Would the 3 Large US Airlines Benefit By Running Low Cost Subsidiaries
It’s a question many people have asked before. Though they’ve all been profitable in the last few years, United, American, and Delta Airlines have all gone through extremely difficult periods since the Airline Deregulation Act came into effect in 1978. In fact, all three airlines filed for bankruptcy between 2002 and 2011.
So, wouldn’t it be beneficial for them to consider Low-Cost Carrier (LCC) subsidiaries and drive more profits to the bottom line?
Well, All Three Have Tried LCCs – And Success wasn’t easy to Find!
United was the first to try a low-cost subsidiary. In 1996, having seen the success of Southwest Airlines, United decided to create an airline called United Shuttle. United Shuttle operated a fleet of Boeing 737s and 757s. To reduce operational costs, hot meals were eliminated, and electronic computer ticketing introduced. The airline also solely focused on the west coast, connecting the bay area to the up and down coast. United Shuttle airline lasted until 2001.
Upon Shuttle failing, United entered the market with another LCC project – Ted – in 2003. Ted was supposed to fix United Shuttle’s problems. For instance, unlike Shuttle, which focused on all forms of business travel, Ted was an exclusive leisure travel airline. The all-economy flights flew to Central America and Mexico. Ted lasted 5 years as well and closed
died in 2008.
Delta has also had two tries. The first Delta low-cost carrier, Express, was launched in 1996 to compete with Southwest and Metrojet. Express offered neither meals nor entertainment. The entire fleet comprised Boeing 737-200s.
Express died a natural death in 2003 to be replaced with Delta Song – a stylish carrier targeting women. Song offered a range of amenities, including leather seats, extra legroom, and personal entertainment screens. Ticket prices were also very affordable. Unlike Express, the whole fleet comprised Boeing 757-200s. It mainly operated between the US Northeast and Florida. Unfortunately, by 2005, Song was no more.
Finally, American Airlines had one notable LCC known as Metrojet. Metrojet was created in 1998 under the US Airways which was a subsidiary of under American. Based in Boston, it operated a fleet of 49 Boeing 737-200s. It was abandoned in 2001.
So Why Have All these LCC Projects Failed
There are two main reasons why all five subsidiaries failed back then and why a similar fate could repeat itself with any new LCC subsidiary today;
- Union labor
Since the days before the adoption of the Airline Deregulation Act, legacy airlines have been premium carriers. All the staff, from pilots to engineers and flight attendants, are very highly paid and eventually became influential union members.
To run a truly low-cost carrier, a legacy carrier would have to ask staff to take a pay cut. Most union members have rejected such proposals in the past and would do so even today.
- Fleet type
If you check closely, you’ll realize that all the successful LCC carriers, including Southwest, JetBlue, and Allegiant operate modern, high-density aircraft that easily take more passengers on board. These aircraft are far more resilient to fuel price fluctuations. Many of the aircraft used by the legacy carriers in their LCC projects, meanwhile, are largely fuel-inefficient.
As such, when fuel prices go up, airlines like Southwest manage to survive while low cost carriers like Express, Shuttle, and Metrojet are knocked out.
The good news is that large carriers may no longer need low-cost subsidiaries to compete with Southwest, JetBlue, and the others. Why? Because they've found an easier way to compete on price. By unbundling their economy fares and charging extra for seat selection and baggage, these airlines can boost their bottom lines without appearing to overcharge passengers!