Audio Low-cost airlines change the face of air travel, but Twin Cities lag (story audio) Photos The Hubert H. Humphrey terminal would be a likely home for new low-cost service. Sun Country CEO Jay Salmen Back for a second try... Resources "New Market Structure Realities," an analysis of the impact of low-cost carriers, prepared by Jon Ash of Global Aviation Associates (pdf file) Sun Country Airlines Northwest Airlines Your Voice Join the conversation with other MPR listeners in the News Forum.

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Low-cost airlines change the face of air travel, but Twin Cities lag
by Jeff Horwich, Minnesota Public Radio
October 28, 2003

Like other low-cost carriers, Twin Cities-based Sun Country is in the midst of a growth spurt (and advertising binge). The airline, which emerged from bankruptcy last year, is still just a blip on the national scene, but hopes to become the number-two carrier in the Twin Cities during 2004. (MPR Photo/Jeff Horwich)

Seven so-called "low-cost" airlines, led by Southwest, now carry more than a quarter of U.S. travelers. Their growth comes partly at the expense of traditional giants like Northwest Airlines, which has lost more than $1 billion since the start of 2001. As low-cost airlines grow more popular, one local airline -- Twin Cities-based Sun Country -- hopes to ride that wave.

St. Paul, Minn. — On a recent afternoon, Sun Country passengers wait for their bags after a flight from Nevada. They say the crew was friendly, and they did get an on-board meal, but many chose Sun Country for one reason: the price.

"We flew Northwest out to Las Vegas and then Sun Country back," said Jason, a man from Winthrop, Minnesota who wouldn't give his last name. "Better rates."

"We both flew here for under $500," says Marie Pulanco of Mendota Heights, standing next to her husband. Pulanco says they have used Sun Country "hundreds" of times to go to places including Las Vegas and Seattle. "Wherever they go, if we go, we'll go on Sun Country."

Paul Meyer of Mankato was in Las Vegas on business, and his company booked the flight. "Corporations, they look for the best price, and that's the (airline) they put us on," Meyer said. "The round-trip total was about $220. Very good, I thought."

	The Hubert H. Humphrey terminal would be a likely home for new low-cost service.

These travelers reflect a fundamental shift in the airline industry. So-called low-cost airlines like Sun Country are growing, while the big network carriers are losing millions of passengers and billions of dollars. The country's largest low-cost carriers are Southwest, jetBlue, ATA, AirTran, AmericaWest, Spirit, and Frontier. Some network carriers are now experimenting with establishing their own low-cost operations.

Fallout from the terrorist attacks of 9-11 forced thousands of layoffs and huge losses, but financial pressure from low-cost carriers is also a leading cause of financial trouble at airlines like Northwest. CEO Richard Anderson, while announcing a small profit for the quarter ended in September, said Northwest still needs job and wage cuts from workers to adapt to the changed industry.

"While this quarter seasonally we've outperformed estimates, and I think in good measure because employees have worked so hard at it, it doesn't take away the long-term challenge that we still face in terms of our cost structure versus the lower-cost carriers, who now cover 70 percent of our domestic system," Anderson said.

Northwest has lost $1.3 billion since 2001. Its domestic passenger traffic has shrunk almost 14 percent since September of 2000. And fares are down; according to Terry Trippler of CheapSeats.com, just one year ago a Northwest ticket to New Orleans, bought two weeks before the trip, cost $870. That same ticket is now $204, due in part to low-cost competition from AirTran.

By comparison, traffic on low-cost carrier jetBlue rose 72 percent in just the last year, and the airline recently recorded it's 11th straight quarterly profit.

While this quarter seasonally we've outperformed estimates...it doesn't take away the long-term challenge that we still face in terms of our cost structure versus the lower-cost carriers. - Northwest CEO Richard Anderson

The low-cost carriers have been seizing market-share. Jon Ash, managing director of consulting firm Global Aviation Associates, says their costs are also well below those of so-called "legacy carriers" like Northwest.

"The average low-cost carrier (like) Southwest, jetBlue, AirTran, they can produce a seat mile, or one seat flying one mile, at costs in the range of seven to seven-and-a-half cents. The major legacy carriers are up in the 10 to 11 cent range."

Costs at Northwest Airlines are actually a little lower than that, at about 9.3 cents. But the low-cost target is still dropping; costs at jetBlue dropped below six cents in the most recent quarter.

Low-cost airlines keep costs down in a number of ways, few of which are available to the network airlines. Like Southwest, they may use and maintain just one type of aircraft. Like AirTran and jetBlue, their workforce may be young and largely nonunionized. And part of the key is in their flight schedules. They fly a limited number of carefully selected routes. Jon Ash says that's why many smaller markets might never see a low-cost airline.

"They can't serve places like, and don't want to serve places like Sioux Falls, South Dakota," Ash said. "So who's going to carry the passengers from Sioux Falls to Albuquerque?"

For travelers in cities where low-cost carriers fly, the payoff is domestic round-trips almost always under $300, even right up to the day of the flight. There is often a ripple effect at other airlines, who cut their own fares to compete.

Some estimates give low-cost airlines as much as 28 percent of the U.S. market. But only six percent of passengers traveling to or from Twin Cities International used a low-cost carrier during the past three months.

Steve Loucks is a spokesman for Carlson Wagonlit Travel, one of the country's biggest travel agencies. "Minneapolis just has not been on the radar screen of the primary low-cost carriers as far as providing service," Loucks said. "We have seen Southwest and jetBlue, the two darlings of the industry, making a big decision not to be here."

Loucks says it's not hard to figure out why. "This is one of the biggest hub fortresses in the entire country. Northwest has a huge presence here. It is going to be a difficult competitor to deal with for any carrier."

Loucks says AirTran has been a little gutsier than the rest, daring to take on both Northwest and Delta with five daily flights to Atlanta. ATA is also moving in on Northwest with six flights to Chicago Midway.

Bill Wren, head of air service marketing for the Metropolitan Airports Commission, says all low-cost carriers have a standing invitation to begin or expand their service here. "The public has for many years requested, in fact demanded, that they have the option of low-cost service here. So we have worked real hard to address that issue," Wren said.

Wren says the airport has plenty of room, especially at the newer Hubert H. Humphrey Terminal. He says the MAC has had regular talks with Southwest for 10 years, and the airport is on jetBlue's official list of those it hopes to serve. A spokeswoman for jetBlue confirms Minneapolis-St. Paul is still an expansion target for the airline.

	Sun Country CEO Jay Salmen

The biggest low-fare presence in the Twin Cities right now is an airline that is hardly a blip on the national scene: Sun Country. This summer Sun Country's passenger count was up 73 percent from the year before, when the airline was just emerging from bankruptcy. In August, Sun Country was the number three airline at Twin Cities International in terms of passenger count. Sun Country officials expect they may pass the number two airline, United Airlines, sometime next year.

CEO Jay Salmen says Sun Country has been growing steadily, and in the short-term hopes to expand service to some of its most popular destinations, which include Orlando, Phoenix, Dallas and Los Angeles.

"We believe that the cities we serve now are very conducive to the Minnesota traveler who is looking for leisure destinations and some business destinations, and our goal is to expand our frequency as we expand our fleets," Salmen said.

Sun Country hopes to have seven 737's in its permanent fleet by next summer. It leases more, as needed, in the winter months. The airline has about 400 employees, and expects to add up to a hundred more next year. Looking out over the next five to ten years, Salmen makes clear Sun Country plans to grow only so big in Northwest's home market.

"Our goal is to grow this market for our existing model. And we envision probably up to 20 airplanes for that," Salmen said. "And then we would try to find another place like Minnesota to run a similar type of operation."

Airline consultant Michael Boyd says Sun Country is wise to try to limit its growth in the Twin Cities. "To be very blunt, as a long-term business plan that is nothing short of brilliant," Boyd says. "It shows a carrier that has a clear view of where it wants to go and a clear understanding of the marketplace."

Jon Ash of Global Aviation is reserving judgment. He says until there's good information about Sun Country's finances, it's hard to gauge their chances this time around of withstanding competition from Northwest.

"I don't think anybody should underestimate the difficulty of becoming a new entrant, nor should Sun Country," Ash said. "Because there's no indication yet that they are financially successful. They may be carrying a lot of people, but they did that three or four years ago. And there's a difference between carrying a lot of people and making money."

Sun Country CEO Salmen would not comment on Sun Country's financial position, other than to say that the company is "debt free" aside from leases on its aircraft.

The airline experts interviewed for this story say whether it's Sun Country, Southwest, or some other carrier, more low-cost service would help keep prices down for Twin Cities travelers. But consultant Michael Boyd says Minnesotans shouldn't feel too sorry about their current situation.

"By Northwest having a hub at Minneapolis-St. Paul, your business base is advanced," Boyd said. "You would not have service to Asia, you would not have service to Europe unless you had the connecting hub, and you would not have service to a hundred destinations non-stop without the hub."

Whether low-cost airlines reshape air service in the Twin Cities remains to be seen. But Northwest officials, at least, are convinced the changes underway in the industry are here to stay.

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