By Tom STIEGHORST
BUSINESS WRITER
Ittlo Castelanos used to fly American Airlines. But last week the lanky, 36-year-old New York City construction worker was on line at Fort Lauderdale–Hollywood International Airport waiting to check in at jetBlue Airways.
Two and a half years after startup, jetBlue has gone from obscurity to celebrity in the 19 cities where it operates.
Cheap tickets are the main draw, sure, but travelers like Castelanos also like the comfortable seats and modern aircraft, which lend an air of substance missing from earlier discount airlines. "I think it's a very powerful company," Castelanos said. "I don't think it is ever going to go out of business."
That's reassurance consumers seek given all the recent turmoil in the airline industry. US Airways filed for Chapter I I bankruptcy protection last week, while United Airlines said it was thinking about doing so.
Carriers like jetBlue represent a changing of the guard of sorts in the airline industry. The shift was taking place even before Sept. 11, but has been brought to the forefront by the problems bigger airlines have encountered in the wake of that disaster.
Low-cost, low-fare airlines now haul 32.3 percent of the passengers at Fort Lauderdale-Hollywood International Airport; up from 26.9 percent a year ago. At Palm Beach International, they account for 18 percent of traffic, up from 11.3 percent. Each year the total grows.
As they expand, upstarts such as jetBlue, Southwest Airlines, AirTran Airways, American Trans Air and Spirit Airlines are slowly displacing more entrenched airlines, at least for domestic travel. Four of those five carriers had a profit in the second quarter, while the overall industry expects to lose $5 billion this year.
Established airlines can see the problem, but have fumbled for an answer. They have selectively matched fares, but now confront low-fare competition on threequarters of their routes. They have set up copycat subsidiaries to attract price-sensitive passengers, but without low-enough costs, those carriers have foundered.
Three recent trends have turbocharged consumer defections from large carriers. One is that discount no longer translates to "shabby airline." A second is that the hub system created in the mid-1980s is be coming outmoded. And third business fliers are in revolt.
All three are creating opportunies ties for upstarts.
Established carriers in South Florida have been in the crosshair: almost since airlines were deregulations in 1978. The area is a hug( destination for vacationers, especially from Northeastern states Delta Air Lines has the most a stake, with 21.6 percent of the traffic at Fort Lauderdale and 35.7 per cent at West Palm Beach.
For years, it stayed largely above the fray while the likes of People Express, Presidential Airways and ( Midway Airlines slugged it out.
All failed, but the new genera of low-fare carriers has newer planes, brighter people, and better plans, which has made their competition petition more tenacious. "These people understand the lessons of poorly managed, undercapitalized airlines," said consultant Stuart Klaskin, of Klaskin, Kushner & Cc in Coral Gables
That is evident at jetBlue, which lined up $130 million in startup capital and is leasing 28 brand new Airbus planes, which are cheap to run and maintain. The carrier': president, David Neeleman, ran two other discount airlines, Morris Air and WestJet, before starting jet Blue.
So far this year, while Delta' traffic in Fort Lauderdale slipped 8.7 percent, jetBlue's passenger count soared 107 percent. It is up 82.6 percent in West Palm Beach.
Also competing for the discount dollar is Southwest, by far the largest of the unconventional carriers, with 355 planes. It began service to Fort Lauderdale in 1 996 and West Palm Beach in 1998, but reached a critical mass in the past few years when it gained more than 10 percent of the market at each airport.
Southwest ran counter to the rest of the industry in several ways, including its flight network, which ran lots of short flights directly between its 58 cities.
Established airlines hewed to the hub-and-spoke idea developed by American and others, which relies on a few large hubs, and planes that fly in and out on spokes to various cities. The planes converge at peak times each day, and passengers switch planes. The hub system pleased passengers by minimizing layovers, but Southwest got more productivity each day out of its planes and crews, which lowered its costs.
When Southwest grew from a regional to a national carrier, the hidden weakness of hubs became apparent, said Donald P. Schenk, president of Airline Capital Associates, a New York consulting firm . "All of the big system carriers have a flawed business model," he said.
BUSINESS FLIERS BALK
At the same time, trips that were once ranked in travel agent computers by shortest flight time were increasingly sold on home computers by price.
The plunge in demand after Sept. 11 further exposed the fixed costs of the hub system which is hard to scale back rapidly. A legacy of higher labor costs compounds the problem. Top pay for a Southwest pilot is $152,100 compared with $211,572 for a pilot at American, where retirement benefits are also far righer, according to AIR, Inc. of Atlanta.
The result, Schenk said is that Southwest can fly a seat one mile for about 7.5 cents, compared with about 11.25 cents for a domestic American flight. "It's a huge gap," he said.
As long as the big carriers kept lucrative business fliers, however, they could rationalize losing some leisure customers.
And they offset cheap vacation fares by hiking business fares, on the theory that corporations would absorb the difference as a cost of doing business.
But when the economy stalled and full-fare tickets remained, 10 times the cost of more restricted ones, business fliers balked. Delta in particular has lost passengers to Orlando-based AirTran, the former Valujet, which has repositioned itself as the frugal business person's alternative at Delta's main hub in Atlanta.
LOW-FARE FAILURES
Until recently, the mainline carriers, some of whom were directly attacked on Sept. 11, seemed paralyzed strategically. Neither business nor leisure fares could be raised and costcutting risked labor unrest, which no mainline carrier seemed eager to add to its list of troubles.
But losses are forcing them to respond. American is modifying its hub-and-spoke system to make flights less bunched together in its Chicago and Dallas hubs. For passengers it means more waiting between flights, but American will improve its efficiency.
Filing for Chapter 11 allows US Airways to finally cut its labor and plane-leasing costs. Before filing it had some of the highest employee costs in the industry. its previous solution, a low-fare subsidiary called MetroJet with the image and prices of a discounter, shut down after Sept. 11.
United, likewise, dumped its seven-year-old United Shuttle after Sept. 11. It battled Southwest with about 500 daily flights, mainly on the West cast.
These low-fare experiments sed older, higher-cost planes and made only marginal progess against discount rivals. When planes had to be parked after the Sept. 11 attacks, the low-fare airlines were viewed as outside the core operations and abandoned.
DELTA'S DILEMMA
One key question, particularly in South Florida, is how Delta responds to the upstarts.
The status quo seems untenable. AirTran is stealing business traffic, while carriers such as jetBlue, Southwest and Miramar-based Spirit are all over its New York-Florida market. Its lower-cost subsidiary airline, Delta Express, was downsized after Sept. 11, blunting its power.
On Aug. 2, Delta said it was developing "a new product that meets customer demand for low-priced service." The New York Times reported Delta could be starting another lowcost airline, but Delta declined to describe in more detail what the new product entails.
Whatever it is, jetBlue isn't waiting to find out. It expects to add eight planes and three new routes this fall. "We'll have 18 daily flights from Fort Lauderdale this winter," said spokesman Gareth EdmundsonJones, up from nine during the seasonally slower summer months.
Perhaps more scary to the majors, however, is the steady, relentless growth of Southwest, which every year adds a few more cities, a few more airplanes and a lot more passengers to its system. Southwest is 13 times bigger than jetBlue and in the second quarter was seven times as profitable,
"Nothing affects Southwest," said Schenk, the constant. "They're a mach They're a machine that delivers what the public wants."
Tom Stieghorst can be reached at tstieghorst@su sentinel.com or 954-3564
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