NEW YORK (MainStreet) — After American Airlines filed for bankruptcy in November, the Southwest (Stock Quote: LUV) CEO Gary Kelly wrote a letter to his employees emphasizing what he believed to be the biggest make-or-break factor for airlines going forward: cost.
“All the majors from 1989 have gone bankrupt. Pan Am. Eastern. Braniff. Continental. America West. TWA. US Air. United. Delta. Northwest. And now, American,” he wrote at the time. “Why? Not because of Customer Service, but because of high costs. Great Customer Service cannot overcome high costs. That is the imperative I wrote about a decade ago: low costs."
As Kelly sees it, the only way forward for the remaining airlines in the U.S. is to become more efficient and bring down operating costs. In effect then, large nationwide carriers like American, Delta (Stock Quote: DAL) and United – the so-called legacy carriers – must begin operating more like low-cost airlines. Or as Kelly put it, “The old legacy airlines are dead and buried.”
Traditionally, there has been a firm distinction between legacy carriers, which airline analyst Rick Seaney refers to as airlines with operating costs of roughly 11 to 13 cents per mile, and low-cost airlines that have costs of about 8 to 9.5 cents per mile. These low-cost carriers were usually bootstrap operations that relied on cheap labor, inexpensive jet leases and no-frills flight experiences to keep costs down and offer insanely low prices to travelers. Now, the legacy carriers are relying on some of these strategies just to survive.
Of course, if you told travelers that major airlines like Delta and United were now considered “low cost,” many would probably laugh at the thought. For most consumers – or at least those who have been flying for more than the past decade – the true low-cost carriers were those that flew a limited number of routes for a cost that often seemed closer to bus fare than airfare. These included carriers like Independence Air, Skybus, People Express, New York Air and USA 3000 Airlines, to name a few. They tended to be small startups with short life spans – Independence Air and Skybus barely lasted two years – and the majority have since gone out of business or, in the case of USA 3000, are about to.
“History is littered with these low-cost airline start-ups,” says George Hobica, an airline expert and founder of Airfarewatchdog.com. “They were more likely to fail than not even when money was loose, and money is tight now.”
How Low-Cost Airlines Are Different Today
The two most prominent low-cost carriers operating today in the U.S. are arguably Spirit and Allegiant Air, but there is one major difference between these airlines and the low-cost carriers of old: more fees.
“The only real low-cost carriers now are high-fee carriers,” Hobica says, and for some, that may undermine their very image as low cost.
Spirit, in particular, has become notorious for relying on often outrageous extra charges to gin up revenues, whether it’s a $30-$45 fee for carry-on luggage or an additional fee for not paying that fee far enough in advance. Previous low-cost airlines like Skybus and People Express had fees of their own, but not to quite the same degree. The net effect, though, is that by introducing as many fees as possible, they can still promise an ultra-low base fee that significantly undercuts the competition. (The same is true if you think about low-cost airlines abroad, most notably Ryanair.)