Low-Cost Carriers Steal the Show

And with JetBlue planning to add eight more planes by the end of 2003, along with an order for 100 Embraer 190 planes set to start arriving in mid-2005, Delta and other network carriers will have to figure out a way to beat the low-cost competition. In the second quarter, nearly every low-cost and regional carrier announced expansion plans, with Southwest adding 92 planes by 2006 and AirTran adding one plane a month until 2008.

According to a study by the Department of Transportation released on July 21, low-fare airlines had 30.2% of the market share in the top 1,000 markets through the third quarter of 2002, up from 26.9% two years ago. But even more worrisome for the network carriers is that their market share in the long-haul markets, where network carriers make their bread and butter, rose to 17.3% from 12.5%.

The next quarter is expected to be strong for the low-cost carriers as well, because of the seasonal uptick in summer travel. "The third quarter is going to be solid, especially after seeing how June came off. And comparisons will be easy, since last year on Sept. 11, the one-year anniversary, there was a dip in travel," said Kuchibhotla of eCLIPSE. "I don't think that will be there. So the third quarter, I'm confident in, but the fourth will be a toughie."

Nonetheless, since March 11, when the broader market bottomed, shares of network carriers have fared as well as, if not better than, their low-cost rivals. AMR rose 547% over that span, while Continental gained 256% and Delta added 75%. Southwest rose 36%, while JetBlue gained 91% and AirTran rose 101%. "I think the stock market overreacted when saying the network carriers would all go bankrupt," said Kuchibhotla. "And now they're reacting the other way. If you listened to the conference calls, no one said anything about long-term prospects improving."