Fuel costs limit chance of startup ultra-cheap carriers - East Valley Tribune: Nation / World

Fuel costs limit chance of startup ultra-cheap carriers

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Posted: Saturday, April 26, 2008 3:51 am | Updated: 9:18 pm, Fri Oct 7, 2011.

CHICAGO - As rising fuel prices propel air fares toward the stratosphere, most travelers would like nothing better than to see a new low-cost carrier with rock-bottom ticket prices.

Better reserve that idea for sometime in the future.

While past recessions have spawned ultra-cheap airlines, experts say the triple-digit oil prices that are pushing air travel out of reach for average Americans also will almost certainly keep a no-frills carrier from entering the market anytime soon.

“When the economy is bad, it’s often a good time for startups because (out-of-work) pilots want to work, planes can be acquired for very little and people are wanting to pinch pennies,” said Alan Bender, professor of airline economics at Embry-Riddle Aeronautical University in Daytona Beach, Fla.

“But with fuel prices being what they are, I believe that kills the whole notion.”

Soaring oil and jet-fuel prices already have contributed to the shutdown of one true no-frills carrier this spring — Skybus Airlines, known for its $10 gimmick fares — along with forcing ATA Airlines and Aloha Airlines out of business and sending Frontier Airlines into a bankruptcy restructuring.

Also, Champion Air plans to cease operations and MAXjet Airways did so in December.

The price of jet fuel, now about $3.66 a gallon, rises correspondingly with every increase in oil prices.

The current price is about 66 percent above last year’s average price, according to AirlineForecasts LLC.

Oil is hovering at around $119 a barrel.

“The question is, how would a new low-cost carrier make money?” said Ilker Baybars, a professor and deputy dean of Carnegie Mellon University’s Tepper School of Business. Even at current fare levels, he said, “the economics of the airline industry don’t make sense.”

It’s not as if there can’t be a successful U.S. version of Ryanair — the Ireland-based budget airline that keeps fares down by charging extra for everything from water to baggage.

People Express, a no-frills carrier that operated from 1981-87, became one of the fastest-growing airlines ever after its launch during a bleak economic period.

The Newark, N.J.-based airline embraced the “flying bus” concept with all economy-class seats, additional costs for checked luggage and snacks, and ticket prices far below the competition’s.

Similarly, Spirit Airlines was born in the recession year of 1980 as Charter One and prospered under its new name and expanded commercial service beginning in 1992, with the economy still in the wake of another down cycle.

But fuel makes up about 50 percent of a startup’s operating costs, according to Bender, and at today’s prices a new carrier would be more vulnerable than ever to a fare war waged by much deeper-pocketed rivals.

Venture capital firms that typically would fund the launch of new carriers have been quiet. Besides high fuel prices, they face a tight credit environment where banks are unwilling to take risks.

Existing discount carriers like Southwest Airlines, Jet Blue and year-old Virgin America, while selling tickets at well above the level of Skybus-type operators, will still try to undercut legacy network airlines’ prices to lure fare-sensitive consumers.

The opportunities to do so are increasing — their bigger competitors have raised fares on many routes eight times this year, and United is trying to do so again this week.

But those airlines, too, look to be getting more expensive. Southwest has raised fares twice this month, and Jet Blue lost money in the first quarter and is joining other airlines in charging passengers for second bags.

Airline consultant Stuart Klaskin said there’s no doubt people would flock to a startup offering low fares, but likewise questioned whether such a carrier could cover its costs.

The unlikelihood of that happening now is fine by him and most of the industry — he said ultra low-cost carriers lead to irrational price wars that hurt the companies involved.

“The public does not care about the health of the airline industry,” said Klaskin, a partner at KKC Aviation Consulting in Miami.

“The public cares about value for their transportation dollar. There’s a reason that Wal-Mart is the world’s largest retailer, and a reason that Southwest is one of the world’s largest airlines.”

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