ANALYSIS: US low-cost carriers chart strategic moves

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US low-cost carriers aim to grow revenue through fleet and airport-related opportunities in the coming years, as volatile fuel costs and a focus on maximising investors' returns call for discipline in capacity and network expansion.

While low-cost airlines have steadily added new destinations and aircraft in recent years and moved into markets long dominated by mainline carriers, they are now calling for more strategic growth focused on various initiatives. This sentiment was repeatedly echoed by US low-cost carrier chiefs during the Boyd Group International Aviation Forecast Summit in Dallas in September.

Southwest Airlines, the largest low-cost carrier in the USA, is aiming to keep capacity flat or slightly down following a decision announced earlier this year to defer 30 Boeing 737 deliveries. Scheduled for 2013 and 2014, these aircraft will now be handed over in 2017 and 2018. The decision has been driven by the airline's goal to hit a 15% return on investment target, which president and chief executive Gary Kelly has said the carrier is confident of doing in 2013.

Instead of adding more aircraft, Southwest will focus on growing revenue through various fleet-related initiatives.

After completing its acquisition of the country's third biggest budget carrier AirTran Airways in May last year, Southwest is in the process of integrating the latter's 737s into its own fleet. It is also sub-leasing all of AirTran's Boeing 717s to Delta Air Lines, a move that will improve overall efficiency and return it to a single-type fleet. In the meantime, Southwest is adding more seats to its own 737-700s as a revenue opportunity and aims to do the same with some of its 737 Classics. All of these fleet developments will help Southwest meet its investment target, Kelly says.

2011: US LOW COST CARRIER SNAPSHOT 

Airline

Revenues

Net profits

Passengers

Southwest $15.7bn $178m 135m
JetBlue $4.5bn $86m 26m
Frontier $1.8bn - 15m
Spirit $1.1bn $76m 8m
Virgin America $1.0bn -$100m 5m
Allegiant $779m $49m 6m

Source: Airline Business low-cost carrier survey 2011 

A shift in fleet is also on the cards at Las Vegas-based Allegiant. The carrier's rapid growth in the second half of the past decade has been based on Boeing MD-80s. But earlier this summer the airline unveiled plans to introduce 19 Airbus A319s as a first step to a fleet growth strategy focused on the type as it seeks to improve fuel efficiency.

Allegiant's chairman and chief executive, Maurice Gallagher, says the airline will gradually phase out its MD-80s over 10 years. The carrier will end 2012 with an in-service fleet of 62 aircraft, including 58 MD-80s. Allegiant plans to put the first two A319s into service in the second quarter of 2013.

Gallagher says the airline is on the lookout to lease more A319s or A320s and indicates that the number of aircraft it is looking for will be close to the number of MD-80s it now operates. In the interim, a project to add 16 seats to each of Allegiant's MD-82/83s is continuing as the carrier aims to get more revenue out of the aircraft. This project will be completed late this year or by the first quarter of 2013.

Aside from fleet-related revenue opportunities, US low-cost carriers also aim to capitalise on growth out of certain cities in the coming years and seize upon infrastructure developments. JetBlue Airways, based at New York JFK airport, plans to focus its growth out of Boston, in the USA, Latin America and the Caribbean.

The carrier is not likely to add another focus city to the six it already has, going by the number of aircraft arrivals it expects, says president and chief executive Dave Barger. JetBlue plans to add 10 aircraft in 2013 and another 10 in 2014, according to a fleet update provided with its second quarter earnings statement.

JetBlue operates 100 flights a day out of Boston but wants to grow this to 150 by 2015 by adding new destinations and boosting frequencies, says Barger.

JetBlue also recently broken ground on an extension to Terminal 5 at New York JFK, which will be home to an international arrivals facility when it opens in early 2015. The airline now handles international arrivals at Terminal 4 and says consolidating all arrivals at Terminal 5 will help improve cost efficiency.

For Southwest, a lifting of flight restrictions at its base of Dallas Love Field will likely lead to a ramp-up in flights from there. Love Field now operates under a piece of legislation called the Wright Amendment, dating back to 1979, to protect the then newly built Dallas/Fort Worth International airport. It limits Love Field's nonstop flights to within Texas, Alabama, Arkansas, Kansas, Louisiana, Mississippi, Missouri, New Mexico and Oklahoma. Under the legislation, flights from Love Field to other states would have to make a stop in these states or be flown on an aircraft with less than 56 seats.

The legislation will be repealed in October 2014, which will allow Southwest to launch more nonstop flights to other states. Kelly says that 2014 is "eligible for increasing the fleet" at Southwest but the airline has not committed itself to doing so. "Because of the dynamic nature and uncertainties of the economy, we have not committed to increasing the fleet yet for 2014," he explains. "We want to buy ourselves as much time as we possibly can before we are forced to make that commitment."