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Where Have All the Low-Cost Airlines Gone?

NEW YORK (MainStreet) -- After American Airlines (AMR) filed for bankruptcy in November, Southwest (LUV) CEO Gary Kelly wrote a letter to his employees emphasizing what he believed to be the biggest make-or-break factor for airlines: cost.

"All the majors from 1989 have gone bankrupt. Pan Am. Eastern. Braniff. Continental. America West. TWA. US Air (LCC). United (UAL). Delta (DAL). Northwest. And now, American," he wrote at the time. "Why? Not because of customer service, but because of high costs. Great customer service cannot overcome high costs. That is the imperative I wrote about a decade ago: low costs."

Discount airlines exist, but the few that remain must rely more on extra fees and sales of secondary services to survive.

As Kelly sees it, the only way forward for the remaining airlines in the U.S. is to become more efficient and bring down operating costs. In effect, large nationwide carriers such as American, Delta and United -- the so-called legacy carriers -- must begin operating more like low-cost airlines. Or as Kelly put it, "The old legacy airlines are dead and buried."

Traditionally, there has been a firm distinction between legacy carriers, which airline analyst Rick Seaney refers to as airlines with operating costs of roughly 11 to 13 cents per mile, and low-cost airlines that have costs of about 8 to 9.5 cents per mile. These low-cost carriers were usually bootstrap operations that relied on cheap labor, inexpensive jet leases and no-frills flight experiences to keep costs down and offer insanely low prices to travelers. Now the legacy carriers are relying on some of these strategies just to survive.

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"They are all becoming low-cost airlines," says Seaney, who co-founded FareCompare, a Web site that tracks airfares. "Airlines are dumping their business-class seats for economy seats, and if you want luxuries, you'll have to pay extra for them as a separate fee."

Of course, if you told travelers that major airlines such as Delta and United were now considered "low cost," many would probably laugh. For most consumers -- at least those who have been flying for more than the past decade -- the true low-cost carriers were those that flew a limited number of routes for a cost that often seemed closer to bus fare than airfare. These included carriers such as Independence Air, Skybus, People Express, New York Air and USA 3000 Airlines, to name a few. They tended to be small start-ups with short life spans -- Independence Air and Skybus barely lasted two years -- and the majority have since gone out of business or, in the case of USA 3000, are about to.

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