Report by Mark Pilling, David Field and Brendan Sobie in St Petersburg, Florida

Fuelled by strong traffic growth, the mood at the seventh annual Network route planning event, held in St Petersburg in early March, was upbeat, with some of the smaller carriers grabbing the limelight for a change

Airports should be free to airlines, was one of the provocative messages from Maurice Gallagher, the chief executive of Allegiant Air, the relatively new Las Vegas-based carrier that is spreading its reach steadily across the USA with its fleet of Boeing MD-80s.

© St Petersburg/Clearwater Area Convention & Visitors Bureau   
St Pete Beach played host to the 350 Network 2007 delegates

"We don't like the indirect method of pricing. Allegiant generates passengers and airports should collect their money from passengers, not airlines," Gallagher told the 250 airline route planners and airport marketers attending Network 2007, co-hosted by Tampa International Airport and St Petersburg/Clearwater International Airport. "Allegiant generates non-traditional revenues, airports should too."

Network in California

Next year's Network route planning event for North America will take place in San Diego, California from 2-4 March. The host for Network 2008 is San Diego International Airport.

His statement caused more than a few raised eyebrows in the audience at Network. But few airports are going to openly challenge Gallagher, whose airline is bringing airports many new services and turning some into a mini-hub or focus city. In fact it is Allegiant, and the move of regional carrier ExpressJet into flying under its own brand, plus the addition of new aircraft by low-fare players like AirTran, Southwest and potentially Virgin America that will bring most of the new capacity to the North American market this year.

Apart from some opportunistic moves, the US majors will not be adding much new service, believes Rick Atkinson, director of West Virginia's Yeager Airport. "There won't be capacity additions for the smaller regional airports this year," he said. "Their planning horizon is 2008."

Network ventures to Latin America

Airline Business has launched Network Latin America, an expansion of its successful Network route planning event to include a new annual meeting in Latin America.

The inaugural Network Latin America event will take place on 2 to 4 December in Monterrey (seen below), Mexico. Airline Business has been organising Network since 2001 and it has grown to become the leading route planning event in North America.

Mexican airport group Grupo Aeroportuario del Centro Norte (OMA) has agreed to host the inaugural Network Latin America event. OMA manages 13 airports across Mexico, including Monterrey, Acapulco and Chihuahua. "Network Latin America will be the route planning event for Latin America, bringing airlines and airports interested in flying to/from and within Latin America together," says Airline Business editor Mark Pilling.

Network Latin America 2007 will give airports an opportunity to build relationships with Latin American carriers, including fast-growing low-cost carriers and regional operators. The event will include a conference programme as well as one-on-one airport-airline meetings and an extensive social programme allowing for informal network opportunities.

For more information contact event manager Angela Jones

But no-one was downbeat at Network, as traffic is expected to continue growing nicely. As Kristie Van Auken, marketing director of Ohio's Akron-Canton Airport put it: "The mood is generally optimistic this year compared to last. There are lots of new aircraft on order, airlines are pulling out of bankruptcy and some are actually posting quarterly profits."

Each airport strives to make its story as compelling as possible to attract new services, often with a specific route in mind. For example, Kalamazoo/Battle Creek airport in Michigan is fighting to get a link to the New York City area, preferably to Newark, says airport marketing consultant Marie Frank. That route would serve business travellers from the pharmaceutical industry which is the major employer in that area.

Elsewhere, Austin and San Antonio airports in Texas are anticipating new nonstop flights to Mexico this year. Both airports have interest in cross-border service from Mexican and US low-cost players as well as traditional carriers.

"Mexico is really interesting," says Barbara Prossen, San Antonio's assistant aviation director. "It's on the verge of a totally new economy. Low-cost carriers are getting going and are really starting to flourish."

Austin and San Antonio are also two of the airports selected by ExpressJet for a batch of new routes. "There seems to be a real feverish pitch this year," Prossen says. "2007 will be a good year."

Jamey Kazanoff, the assistant director of Austin-Bergstrom International Airport, adds several airports are enthused by ExpressJet's plan to begin independent flying under its own name with some of the regional jets it had used for Continental Express service. The ExpressJet network will have point-to-point services linking 24 cities. This, says San Diego International Airport's manager of route service development Hampton Brown, makes a huge difference to airports seeking direct services rather than hub routes.

Key decision

For New Orleans, ExpressJet's decision to operate 12 flights to six new destinations is key because the airport has 30% fewer flights and 38% fewer seats than before Hurricane Katrina devastated the city in 2005. "Airlines are very conservative about putting in new flights because they are not sure the traffic is there. But when they put in flights, they get high load factors and a high portion of business traffic," says New Olreans airport commercial development manager Larry Johnson.

Airports are also excited about the possible launch of Virgin America, which has set a June launch date pending approval from US authorities. Stephen Milstrey, a Virgin America route planner and scheduler, says the market is ripe and Virgin America already has taken delivery of 12 Airbus A320s. "The market is good. Fares have gone up and capacity has gone down."

Indiana's Gary Chicago International Airport has benefited from new services from SkyValue, which launched late last year with a wet-leased Boeing 737-800 operating four routes from Gary. Airport director Chris Curry says SkyValue's initiation has been successful and in April it will add a fifth route. For Gary, which did not have any services for 10 months before SkyValue's launch and has seen several start-ups withdraw in recent years including Hooters Air, Pan American and Southeast Airlines, things are looking up. "All these guys pulled out but were valuable because they proved which markets don't work," says Curry.

The time for Caribbean consolidation is ripe

Caribbean Airlines chief executive Peter Davies plans to launch and lead an initiative to create one airline for the entire Caribbean region. Davies says bringing all the Caribbean carriers together may be the only solution if long-term profitability is to be achieved following years of losses. He claims all the major carriers in the region are losing money, including Air Jamaica, Caribbean Airlines, Liat and Caribbean Star. "There should be one airline," he told airlines and airports attending Network 2007.

Caribbean Airlines has already approached Liat and Caribbean Star, which merged their operations at the beginning of February under the Liat name. Davies envisions Antigua-based Liat, which only operates turboprops, feeding Trinidad-based Caribbean Airlines, which will only operate Boeing 737-800s and focus on connecting several Caribbean islands with North America.

Davies acknowledges persuading Air Jamaica to agree to a merger may be more difficult because it is now pursuing an aggressive strategy to create a hub for the entire Caribbean and Latin American region. He adds he "understands" why Air Jamaica wants to continue promoting Jamaica and one potential solution is to convert the carrier into a Caribbean Airlines franchise. Davies launched Caribbean Airlines at the beginning of this year after shutting down BWIA West Indies Airways. Caribbean Airlines is now "an organisation that is leaner and in a better position to attack the market", he says.

The Caribbean, he says, needs to "wake up" and develop a deregulated market where airlines are free to stimulate demand. "They need to forget and ignore the history and put together a business plan," Davies says. "I'd like to think we can do it in conjunction with other airlines. Consolidation is very much in the cards."

Caribbean Star head Skip Barnette, responding a few days later, says while Davies' vision is "wonderful", a more practical short-term approach is for broad-based alliances. "A mid-term vision, beyond the initial alliance step, could be a single, worldwide marketable brand, that allows the individual carriers to maintain some identity," Barnette says.

Jamie Baker, executive director and senior airline analyst at JP Morgan, told delegates that for the airlines "from the demand side, everything is good right now." There is "a reasonably robust technology sector", he added, unlike the spring of 2000, when the bubble burst in the USA. This led to a rapid implosion of the hi-tech sector, crimping corporate travel in key regions such as Texas, New York, and California and crippling the economics of transcontinental airline services.

Baker added that other sectors, such as financial services or pharmaceuticals, which generate higher-yielding business travellers, were also thriving, and that the generally robust US economy along with rising real estate and home values were all pushing more people to travel and to pay more for their travel.

It is against this background that traffic is growing. As always, capturing it profitably is the key. Allegiant's Gallagher wants airports to make money, but stressed the need for a new approach. "What Allegiant brings to your airport is new passengers," he says. The carrier is about traffic stimulation with nonstop, full-size aircraft (see below).

Airports should tap the travellers Allegiant brings to the airport for their revenue, just as the airline does on board. "We put a lot of cars in your parking lots," he said. While no fees to airlines is not something many airports can stomach, Gallagher's message is clear: "We want low permanent costs, not temporary incentives." Allegiant's often infrequent service does not warrant airbridges or dedicated space. "We need a creative and flexible approach to getting into your airport," he said.

That new approach must also apply to fuel services. "Fuel is a pain in the ass," says Gallagher, but it represents 40% of Allegiant's expenses. "So I'm in the fuel business." Airports should not "outsource and forget" fuelling services. "A monopoly fueller is a serious competitive handicap. We literally have a number of cities we won't go into because of this. They are not just making a living off us they are making a killing off us, and we are just not going to do it."

Despite its aggressive stance, Allegiant is popular. "We pay our bills, follow through on our commitments and bring you service and passengers no one else will," said Gallagher.

Network's co-host airport, St Petersburg/Clearwater, is one of Allegiant's three focus cities along with Las Vegas and Orlando Sanford International. St Petersburg/Clearwater works hand in hand with neighbour Tampa International to bring traffic to the Tampa Bay area. The airports are only about 20km apart. The former seeks to attract low-cost carriers with lower fees and the option of choosing limited services, while Tampa offers a more traditional full-service menu. However, both airport directors, Louis Miller of Tampa and Noah Lagos of St Petersburg/Clearwater, believe in the "strength of the market philosophy" to lure new services. "It is the market that should generate the incentive," says Miller. "To only a very small degree do we compete for services," adds Lagos.

Lowering costs

Tampa has never offered direct financial incentives to airlines to serve the airport, Miller told delegates. Its approach is to lower costs wherever possible. In fact, its per passenger cost to airlines is now $4.22 compared to $5.32 in 1996. The airport has also been developing its non-aeronautical revenues, which are now 76% of the total compared to an average of 55-60% at most US airports.

St Petersburg/Clearwater has a similar model. "We derive little revenue from our airlines. We really make our money on the spin," says Lagos, referring to sales made directly to travellers.

In addition, Tampa has a scheme that shares some of its non-aeronautical revenues with carriers. "We generate $11 out of every passenger that flies out of Tampa and we give back the airlines 20% of that," said Miller. Last year this amounted to $9 million.

The focus on these ancillary revenues is the same at airports and airlines. Both parties are also focusing on the strength of the industry going forward. For now, the outlook is good, says JP Morgan's Baker. "If fuel stays in the $55 to $60 a barrel range, we will have a record year. But the bad news is that given the expected escalation in labour costs and the resulting potential of unit cost acceleration, it is hard to imagine that 2008 and 2009 would be any better than 2007. The year 2007 will be the best for the industry."

He noted that many US airline labour contracts come up for renewal next year and in 2009, and that the unions who gave such deep concessions and pay cuts will demand that they share in the industry's good fortunes with pay raises and other recompense. And Baker suggested that labour unions will revert to their old tactic of "pattern bargaining" in which one union waits for another labour group to gain raises and then demands the same raise - plus a little bit more.

Allegiant plans major growth

Allegiant Air chief executive Maurice Gallagher revealed at Network plans to add 50 cities over the next five years, including up to five new focus cities.

Given Allegiant's unique model of flying where no one else flies, Gallagher's promise should translate into critical business for dozens of small US airports eager to attract more services. Allegiant now operates 68 routes, linking 48 small US cities with three focus cities.

Gallagher, who took over Allegiant in 2001, when it operated only one route, is proud to say Allegiant intentionally does what other carriers avoid. Allegiant operates point-to-point routes not served by mainline carriers. It focuses exclusively on the leisure market with few frequencies and relatively large aircraft, Boeing MD-80s, given the small size of the markets it serves. It currently operates 26 MD-80s.

"We're the only carrier in the last 20 years that broke out of that hub mould," he says. "We've created our own marketplace." 


Source: Airline Business