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apr 07 2008

Airlines: Why did Skybus die? And which airline's next?

Skybus shut down this weekend. The discount airline was less than a year old. It won our hearts by selling $10 early-bird fares.

Ticket-holders are being told to call their credit card companies and file disputes. (See info on how to do that in our post on ATA's demise.)

The Skybus collapse was surprisingly fast. Here are some answers to some key questions:

If you're a stranded ticketholder, what can you do? Call JetBlue and pay only $50 for one-way fares to any JetBlue destination within 100 miles of your original Skybus destination. (The offer is good for departures within the next 7 days.) US Airways is making a similar deal, except that it is adding taxes and fees. (Throughout the weekend, Southwest offered to fly stranded Skybus passengers for free.)

Why did Skybus collapse? While this airline had lost lots of money, most start-up airlines lose money in their first years, and its investors ought to have been prepared to stay for the long haul. In fact, the airline still has plenty of cash on hand, according to some reports. But the investors, including the owner of The Columbus Dispatch, threw their cards in anyway. The high price of oil is the key factor. Skybus had to charge dirt cheap fares to attract a minimum number of passengers to keep its planes full, but the money it earned from those fares wasn't enough to cover its cost of operations. The price of oil has gone up about 50 percent in the past year. Fuel costs account for nearly a third of the cost of flying a plane, on average.

Who's to blame? In part, we all are. I posted a blog post in January titled, "I bet you'll let Skybus fail". Back then, Skybus was still expanding its route map, but I worried that not enough budget travelers were stepping up and buying tickets. Travelers rejoice when a discounter arrives on the scene. They love it because the discounter usually sparks a fare war with the well-known major airline that serves their hometown. But as fares drop, many travelers simply fly the major airline, taking advantage of its lower fares. Few fly the new discounter. Then, the discounter fails because of lack of business. And the major airline hikes its fares back up, hurting consumers.

Which airline will fail next? Frontier and Airtran look shaky. Among the majors: United. That's all according to Fox Business. Admittedly, the major airlines should be doing better because they have hiked their prices in recent months, as fare-watcher Rick Seaney has blogged. But the fare hikes haven't been enough to cover the higher costs of flying planes today, notes Hartford Courant columnist Jeanne Leblanc.

Why do European low-cost carriers succeed while Skybus failed? The difference may be in the route maps and in the public transportation systems. As Jared Blank explained recently on his blog, Skybus had hub airports at medium-sized airports trying to serve other, even-smaller airports. But not enough passengers visited these small airports to keep Skybus planes full. Skybus's costs were thus far higher than those for European success story Ryanair, partly because Ryanair flies most of its flights out of major hub cities, such as London and Rome, with lots of passengers. Of course, Ryanair also flies to some truly out-of-the-way airports, such as Hahn, Germany. But European governments have subsidized public transportation links between many of its smaller airports (such as Hahn) and its largest cities (such as Frankfurt), while the U.S. government hasn't invested in public transportation. For Skybus, this meant that not enough budget-conscious Americans were willing to fly to small airports, such as Punta Gorda, Fla., because they'd have to add a rental car cost into their trip budget--something Europeans fliers have the practical option of skipping.

What's the worst part of the Skybus collapse? Well, no other airline will now likely copy Skybus's signature offer of early-bird fares starting at $10 each way. We also feel bad for the 500-odd folks who have lost their jobs. We feel sad, too, for the taxpayers of Columbus, who spent millions to induce the airline to make their city airport its hub. We also feel bad for Greensboro, another major Skybus gateway, because it probably won't see another discount airline replace Skybus any time soon. As of today, less than 30 percent of seat capacity is flown by low-cost airlines, says the Economist.

Will oil continue to be costly? Most likely. The current oil crisis is a "demand-side" problem, meaning that China, Dubai, and other parts of the world are demanding more and more oil and forcing prices higher. So $80 a barrel oil may be here to stay for a while. If the high prices were instead due to a production problems or hurricanes disrupting deliveries, then there would be a better chance that oil prices would drop once any supply problem was solved. Years ago, it was possible to buy futures contracts on oil and save money by placing bets on the future direction on the price of oil. But that opportunity, which Southwest took advantage of, seems to have passed now.

Can airlines trim their oil usage? There's no workable short-term solution, except the unlikely step of charging overweight passengers an additional fee because of the additional cost it takes to fly them. In the coming years, airlines can buy new planes that are more fuel efficient. Unfortunately, the next 737s may not have enough gains in fuel efficiency, worries the blog Airline Bulletin. Another alternative is to speed up the development of fuel-efficient airships, which we've blogged about before.

EARLIER

Our first glowing reports on Skybus

Get Inspired with more from BudgetTravel.com


Note:This story was accurate when it was published. Please be sure to confirm all rates and details directly with the companies in question before planning your trip.

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