The number of discount flights in and out of Florida is set to soar in upcoming months, but airlines' losses could reach new levels.
By STEVE HUETTEL
Published October 4, 2004
There's good news for Floridians hooked on bargain-basement airfares.
The party is a long way from over, especially for trips to big East Coast cities. It's also going to get easier to reach a host of smaller destinations without connecting through busy hub airports.
After a summer of deep discounts, airlines are launching dozens of new Florida routes and adding flights above and beyond typical seasonal schedule changes.
Airline capacity between Florida and East Coast cities will increase 16 percent in the last three months of 2004 over the same period last year, JPMorgan analyst Jamie Baker wrote in a report Sept. 16. That's triple the overall domestic growth rate for airlines, he wrote.
The extra capacity means airlines likely will repeat summer sales with one-way fares to Northeast cities as low as $49, airline experts predict. Last week, round-trip tickets from Tampa International Airport were available on the Web for $126 to New York, $131 to Boston and $138 to Baltimore-Washington, taxes and fees included.
The coming weeks also will bring Tampa International 10 new nonstop destinations, including Rochester, N.Y.; Dayton, Ohio; Greensboro, N.C.; and Salt Lake City.
The expansion could backfire on battered airlines. Already suffering from persistent discounting and high fuel prices, many carriers could be setting themselves up for more red ink by dumping additional capacity into Florida's highly competitive, low-fare markets.
"We're heading into a winter of abysmally low yields and low fares, especially between Florida and the Northeast," says Stuart Klaskin of KKC Aviation Consulting in Coral Gables. "It's going to help the consumer, but it's not going to help the industry at all."
Merrill Lynch recently downgraded shares of two big Florida players, Delta Air Lines and AirTran, citing overcapacity on routes connecting East Coast markets, including Northeast-to-Florida routes.
So, why are airlines throwing more planes into the fray?
Delta is closing its money-losing Dallas hub and shifting aircraft to the East Coast. Florida's largest carrier, Delta is muscling up in the Sunshine State to hold its ground against low-cost carriers such as Southwest, JetBlue and AirTran.
Meanwhile, those discounters keep buying new planes and see Florida as fertile ground for expansion. A new low-fare carrier, Independence Air, arrives in Orlando on Oct. 13 and in Tampa on Nov. 3.
Even bankrupt US Airways is expanding in Florida's fiercely competitive markets. The airline plans to start at minihub at Fort Lauderdale with planes that used to fly from its downsized Pittsburgh hub.
Skeptics say the glut of flights will drive down fares. In some cases, they say, airlines will withdraw from markets where there simply aren't enough passengers to support new routes like Tampa-Huntsville, Ala. Next month, Delta and Independence Air will make a total of four daily round-trip flights between the cities with 50-seat jets.
"This service will be gone in a year," says Joe Brancatelli, who runs JoeSentMe.com, a business travel Web site. "This is not being driven by demand. This is being driven by the availability of airplanes."
A top tourist destination with a large and growing population, the Sunshine State has traditionally been a competitive hot spot. Because so many people travel back and forth to Florida on leisure trips, airlines can easily stimulate traffic by lowering fares.
Geography helps, too. The largest East Coast cities are no more than three hours away by air. So many New Yorkers have connections to Florida that JetBlue chief executive David Neeleman likes to call the state the Big Apple's sixth borough.
More people flew between New York City and Fort Lauderdale last year than any other two cities in America: more than 3.5-million, or about 9,600 each day. New York-Orlando was No. 2, New York-West Palm Beach was No. 8, and New York-Tampa No. 16.
Delta owns the biggest share of Florida's $12-billion-a-year airline business with more than $3-billion, or 25 percent. That represents about 23 percent of Delta's annual revenues, according to the JPMorgan report.
Chief executive Gerald Grinstein sent a strong signal last month that he intends to defend Delta's position in the Sunshine State, even as the airline shakes up its route structure, and cuts costs and jobs.
Delta designated Florida's biggest markets - South Florida, Orlando and the Tampa Bay area - as focus cities and added flights to new destinations in the Southeast and Midwest. Fort Lauderdale and Orlando also will get additional flights to Delta's big Atlanta hub.
"I look at three of the largest growth areas in the states of California, Texas and Florida," Grinstein told reporters after announcing a wide-ranging restructuring last month. "Florida is the one where we're concentrated, and I'll have to build it up."
At least for the near future, Florida doesn't look like a place where the nation's No. 3 carrier can make money. Delta's operating costs are 30 to 40 percent above those of low-cost competitors, Grinstein said.
Delta has lost $2-billion so far this year and $5.6-billion since 2001. Without $2.7-billion in additional annual cost savings, including $1-billion from pilots, the airline has said a bankruptcy reorganization is inevitable.
But Delta is willing to absorb losses for now to protect market share in Florida and credibility with frequent business customers, said Klaskin, the Coral Gables consultant.
"Delta's trying not to have further erosion of their brand," he said. "The idea is that if someone's comfortable flying them from Fort Lauderdale to New York, they'll feel comfortable flying New York to Paris."
Except for two nonstops to Salt Lake City, the new service from Tampa International will be 50-seat Delta Connection jets flying to nine smaller cities, such as Pensacola, Knoxville, Tenn., and Charleston, S.C.
Tampa Bay area travelers can reach all those places now through Delta's Atlanta hub. But the nonstop flights should attract more passengers and slightly higher fares for the convenience, said Mike Gallagher, a network analyst for Delta.
"There's a lot of value to not having to connect over a hub for a business meeting," he said. "There's a slight premium people will pay for nonstop service."
The new service underscores the ferocious competition in Florida and throughout the East Coast. On Sept. 13, Independence announced plans to make the first nonstop flights from Tampa International to five cities in the Southeast starting Nov. 3.
Within hours, Delta issued a news release trumpeting its own flights from Tampa to the same cities - starting two days before Independence's launch date.
There hasn't been this much new service in such a short time at Tampa International since Southwest Airlines arrived in January 1996, said executive director Louis Miller.
He wonders how routes such as Tampa to Columbia, S.C., can support four daily round-trip flights by Delta and Independence with a total of 400 seats. Last year, an average of 33 people flew between the cities each day.
Even markets the size of New York-Fort Lauderdale might not be able to absorb all the additional capacity without deep discounting. JetBlue launched seven new flights last month and at peak season, around Easter, will have 24 round trips on the route every day. US Airways plans to begin four new flights Nov. 7.
The hurricane season could have an effect on fares, as well. Images of destruction from Florida's hurricanes could weaken demand to the point where airlines will cut one-way fares to the Northeast below $49 to fill planes, wrote Baker, the JP Morgan analyst.
JetBlue has consistently run with nearly full loads of passengers since its first flight between Fort Lauderdale and New York on Feb. 11, 2000, said spokesman Gareth Edmondson-Jones. "Clearly, we can fill the flights," he said. "It's anyone's guess at what fare."
