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Fare play
Airports without
discount airlines seek a competitive advantage
by
Chip Jones
Virginia Business
February
2005
Amid
the updrafts and downdrafts of the airline industry
— with US Airways recently teetering on the brink
of liquidation and other carriers like United sputtering
along in bankruptcy protection — consider the
workings of a little-known economic principle: the banana
factor.
Jacqueline
Shuck, executive director of the Roanoke Regional Airport
Commission, hit upon this concept as she tried to explain
the forces buffeting regional airports. Small and medium-size
market airports in Roanoke, Lynchburg, Charlottesville
and Richmond all face the loss of business that comes
when bargain-hunting passengers flee to other airports
to save a few hundred bucks for that last-minute business
trip to Atlanta, New York or L.A. It’s called
“leakage,” and it’s a problem for
which there are no easy answers. In fact, about the
only solution is to land a low-fare carrier —
as Newport News and Norfolk have — or to combine
discount carriers and high-volume service (as in Northern
Virginia at Reagan National and Washington Dulles International
airports).
As
the airports see their core passenger base — business
travelers — looking for ways to trim ticket costs,
they’d like nothing better than to order up a
discount airline. But just as food vendors are the ones
who stock many supermarket shelves, air service is provided
by the airlines. “The frustrating thing is that
the community looks at us as the actual service provider,
when in reality, we are only the facility. … It’s
sort of like you’re in the grocery business, but
you can’t buy the bananas,” says Shuck.
Federal regulations strictly forbid airport managers
from playing favorites with airlines. “I can’t
go negotiate a deal with United Airlines to bring service
into Roanoke, especially at some particular fare,”
explains Shuck.
In fact airport executives have little leverage in placing
orders with the hottest banana-vendors on the airline
block — Southwest, JetBlue, AirTran and other
low-fare salesmen. Ever since Congress deregulated the
airlines more than 20 years ago, the free market has
been at play, sometimes for better (low fares and more
choices for consumers), sometimes for worse (high fares
and undependable service).
So how can regional airports compete? For when it comes
to factors that determine an area’s business climate
— whether it’s attracting or retaining employers
— the quality of air service is key. Just ask
any bedraggled business traveler who’s had to
drive two or three extra hours to another airport to
get a better deal on a ticket, or an economic development
recruiter who has just lost a prospect to another city
with better fares.
Last year many airport directors and commissioners became
proactive, raising money or lobbying for federal grants
to help create war chests to do battle in the heated
fare wars.
During 2004, fares took wild swings, with prices as
low as $29 one-way from startups like Independence Air,
which lifted off last summer with so much promise at
Washington Dulles International Airport only to see
revenues slump. By year’s end, Independence —
like the older “legacy” carriers”
— was staring down the dark maw of bankruptcy
court protection.
US Airways, already fighting for its life, suffered
an operational meltdown in Philadelphia at Christmas
as baggage and ticket handlers called in sick for the
holiday. This Grinch-like move snarled the entire East
Coast air system, leaving thousands of travelers stranded
and countless bags lost. It also prompted analysts to
wonder whether this was an early death knell for the
Arlington-based airline.
But the airline gained some breathing room in mid-January.
A federal bankruptcy judge approved the extension of
an interim financing deal between US Airways and the
federal Air Transportation Stabilization Board until
June 30. That is when the airline hopes to emerge from
Chapter 11 bankruptcy. Before the judge’s decision,
US Airways had obtained concessions worth $800 million
annually from its unions. The airline had warned that
it would have been forced to liquidate without the extension.
The extension also is expected to help the airline seal
a leasing and financing deal with General Electric Co.,
which would improve US Airway’s liquidity. The
airline still must find an investor willing to pump
$250 million into a company that has sought bankruptcy
court protection twice since 2002.
With such a constant state of flux, airport leaders
have had to be as nimble as an NFL player. Unless they
could find a way to tackle a low-fare carrier, they
were left out in the cold.
Consider the travel game being played out in the state
capital: Richmond International Airport estimates that
nearly 845,000 passengers a year flee to six other airports
in the region. And, until recently, those business travelers
that had to fly out of their hometown airport wound
up paying dearly for the privilege. In early 2004, the
federal transportation department said Richmond ranked
fifth for high-ticket prices among the nation’s
airports. “Historically, we’ve been the
one subsidizing the other airports,” says Jon
Mathiasen, Richmond International’s chief executive
and president.
Mathiasen and his bosses at the Capital Region Airport
Commission decided to attack the problem head on. After
a near miss in 2001 —when discount king Southwest
Airlines announced plans to come to the capital only
to postpone them because of 9/11 — Richmond’s
air service created a chronic case of civic heartburn.
Among corporate recruiters, it ranked just after the
city’s high crime rate in the list of things that
deter companies from moving to the area. Companies who
picked up their computers and fax machines and moved
to the Raleigh-Durham area to do business near a low-fare
airport also blamed Richmond’s air service.
Gregory Wingfield, president of the Greater Richmond
Partnership, the area’s economic development organization,
says he’ll never know how many companies have
shunned Richmond over the years because of its high-altitude
fare structure. But he knows the problem scared off
one corporate prospect. When Louisiana Pacific Corp.
— an Oregon-based paper company — was looking
to move its headquarters last year, Richmond made the
list of three finalists, along with Nashville and Charlotte.
“You’d think Charlotte would be competitive
because of its airport, but the ticket prices there
were actually higher” than Richmond’s, says
Wingfield. Nashville eventually won the relocation sweepstakes
because of its lower fares. “It was a deal-breaker,”
Wingfield says.
Such lost opportunities sent blood pressure soaring
among members on Richmond’s airport commission,
especially Beverley “Booty” Armstrong, a
principal of CCA Industries Inc., which owns The Jefferson
Hotel. He became a driving force behind the airport
commission’s decision to send its top gun, Mathiasen,
out on a mission to bring down the fares.
Something had to be done, Armstrong explains, because
“the airline industry is so volatile.” The
veteran executive knew that business negatives could
be turned into positives. Richmond’s high fares
may cause people to flee the airport now, but they also
prove that Virginia’s capital is ripe for the
plucking for a low-fare carrier or any one of the airport’s
six “legacy” carriers willing to drop prices
in return for a larger chunk of the travel pie.
Working with the Greater Richmond Chamber of Commerce,
Richmond International managed to secure a $950,000
federal grant that could be used to sweeten the pot
for any airline willing to make a dramatic fare cut
at the airport. Coupled with matching funds from the
Chamber, airport chief Mathiasen is armed with a war
chest of more than $2 million to finance his crusade.
“He’s been put on this thing full time,”
Wingfield says. “That’s his job. So to me,
this really underscores the seriousness that everybody
is placing on getting a low-cost carrier, or a restructured
legacy carrier, in here with lower costs.”
The campaign continues. In mid-November, Richmond claimed
a significant victory after Delta Air Lines announced
it would drop business and leisure fares from Richmond
to nine key cities. Delta officials committed to cutting
half its walk-up fares of more than $1,000, driving
them down to the $450-range in two key markets, New
York and Atlanta. Armstrong called Delta’s fare
restructuring “a good first step,” adding,
“I don’t think it’s the end of the
hunt.” (Delta announced a nationwide plan in January
that would cut its most expensive fares and eliminate
many restrictions.)
Richmond’s hunt for fare relief illustrates the
kind of aggressive strategy needed in today’s
tenuous business climate. As US Airways’ fate
has been sorted out in bankruptcy court, Virginia airport
officials have been on guard, thinking about what they
would do if the airline was permanently grounded. They
were encouraged by news of the extension of US Airways’
interim financing deal. Bryan Elliott, executive director
of the Charlottesville-Albemarle Airport, says that
he is cautiously optimistic that the airline will emerge
from bankruptcy and reinvent itself. The development,
he notes, would be a great benefit for cities by served
the airline along the East Coast.
US Airways commands about 50 percent of the total passenger
base in Charlottesville, with 16 of 26 daily departures.
Its market share rises higher in Lynchburg (60 percent),
and is about 40 percent in Roanoke and 30 percent in
Richmond.
The turbulence in the airline industry isn’t limited
to US Airways, with its high cost structure and bruising
competition from Southwest Airlines in Philadelphia.
After losing billions of dollars in revenue after the
2001 terrorist attacks crippled the industry, every
one of America’s commercial airlines has been
buffeted by market forces the likes of which veterans
say they’ve never seen before. The downdraft actually
began before the 9/11 attacks, Elliott says. “The
industry has been in a constant state of flux since
late 2000, when the airlines started seeing a downfall
in capacity to attract the high-yield business traveler.
Moving forward has been one calamity after another.”
Mark Courtney, airport director at Lynchburg Regional
Airport, expects things to clear up by mid-2005. “I
almost feel that we’re in a situation where things
for us are going to be quite a bit better or quite a
bit worse.”
What’s clear is that airport directors need to
start analyzing the motives of those “banana suppliers”
— the airlines.
***
Darryl
Jenkins, a visiting professor at Embry-Riddle Aeronautical
University in Florida, says, “I have been in this
business since 1971 and have never seen it as intense
as it is right now. I have never seen the revenue environment
as weak as it is.”
The days of courting an airline and giving it time to
build up popularity in a new market are as antiquated
as an eight-track tape. “There’s no more
saying we’ll start service, and in two years perhaps
we’ll make a profit,” Richmond’s Mathiasen
says. “They want instant revenue-producing operations.”
Yet an overpriced market like Richmond actually can
prove attractive, says Jenkins, who’s a consultant
for the airport. “You’re a wealthy community
ripe for the plucking,” Jenkins says, “You
have very successful, large businesses that fly to other
large cities, with no low-fare competition.”
Jenkins predicts that JetBlue Airways will decide to
start service in Virginia’s capital by next year.
But the New York-based airline — while making
overtures to Gov. Mark R. Warner — has played
its cards, and its planes, close to its vest, setting
no timetable for the expansion.
Another top airline analyst says it’s important
for regional airports not to count on hitting the low-fare
jackpot. “There are lots of charlatans selling
snake oil promising they’ll do a $50,000 study
and bring new air service to a community,” says
Mike Boyd, head of The Boyd Group Inc., an airline consulting
firm in Denver that has worked with Virginia airports.
“Too many communities think, ‘If we keep
studying it, we’ll find a cure.’ Well, there
ain’t no cure,” he says.
Some civic officials think Southwest is a panacea to
all of their problems with the traditional, so-called
“legacy,” airlines. Nonsense, says Boyd.
“There are people who say let the big airlines
go out of business, and Southwest will be there. Southwest
will not be in Lynchburg. That’s just ridiculous.
You’re more likely to get a moon launch than Southwest.”
In Charlottesville, the Central Virginia airport serves
a core area with more than 150,000 people, including
well-healed travelers from the University of Virginia.
But that doesn’t mean the folks from Southwest
or JetBlue are going to be knocking down the door, says
Elliott. “Where are the discount carriers in the
markets of 150,000?” he asked. “They’re
looking for population mass.”
What airports can do is “support the service you
have,” Boyd observes. Officials simply must accept
that “you’ll have people driving away”
for cheaper tickets, whether they’re to be found
at Dulles, Raleigh-Durham or Newport News. “You
want to make sure your core business base continues
to use your airport because that’s the kind of
air service the business needs.”
Airports can, however, lobby airlines for equitable
fares, something airport directors already do on a regular
basis. “Price parity is something we’ve
always tried to work on,” Elliott says. “If
something seems to be amiss, we pick up the phone and
call the airlines.”
He also tells his Charlottesville-based fliers that
driving to Dulles or BWI might save money in the short
run but it can exact hidden costs. “We try to
impress on people the soft cost of driving to another
airport,” Elliott says. “What’s the
value of your time? Do you really want to be stuck out
in Loudoun County and make multiple transfers to get
to the front door of the airport building?”
All in all, it seems that Virginia’s airports
are faring better than much of the rest of the country.
“I’m not worried about the Roanokes of the
world, or really anything in Virginia,” Boyd says.
“Where we have real challenges are rural places
with no interstates.”
Parts of Kansas and Colorado, for example, are becoming
“air-service blighted” because of the airline
industry’s downsizing and a lack of interest by
any commercial airlines, he says.
***
So
the vultures aren’t circling over the airport
terminals of Virginia. And all four airports lacking
low-fare service have established close links with their
key constituency: the business traveler. That loyalty
was evident in Roanoke in early 2003 when the airport,
helped by the Chamber of Commerce, raised about $2 million
in commitments to use AirTran Airways, then a prime
candidate for Star City service. “We anticipated
it would take about six months to put this together,”
says Beth Doughty, president of the Roanoke Regional
Chamber of Commerce. “It took hardly anytime at
all. The response was so dramatic.”
The chamber presented AirTran with the pledge program
— often called a “travel bank,” guaranteeing
a level of commitment to use the airline if it came
to Roanoke. In the end, AirTran “didn’t
say no” but “didn’t say yes either,”
Doughty says.
The Roanoke travel bank was put on hold after AirTran
decided to focus on larger markets. But Roanoke’s
business community, which remains interested in AirTran
and Independence Air, could take pride in getting pledges
from about 100 businesses. The effort also generated
fresh data and contacts that may prove valuable in future
talks with airlines interested in flying out of the
commercial hub of Southwest Virginia. “When you
work with these airlines, they never ask the same question
twice,” Doughty noted. “You have to craft
the information different ways for different prospects.
It’s not that different from industrial prospects.”
Roanoke is not waiting for a low-fare savior to swoop
over Mill Mountain. The regional airport, with a market
area of about 800,000 people, boasts an airline lineup
that would be the envy of other cities its size. Besides
US Airways and Delta, it has service from Northwest
Airlines to Detroit, and United Airlines to Chicago
and Washington Dulles.
While some Roanokers drive to Greensboro and Charlotte,
Doughty says, “You’re really in a situation
to say, ‘Support your local airport.’ We
attempt to provide whatever services we can,”
including free wireless Internet access in the airport
terminal. “When you can’t compete on fares,
you try to find other ways to compete.”
Lynchburg also has established an airport-business coalition.
A 2003 air service campaign, helped by a $500,000 grant
from the U.S. Department of Transportation, “was
an unqualified success,” Courtney, the airport
director, says. “It was a case study in how it
should work.”
The federal grant was used to provide guaranteed revenue
for up to a year to Delta for flying three times a day
between Lynchburg and Atlanta. By the end of the year,
“We were exceeding the target profit margin”
set by Delta. “So they didn’t need the revenue
guarantee anymore,” he says. “We are still
maintaining a high passenger load on these flights.”
The chamber chipped in a $100,000 to run a series of
print ads and TV commercials with the theme “Use
it or lose it,” says Christine Kennedy, vice president
of business development for the Lynchburg Regional Chamber
of Commerce. “We created a buzz,” she says.
When Delta dropped its fares to Atlanta, “ridership
went off the wall as soon as that happened. Slowly but
surely, the community as a whole has decided to come
back to Lynchburg.”
The liftoff to Atlanta taught Lynchburg that “you
have to say you want the service and then you have to
prove it,” Kennedy says. “You prove it by
using it.”
Certainly that’s been the experience in Richmond,
where Delta’s fare restructuring has been an instant
hit with business travelers who now have an option to
driving on traffic-choked interstates to the north and
east just to get lower prices on airline tickets.
Richmond’s experience teaches a lesson as old
as the Olympics: the importance of competition. The
airport conducted a study in late 2004 that showed US
Airways and Continental started matching Delta’s
lower fares to New York-area airports, with round-trip
tickets selling for as low as $188. “Richmond
for the first time is seeing competitive fares in some
of its markets,” says Mathiasen, adding, “It’s
just the start.”
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