It’s been happening for several decades: Low-cost, low-fare new entrants start flying in a busy market, forcing incumbent airlines to lower their prices. More travelers fly the route. Airlines with lower costs can earn profits; airlines with higher costs suffer losses. Eventually, even though planes are full, the higher-cost airlines don’t want to keep losing money, and so they drop flights. Share of the market shifts. It’s how out domestic flying has been moving from one type of airline to another.
The latest example is worth a close look. AMR Corp’s American Airlines has decided that on Nov. 17, it will discontinue twice-daily non-stop flights in each direction between Boston and San Francisco, two major U.S. cities. Neither is a hub for American, but the airline has long gone after customers in both cities, especially corporate fliers. American has its own airport clubs in both cities. Boston, in particular, has been a major focus, and American has international service out of Boston’s Logan Airport.
There’s much anxiety about the move among frequent fliers on FlyerTalk.com. For loyal American customers in either Boston or San Francisco, the shrinking of major-city offerings may force a change in favored airline.
What happened? JetBlue Airways and Virgin America. JetBlue has expanded aggressively in Boston and is now the biggest airline there in terms of flights and destinations. Virgin America, based in San Francisco, now flies twice a day between Boston and its home base. United Airlines, which has a hub in San Francisco, is also in the market. Both Boston and San Francisco have seen a wave of new low-fare airline competition. The skies seem to have gotten too low-fare, and too crowded, for American.
Analyst Robert Herbst, a consultant who runs AirlineFinancials.com, notes that American has flown between Boston and San Francisco non-stop since 1998, and from that time to 2009, United and American were virtually the only two airlines with non-stop flights on that route. During that period, the route had passenger yields – what we pay to fly each mile, on average– above what both airlines averaged throughout their systems, Mr. Herbst says.
In February 2009, Virgin America entered that route. In May last year, JetBlue went from seasonal service to daily year-round flights. Available seats in the market shot up dramatically to 53,000 per month in August from 30,000 per month at the beginning of 2009. Prices came down, and for American and United, yields dropped below their system averages, Mr. Herbst said, using data airlines file with the federal government. With JetBlue adding more capacity in the market this year, American decided to take its Boeing 757s elsewhere where it might earn a higher return.
A spokesman for American says the change is largely the result of its strategy to focus more of its flying on its hubs and reduce point-to-point flying. New York, Miami, Chicago, Dallas and Los Angeles are the priority for American now, spokesman Tim Smith said.
And so, the market shifts.