everyone loses."

(Additional reporting by Jon Herskovitz in Dallas) =



=A92003 Reuters Limited. =


Roger
EWROPS

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