The economics of budget airlines don't make sense

[Matthew H Fish]

There seems to be four different models for non-traditional air service:

1. European budget air service, that depends on flying between smaller cities and non-hub airports, in a densely populated area (so that planes fill up fast, and there is short turn-around time)
2. American budget air service, that depends on flying between major hub cities, with long wait times to fly to non-hub cities.
3. Contracted service to major airlines, like what Skywest does. According to Wikipedia, they get a fixed fee per flight---which makes me think that major airlines are willing to use flights to smaller airports as a loss leader, because the want to keep their market share.
4. Directly subsidized flights, like with the EAS program.
I originally started thinking about this when I read a news article about Salem, Oregon resuming scheduled passenger service. From the article I read, it would have service to Los Angeles, California. And of course, considering how long it takes to get from Salem to LA by train, the idea of being able to zip cheaply between Salem and LA on an airplane certainly seemed to be competitive. But then I started looking at other air flights between non-hub, smaller cities on the West Coast, and how uneconomical flight is started to become obvious.
I looked at the Eugene airport, which would be the closest to the Salem airport now. From Eugene, Allegiant airlines offers an $88 round trip to Las Vegas---even after paying extra for luggage, a 2 hour flight to Las Vegas is hard to beat. But then I started looking for other flights around the West--- to other, smaller cities. $250 to Boise. $260 to Redding. $320 to Spokane. $440 to Missoula. And about $500 to get to the Tri-Cities.
And to return it back to trains---some of these flights are not only more expensive, but longer than comparable train trips. And leave at inconvenient times. So if a smaller metro like Salem gets regular service, it might have really cheap service to one city---but it won't at all be easy to fly between other small metro regions in the area. Getting to Spokane, which is a pretty convenient train ride, will involve flying to Los Angeles and waiting for hours to fly back to the Pacific Northwest---all for around 5 or 6 times as much as a train ticket.
Budget airlines might be feasible in areas of high population density, or between very busy hubs, but while it might operate for a while as a loss leader in smaller metro areas, the economics of it don't make sense long term.

 

[Anderson]

There seems to be four different models for non-traditional air service:

1. European budget air service, that depends on flying between smaller cities and non-hub airports, in a densely populated area (so that planes fill up fast, and there is short turn-around time)
2. American budget air service, that depends on flying between major hub cities, with long wait times to fly to non-hub cities.
3. Contracted service to major airlines, like what Skywest does. According to Wikipedia, they get a fixed fee per flight---which makes me think that major airlines are willing to use flights to smaller airports as a loss leader, because the want to keep their market share.
4. Directly subsidized flights, like with the EAS program.
I originally started thinking about this when I read a news article about Salem, Oregon resuming scheduled passenger service. From the article I read, it would have service to Los Angeles, California. And of course, considering how long it takes to get from Salem to LA by train, the idea of being able to zip cheaply between Salem and LA on an airplane certainly seemed to be competitive. But then I started looking at other air flights between non-hub, smaller cities on the West Coast, and how uneconomical flight is started to become obvious.
I looked at the Eugene airport, which would be the closest to the Salem airport now. From Eugene, Allegiant airlines offers an $88 round trip to Las Vegas---even after paying extra for luggage, a 2 hour flight to Las Vegas is hard to beat. But then I started looking for other flights around the West--- to other, smaller cities. $250 to Boise. $260 to Redding. $320 to Spokane. $440 to Missoula. And about $500 to get to the Tri-Cities.
And to return it back to trains---some of these flights are not only more expensive, but longer than comparable train trips. And leave at inconvenient times. So if a smaller metro like Salem gets regular service, it might have really cheap service to one city---but it won't at all be easy to fly between other small metro regions in the area. Getting to Spokane, which is a pretty convenient train ride, will involve flying to Los Angeles and waiting for hours to fly back to the Pacific Northwest---all for around 5 or 6 times as much as a train ticket.
Budget airlines might be feasible in areas of high population density, or between very busy hubs, but while it might operate for a while as a loss leader in smaller metro areas, the economics of it don't make sense long term.

(2) varies from airline to airline. I'd note that there are a few US budget airlines which are very leisure-focused. In the case of Allegiant, for example, four of their top five destinations use secondary airports (Las Vegas is the outlier, and I suspect that's more for the lack of a decent alternative to McCarran). There are a few other examples (particularly in the NYC area).

(3) is a bit trickier to handle. Basically, I believe that a lot of those routes may operate at a small marginal loss taken alone, but the "feed" onto other legs more than makes up for it. For example, there's probably no way that DL is making money CSG-ATL - but those folks are almost all connecting somewhere. You'll note that some one-way fares on such short routes can end up being quite...impressive...in an attempt to deter local traffic.

With (4), EAS is the most obvious example, but you often have local subsidies involved as well (e.g. I believe the casinos in Las Vegas rather help subsidize those routes, and local governments will also fiddle around with incentives).

Now, on your point about smaller destinations - yes, that's a big advantage of rail. We might think of the Empire Builder as a "Chicago to Seattle/Portland train", but it also connects Spokane to Minneapolis/St. Paul and Fargo to Williston (and with a few exceptions, the vast majority of pax on LD trains are going either from an endpoint to an intermediate destination or between intermediate destinations).

 

[jiml]

Really interesting discussion. One thing that I didn't see mentioned in the comparison of European and North American LCCs is the role that regional transit - particularly conventional rail - plays in the success of the European ones. The attraction of flying into a secondary airport is lessened if there is not robust transportation infrastructure to get you to your final destination. Use the example of London, where airports such as Luton and Stansted are made more viable by the ability to step off the plane and onto a train and vice-versa. There aren't that many similar places in North America (maybe Chicago MDW?) because many secondary airports don't have transit and cities with robust transit don't always have a secondary airport of any consequence. This means the budget airlines have to fly to many of the same airports as the legacy carriers, paying the same high fees, wages for baggage handling, etc., so must find other ways to cut their costs - many of which have been mentioned. This is far less prevalent in Europe. The alternative for a North American LCC is often to fly to another city entirely, which is less likely to have transportation options to the ultimate destination. (An obvious exception is BWI for Washington.) Once a LCC is flying into a major airport in direct competition with legacy airlines it becomes much easier for them to be targeted by means such as predatory pricing, and in many cases fail or be absorbed by the competition.

 

[MARC Rider]

The whole original business model of Southwest was to use secondary airports: BWI instead of National, Manchester and Providence instead of Logan, Midway instead of O'Hare, Oakland instead of Fan Franscisco, etc. Now they fly to some of the bigger airports, but, to be frank, using the less crowded secondaries is one of the pluses of their service.

 

[jiml]

Southwest may have started that way but has since evolved into a really unique business model that has been difficult to duplicate. The true LCCs offer far less service and route options. Canada's WestJet sought to copy WN in the beginning with everything from fleet to secondary airports (e.g. Hamilton, ON, instead of Toronto), but is now "just another airline" with noncompetitive pricing which has allowed a flood of new LCCs into the marketplace.

 

[Matthew H Fish]

Really interesting discussion. One thing that I didn't see mentioned in the comparison of European and North American LCCs is the role that regional transit - particularly conventional rail - plays in the success of the European ones. The attraction of flying into a secondary airport is lessened if there is not robust transportation infrastructure to get you to your final destination. Use the example of London, where airports such as Luton and Stansted are made more viable by the ability to step off the plane and onto a train and vice-versa. There aren't that many similar places in North America (maybe Chicago MDW?) because many secondary airports don't have transit and cities with robust transit don't always have a secondary airport of any consequence. This means the budget airlines have to fly to many of the same airports as the legacy carriers, paying the same high fees, wages for baggage handling, etc., so must find other ways to cut their costs - many of which have been mentioned. This is far less prevalent in Europe. The alternative for a North American LCC is often to fly to another city entirely, which is less likely to have transportation options to the ultimate destination. (An obvious exception is BWI for Washington.) Once a LCC is flying into a major airport in direct competition with legacy airlines it becomes much easier for them to be targeted by means such as predatory pricing, and in many cases fail or be absorbed by the competition.

Well, that is a great question, but is also related to the different population densities of Western Europe versus most of the United States, both directly and indirectly. Most of the US is less dense than most of Europe. It is still dense enough to have good rail connections, even though in most places, it doesn't. But most US cities are not big enough to have secondary airports. The economics of say, Cleveland getting a second airport don't make sense. As far as I can tell, there are eight areas in the US with multiple major airports in an urban area: San Francisco/Oakland/San Jose, Los Angeles, Dallas, Houston, Chicago, Miami, Washington DC and New York City. (Someone can make an edge case for something like Milwaukee/Madison, but that is stretching it).
I started this by thinking about airports in my local area---airports that serve communities of a few hundred thousand people. Across the Pacific Northwest and into the mountains, the population densities are low enough that airports are usually well over a 100 miles apart. Even with a very robust rail network, a budget carrier couldn't really do something like fly into Eugene with the hopes of people travelling onward to Portland by land.

 

[Matthew H Fish]

Southwest may have started that way but has since evolved into a really unique business model that has been difficult to duplicate. The true LCCs offer far less service and route options. Canada's WestJet sought to copy WN in the beginning with everything from fleet to secondary airports (e.g. Hamilton, ON, instead of Toronto), but is now "just another airline" with noncompetitive pricing which has allowed a flood of new LCCs into the marketplace.

This makes me wonder how much of a business cycle there is with LCCs. And, also, how much of their existence involves having accountants who really know how to deal well with things like deprecation.
I am imagining something like this:

1. Small local airline, in a time of low interest rates or surplus of planes/air crew, decides to disrupt the business, borrows money to buy planes and hire crew. They are successful at it for a while.
2. But the lack of service means that customers who tried to the airline for a while don't develop loyalty. The low wages and unsteady work mean the pilots and cabin crew also want to find better jobs. Hiring people is a big hassle for the business.
3. Uh-oh! The original venture capital is gone, and now they have to compete with established businesses. But maybe they do so, becoming a standard airline, or they go broke---releasing employees and equipment on the market. Some other local airline borrows some money and tries to relaunch the same service...
I guess the main point about this, in regards to train service, is that many people think Amtrak is a clodgy federal bureaucracy that provides bad service, especially when they compare it to the cheapest LCC routes. And so they think they can attract a LCC to their city. But most LCCs don't have a sustainable business or service model, either. Especially not for the type of towns I spend my time in.

 

[Devil's Advocate]

Well, I wouldn't find that a good comparison at all, because that is a comparison between an airplane coach seat, which is smaller than an Amtrak coach seat, and an Amtrak bedroom.

Before you judge the validity of my comparison let's consider the longest domestic flights from my hometown airport.

Miami 2.5 hrs
Chicago 2.5 hrs
San Diego 3.0 hrs
Boston 4.0 hrs
Seattle 4.5 hrs

For what reason would I need a bedroom on flights of these lengths?

A better comparison is how does a normal Amtrak seat compare with a normal airline seat.

I'm not interested in booking an upright seat on an overnight trip anymore than I'd want to book a bedroom on a 4-hour trip.

If you want to do a comparison of that, you would need to compare an Amtrak bedroom to an airplane bedroom-- -which I don't think is something that exists on domestic commercial flights.

The LCC's that have really struggled to survive are those that sell no frills service on long duration flights. In other words those that are most like Amtrak's bare bones long distance coach service. Maybe that's the real story here?

 

[Siegmund]

There seems to be four different models for non-traditional air service:

1. European budget air service, that depends on flying between smaller cities and non-hub airports, in a densely populated area (so that planes fill up fast, and there is short turn-around time)
2. American budget air service, that depends on flying between major hub cities, with long wait times to fly to non-hub cities.
3. Contracted service to major airlines, like what Skywest does. According to Wikipedia, they get a fixed fee per flight---which makes me think that major airlines are willing to use flights to smaller airports as a loss leader, because the want to keep their market share.
4. Directly subsidized flights, like with the EAS program.

As long as we're discussing airline economics... one more to throw into the mix: it is outrageously expensive to park a 737 (or even a Cessna) on the ground overnight at many of the busy hubs. Flying an almost-empty plane to an airport with cheap or free parking is a good business move. It was quite possibly the only reason that Delta kept sending one plane a day to Fairbanks, AK, after they gave up all pretense of competing with Alaska Airlines and (back in the 90s) MarkAir.

If nothing else, it acts as a nudge to enforce the hub model, with "last flight at night out to the spokes, first flight in the morning in from the spokes."

 

[cirdan]

Sounds to me, what you are proposing is not a bus… but a railroad train…

As long as you don't call it that.

 

[cirdan]

Really interesting discussion. One thing that I didn't see mentioned in the comparison of European and North American LCCs is the role that regional transit - particularly conventional rail - plays in the success of the European ones. The attraction of flying into a secondary airport is lessened if there is not robust transportation infrastructure to get you to your final destination. Use the example of London, where airports such as Luton and Stansted are made more viable by the ability to step off the plane and onto a train and vice-versa.

For much of their history, actually, Gatwick and Luton had better transit connections than Heathrow, which is strange as Heathrow was always marketed as London's principal airport. The location of Gatwick was chosen specifically because it adjoined the London to Brighton railroad. I believe the station was not built until later, but at least the possibility had been considered from the start. Today you can catch the Gatwick Express and get to Victoria with only one intermediate stop (if that) and that puts you within comfortable walking distance of many of London's attractions. Heathrow's location OTOH was chosen essentially because there was a relatively empty bit of land - empty actually because it is one of the traditionally foggiest areas around London, and we all know that fog is not ideal for aviation either. For many years the only transit connection from Heathrow was a bus and it was considered quite a breakthrough when the Piccadilly line was first extended there, even though the ride into central London could easily be over and hour, depending on your destination. The Heathrow Express didn't materialize until much later. And now of course there is Crossrail as well.

Yet Gatwick is somehow perpetually considered and treated like a second tier airport and has to muddle through with time-worn if not decrepit facilities (and yet somehow still works) while Heathrow seems to have had a major facelift more often than I can remember (and is still awful despite all the lipstick they've been trying to apply to it).

 

[Anderson]

Really interesting discussion. One thing that I didn't see mentioned in the comparison of European and North American LCCs is the role that regional transit - particularly conventional rail - plays in the success of the European ones. The attraction of flying into a secondary airport is lessened if there is not robust transportation infrastructure to get you to your final destination. Use the example of London, where airports such as Luton and Stansted are made more viable by the ability to step off the plane and onto a train and vice-versa. There aren't that many similar places in North America (maybe Chicago MDW?) because many secondary airports don't have transit and cities with robust transit don't always have a secondary airport of any consequence. This means the budget airlines have to fly to many of the same airports as the legacy carriers, paying the same high fees, wages for baggage handling, etc., so must find other ways to cut their costs - many of which have been mentioned. This is far less prevalent in Europe. The alternative for a North American LCC is often to fly to another city entirely, which is less likely to have transportation options to the ultimate destination. (An obvious exception is BWI for Washington.) Once a LCC is flying into a major airport in direct competition with legacy airlines it becomes much easier for them to be targeted by means such as predatory pricing, and in many cases fail or be absorbed by the competition.

It also helps the secondary airports if the transit options at the main ones stink, or if there are lots of use cases where the options are pretty lousy. For example, in NYC you have JFK, EWR, and LGA plus Islip, White Plains, and so on. EWR stinks if you have to go into New York and anywhere but downtown. LGA just stinks. If you need to go to the north side of town, White Plains is probably outright preferable, and Islip probably an easier ride to Ronkonkoma than JFK is to Jamaica. It's probably easier (by transit) to get from Islip to Penn Station than it is from SFO to either San Jose or San Francisco, and the only downside is that midday service is only roughly hourly (but so is Caltrain, for that comparison).

 

[Matthew H Fish]

Before you judge the validity of my comparison let's consider the longest domestic flights from my hometown airport.

Miami 2.5 hrs
Chicago 2.5 hrs
San Diego 3.0 hrs
Boston 4.0 hrs
Seattle 4.5 hrs

For what reason would I need a bedroom on flights of these lengths?


I'm not interested in booking an upright seat on an overnight trip anymore than I'd want to book a bedroom on a 4-hour trip.


The LCC's that have really struggled to survive are those that sell no frills service on long duration flights. In other words those that are most like Amtrak's bare bones long distance coach service. Maybe that's the real story here?

The point of my post was to talk about the systemic economics and service models of budget airlines, especially in comparison to railroads.
Amtrak travellers have a variety of reasons to travel. They also have a variety of preferences and financial resources. I have slept in coach many times, with my longest stretch being four days. I am aware that not everyone wants to or can do that.
The thing is, even with upgraded technology and perfect management, there are train trips that will never be able to compete with air travel, at least on most tangible factors. But there are also many airline trips that can't currently compete against Amtrak on price, time or comfort. With improvements, there are many more trips that could compete against airlines.

 

[Matthew H Fish]

Okay, everyone, in case the subtext of why I am posting about this isn't clear:
Fossil fuel dependency is a big problem in the United States economy, with geopolitical, economic and environmental consequences that will continue to increase.
Even people who are environmentally conscious seem to take flying for granted. My theory is that people who have flown on a low-cost, convenient flight between destination airports believe that this service model is sustainable and will eventually spread, even when experience and math show that this isn't the case. But because flight is engrained in middle-class culture, the expectation will continue that flight is the most "reasonable" method of travel.

 

[DetroitTed]

For much of their history, actually, Gatwick and Luton had better transit connections than Heathrow, which is strange as Heathrow was always marketed as London's principal airport. The location of Gatwick was chosen specifically because it adjoined the London to Brighton railroad. I believe the station was not built until later, but at least the possibility had been considered from the start. Today you can catch the Gatwick Express and get to Victoria with only one intermediate stop (if that) and that puts you within comfortable walking distance of many of London's attractions. Heathrow's location OTOH was chosen essentially because there was a relatively empty bit of land - empty actually because it is one of the traditionally foggiest areas around London, and we all know that fog is not ideal for aviation either. For many years the only transit connection from Heathrow was a bus and it was considered quite a breakthrough when the Piccadilly line was first extended there, even though the ride into central London could easily be over and hour, depending on your destination. The Heathrow Express didn't materialize until much later. And now of course there is Crossrail as well.

Yet Gatwick is somehow perpetually considered and treated like a second tier airport and has to muddle through with time-worn if not decrepit facilities (and yet somehow still works) while Heathrow seems to have had a major facelift more often than I can remember (and is still awful despite all the lipstick they've been trying to apply to it).

Of all the London airports ( and I've flown out of all except Luton), Gatwick is my favorite specifically because of the train station in the lower level. It not only provides London-Brighton trains, but also trains to Southeast England ( my particular favorite town off the rail is Rye -- one of the original Cinque Ports). Speaking of Rye station, have you ever been to a station where track 2, not track 1, was the closest to the station? I almost missed my connection to London because I assumed track one was closest to the station!

 

[Metra Electric Rider]

One thing that European LCC's focus on, slightly more (IMHO - could be wrong) the large leisure/vacation travel market from Northern Europe to Southern (or Eastern), i.e. Nordic countries to Spain/Greece or the UK to Eastern Europe for hen and stag nights. Of course, we had ATA to Florida, but the difference is that they are in some ways the successors to the package holidays which included airfare, possible 'charter' flights and hotels, etc.

 

[Anderson]

Before you judge the validity of my comparison let's consider the longest domestic flights from my hometown airport.

Miami 2.5 hrs
Chicago 2.5 hrs
San Diego 3.0 hrs
Boston 4.0 hrs
Seattle 4.5 hrs

For what reason would I need a bedroom on flights of these lengths?


I'm not interested in booking an upright seat on an overnight trip anymore than I'd want to book a bedroom on a 4-hour trip.


The LCC's that have really struggled to survive are those that sell no frills service on long duration flights. In other words those that are most like Amtrak's bare bones long distance coach service. Maybe that's the real story here?

So, I'll split this in two:
(1) I might not want/need a bedroom on a 2-4 hour flight. I do want a reasonably comfortable recliner with a footrest, and have a preference for a 2-1/2-2 configuration over 3-3. At the longer end, I probably also want some decent F&B thrown in, especially if there's a risk of a tight connection somewhere in the mix.
(2) The big difference with Amtrak's LD model and the LCC model is that Amtrak has (1) better seat pitch and padding, (2) more room to stretch one's legs while en route, and (3) at least some F&B available for purchase throughout most of the trip. That being said, Amtrak cutting coach pax off from the diners is a decent-sized problem (at least when they don't offer some sort of Business Class with access for folks who might, say, want a meal on a 10-hour trip but don't need a bed because it's not overnight).