Skybus Goes Broke

[D'kian]

I first learned about Skybus last year from a short article in Popular Science. I was very intrigued by its minimalist business model. I researched it a bit online, mainly through its web site and by comapring it to other low cost airlines. One thing I dind't quite get was Skybus' routes. All its flights went from Columbus, Ohio to several destinations. that's fine, but there were no flights between Boston and LA, or Houston and New York, or Chicago to San Francisco. One might think, then, that to get from LA to NYC at a low price one could connect in Columbus, right? Well, one could, but Skybus did not encourage or even recommend its customers do that. So it seemed to me its entire business plan depended on enough people wanting to fly to or from Columbus (knowing there are several cities close enough to Columbus to be worthwhile).

The airline is now broke and has closed down. Its website claims the reason was the rise in jet fuel and the slowdown in the economy. That's reason enough. Less people fly in a slowing economy, and if jet fuel prices go up, as they have, that raises operational costs. Of course raising prices is not simple considering the market has shrunk to begin with, so we're left with lower profits or even losses. But I wonder if the lack of more popular routes didn't do more to hurt Skybus than anything else.

Low cost airlines are well named. They offer lower prices because they have lower operating costs. They achieve this by various means, suh as using only one type of aricraft, landing on nearby alternate airports (like Long Beach instead of LA, or Toluca instead of Mexico City) which have lower landing fees, handling most operations via web, etc.

One such measure Skybus took was not routing its customers bags when making connections. That's why connections were not recommended. I know that's a large cost most passengers aren't even aware of, but I wonder if it's not one of those things that are worth it even so.

I love to fly. To a lesser extent I like to travel. Naturally anything that makes it easier (or cheaper, which is similar) to fly and travel intersts me a great deal (I haunt travel sites for fun, airlines, travel agencies, hotel finders, etc). I can take months to book a vacation because I do check every alternative I can think of, and commit myself only when I think I have the best deal I can find (two years ago I saved $150 by outwaiting Expedia and Aeromexico on a non-stop flight to Orlando).

Anyway, I did compare Skybus to other low cost airlines. Very few offer any kind of connections. Many lack the option for multiple destinations that is a staple in regular airlines and travel sites. Many also fly to and from one hub only (In Mexico this makes a great deal fo sense because the hub is Mexico City, which concentrates nearly 20 million people, which is a hell of a big market all by itself). But some do run to multiple destinations, sometimes by stages. A line in Mexico, Aerocalifornia, which isn't low cost per se but operates like one, employs a strategy of long flights with many stops (ie, Mexico City to Tijuana, with stops in Guadalajara, Los Mochis and Culiacan along the way; as an analogy imagine a Dallas to Seattle flight with stops in Phoenix, LA and Portland).

So I'm disappointed that Skybus went down in bankruptcy. Despite my reservations, it looked like a promising venture with a good chance of greater thigns in its future. Perhaps the people who launched it will try again later. Everyone could use cheaper flights, after all. The less you pay for the flight, the more you can spend on the trip.

[KendallJ]

It is illustrative of the idiocy of a weak dollar policy and the economic havoc it wreaks. Initial surge in volume and profitability, but eventually costs must increase, and demand will shrink. Oil is the big issue here, denominated in dollars, and the component in fuel costs.

I'm not suggesting that SkyBus's model might not have been flawed, but the underlying economic climate kills companies that might ordinarily have had time to be a little sick till they figured themselves out.

The net effect is a firesale on all exports, and a slow down in purely domestic demand. Multinational companies have some reprieve from this as they can now sell exports cheaplyand will shift volume in that direction, but eventually their costs will rise and their export prices will come back in line with world markets. However while that happens, the domestic markets will slump.

It's going to get worse before it gets better...

[softwareNerd]

If the cost of oil is the proximate cause, it must affect other competitors. How is it that those others are not folding? Any thoughts?

[adrock3215]

It is illustrative of the idiocy of a weak dollar policy and the economic havoc it wreaks. Initial surge in volume and profitability, but eventually costs must increase, and demand will shrink. Oil is the big issue here, denominated in dollars, and the component in fuel costs.

Actually, most airlines have trading desks which hedge against costs of fuel. Matter of fact, one of the greatest trades of last year (across Wall St, including investment banks and hedge funds) came from Southwest Airlines, who employs many great oil traders. The trading desk had gains in 2007 of close to half a billion if I remember correctly, which enabled Southwest to keep prices low. These trades were put on years ago, because traders/management had the foresight to know which side of the trade to be on. I am not trying to say that rising fuel costs don't hurt profits, but I am pointing out that airlines which are run well find a way to survive in all environments, even if it means that they have to generate profits from places other than the core business.

Commodities Trade of the Year

(Energy Runner-Up) Southwest’s High Flyer

Commodities futures were designed as a way for industry users to hedge away risks. Without them, speculators would be relegated to betting on jai alai. Rarely, though, does the manager of an airline’s purse strings have the same foresight as a seasoned NYMEX oil-pit trader. But in the case of Southwest Airlines, hedging against rising fuel costs has helped the discount carrier soar high above its competitors.

“With our hedging advantage, we’ve enjoyed more flexibility in managing revenues,” explains Southwest treasurer Scott Topping. Southwest locked in oil at $51 a barrel prior to crude’s yearlong run-up. For the first nine months of ’07, the Dallas-based carrier realized gains of $427 million. Those hedging profits, a result of a shrewd call by Southwest CEO Gary Kelly, have kept costs down, competitors reeling — and Southwest customers free to move about the country.

Edited April 8, 2008 by adrock3215

[JASKN]

One thing I dind't quite get was Skybus' routes. All its flights went from Columbus, Ohio to several destinations. that's fine, but there were no flights between Boston and LA, or Houston and New York, or Chicago to San Francisco.

From what I can tell, there is not much demand here in Columbus for air travel. Last year, Skybus had some advertising around the college area of town that went something like, "You can now use your beer money to fly instead!" which didn't make sense to me. Anyone who has "beer money" is going to spend it on that, and only that. And even with extremely low air fare, college kids can't pay for the rest of a trip they might take, not to mention that they don't have time to take it in the first place.

As for the rest of the town, nobody gives much thought to flying around. If something is going to happen on the weekend, it will happen around town; shopping, a movie, out to eat, etc. Skybus seemed to be geared toward people who were interested in traveling over the weekend.

Edit:

As for the cheap fares, I went online a couple of times, just to see. The extremely low tickets, around $10, were sold out many months in advance, tickets around $70 to places I wanted to go were the same, but tickets around $120 to a couple cities I was interested in were available right away. Well, so it was with every other airline!

Matter of fact, one of the greatest trades of last year (across Wall St, including investment banks and hedge funds) came from Southwest Airlines, who employs many great oil traders.

Southwest is a great airline in other ways, too. They are always willing to help, and all of their employees are friendly. In contrast, Delta is neither of those things. Edited April 8, 2008 by JASKN

[D'kian]

I'm not suggesting that SkyBus's model might not have been flawed, but the underlying economic climate kills companies that might ordinarily have had time to be a little sick till they figured themselves out.

I know that. In fact, some companies can manange to hang on for a while, but die after things improve due, in part, to what its customers had to do during the bad times, plus the losses they incurred while hanging on. Of course, sometimes things are a lot mroe complicated. Try to have your currency devalued by 3,000% over two years while interest rates and taxes go up. That was an ugly scene. And the government's bailout of failed banks almost killed off credit for a decade.

[TheEgoist]

This is regrettable, as that is how I was planning to get to OCON.

[KendallJ]

Actually, most airlines have trading desks which hedge against costs of fuel. Matter of fact, one of the greatest trades of last year (across Wall St, including investment banks and hedge funds) came from Southwest Airlines, who employs many great oil traders. The trading desk had gains in 2007 of close to half a billion if I remember correctly, which enabled Southwest to keep prices low. These trades were put on years ago, because traders/management had the foresight to know which side of the trade to be on. I am not trying to say that rising fuel costs don't hurt profits, but I am pointing out that airlines which are run well find a way to survive in all environments, even if it means that they have to generate profits from places other than the core business.

Actually, I know a little bit about hedging, and while it is true that most companies hedge fuel, it is not true that most companies can hedge fuel out for more than a year or so. Hedging strategies are insurance policies that smooth out the volatility and can allow a company to weather a short increase in prices. For a sustained or permanent increase, no one can hedge such a thing forever. After a while your insurance runs out and you will see the same price increase everyone else does. The same will happen to SWA. Foresight about the price of oil is rare. If one succeeds in hedging that far out, one could call it foresight, but in reality it is pure speculation 99% of the time. If you really were that confident in your ability to predict the price of oil that far out, you could become a zillionaire on the information.

So heding only acts to delay the inevitable results of this policy.

[adrock3215]

Actually, I know a little bit about hedging, and while it is true that most companies hedge fuel, it is not true that most companies can hedge fuel out for more than a year or so.

I'm not so sure about this. Some companies are able to achieve a hedge which is consistently below market price (McDonald's for example). Therefore, in a business such as airlines, that particular company (in this case Southwest) can usually price below its competition. I don't mean to say that there are firms still paying $20 a barrel for oil, rather, that there are firms which consistenly, year after year, lock in a price at a percentage below market (let's say 5% for example), and thereby gain market share from competing firms who cannot price as low, due to inferior hedge techniques.

Edited April 8, 2008 by adrock3215

[KendallJ]

Adrock, that is correct that some hedge better than others, but not that all can hedge away the impact of the monetary policy. I think we're in violent agreement here about the context. Some can weather the "storm" better than others, but the "storm" itself is stupid and man-made, and no one can hedge their way out of the storm. One can't make the effect of the policy go away through hedging.

If the cost of oil is the proximate cause, it must affect other competitors. How is it that those others are not folding? Any thoughts?

I would look to airlines who have exposure to either a recession in the US more heavily than others, or to sectors that are already uber-competitive. Regional airlines and those that rely on discretionary income more heavily like vacation airlines (witness the ATA and Aloha Air bankrupcies). I think the big multi-national hub and spoke carriers are much better diversified against this type of exposure. And SWA just knows how to run an airline better than anyone else.

[adrock3215]

Fair enough. You're right; we are in agreement here. Monetary policy affects all industry negatively...well, except maybe for banking.

Edited April 8, 2008 by adrock3215

[Galileo Blogs]

And SWA just knows how to run an airline better than anyone else.

They certainly do. That makes it all the more ironic that the FAA grounded a number of Southwest's planes for failing to perform required safety inspections. The FAA is on a warpath to enforce the letter of regulation. Meanwhile, the fatality rate of commercial airlines is (I believe) at an all time low. The last fatal accident of a U.S. carrier was at least several years ago.

The lie is that regulation results in safety. It does not. Profit-seeking behavior in a capitalist society produces safety.

[D'kian]

From what I can tell, there is not much demand here in Columbus for air travel.

I know little about Columbus. How far is it from Cleveland, Cincinnati, etc?

Last year, Skybus had some advertising around the college area of town that went something like, "You can now use your beer money to fly instead!" which didn't make sense to me. Anyone who has "beer money" is going to spend it on that, and only that. And even with extremely low air fare, college kids can't pay for the rest of a trip they might take, not to mention that they don't have time to take it in the first place.

Obviously that refers to the $10 fares. Why would college kids want them? Well, suppose the school team, in any sport, is playing in new York, LA, Boston, Houston, wahtever. I can see enough kids buying $20 round fares for the same day to go see a game, if they can afford the game tickets of course.

A local low cost, Interjet, offered simialr fares for a while. from time to time I thought of buying a round trip for a Saturday or Sunday to Juarez City. Nothing to do there, that I know of, but its right across the border from Texas. I didn't because with my job I'm never sure I won't work on a particular Saturday, but thinking about it now it's not a bad idea at all...

And being who I am, I might get a $20 round trip fare to anywhere in the same day just to take a flight. I love to fly. Hel, I might take it just to see what the A-320 is like

There are other possibilities. For example, get a round trip to New Orleans for dinner, then go home. That's bordering on sybaritic. Of course, who nkows what the schedules are like.

Skybus seemed to be geared toward people who were interested in traveling over the weekend.

Could be. On the other hand, businesses make a lot of use of low cost airlines. That's why it makes sense to base one in, or near, a major commercial center that sees a lot of travel. Say NYC, Mexico City, London, etc. Columbus doesn't strike me so.

As for the cheap fares, I went online a couple of times, just to see. The extremely low tickets, around $10, were sold out many months in advance, tickets around $70 to places I wanted to go were the same, but tickets around $120 to a couple cities I was interested in were available right away. Well, so it was with every other airline!

At most times you'll get the best fares by booking either early or very late. Some airlines will discount tickets Near to the departure time if they think they won't sell otherwise. A more arcane option, positively Byzantine, is to wait until shared codes kick in. That's dicey, the flight may sell out sooner, it's mostly unpredictable, and it may turn up being more expensive.

Another tip is to travel off vacation season. Not only flights, but hotels and even some tourist sites are much less expensive then. Adn things are not crowded. June is usually good. September is much better, as weather is at its best in most places.

When the economy slows down, however, you can expect the cheaper fares to sell out much sooner.

[JASKN]

I know little about Columbus. How far is it from Cleveland, Cincinnati, etc?

[...]

Another tip is to travel off vacation season. Not only flights, but hotels and even some tourist sites are much less expensive then. Adn things are not crowded. June is usually good. September is much better, as weather is at its best in most places.

Thank you for your advice. Personally, I like to travel, so when I have time, Skybus could have offered some cool options for me; I like the kinds of things you describe. My impression about Columbus' interest in flying could just be based on the wrong circles of people.

And FYI, Columbus is about smack in the middle of Ohio, and is also in the middle of everything on America's upper-east side. Driving times: 2.5-3 hours to Cleveland, 1 hour to Dayton, 2 hours to Cincinnati, 3 hours to Detroit, 3 hours to Pittsburgh, 5.5-6 hours to Chicago, 8-8.5 hours to NYC, and 6.5 hours to DC.

[D'kian]

Thank you for your advice. Personally, I like to travel, so when I have time, Skybus could have offered some cool options for me; I like the kinds of things you describe. My impression about Columbus' interest in flying could just be based on the wrong circles of people.

I travel only when I have the time, too, and, as I said, my job makes it difficult. Oh, if I tell the boss I'm taking a vacation from may 5th till the 16th and he approves, I can count on those dates. But planning a long weekend trip when there's a long weekend simply cannot be done.

Back in the late 80s KLM would sell round trip tickets inside Europe for $90, as long as the trip was completed the same day. The idea was to get something for seats that would otherwise go empty, and that customers would buy them to increase their frequent flyer milleage. If I lived in Amsterdam, i wouldn't have minded a day trip to Rome, Florence or something along those lines for that price, either. I've no idea how that worked or if it's still around.

Now, suppose supersonic and hypersonic flights were common. At first they'll be outrageously expensive, but I think someday they'll be cheap enough to go low cost, the Concorde notwithstanding. Imagine going to Paris for dinner, or lunch, or to London for the weekend. It can be even better. Suborbital flights could get you from California to Australia in a little over an hour on a ballistic track much like ICBMs take. Imagine short trips to Australia, Japan, Korea, Thailand....

And FYI, Columbus is about smack in the middle of Ohio, and is also in the middle of everything on America's upper-east side. Driving times: 2.5-3 hours to Cleveland, 1 hour to Dayton, 2 hours to Cincinnati, 3 hours to Detroit, 3 hours to Pittsburgh, 5.5-6 hours to Chicago, 8-8.5 hours to NYC, and 6.5 hours to DC.

That's what I find hard to understand. Columbus may not offer much of a market, there's no big market near enough (for a $10 roud fare most people would drive for a few hours, otherwise not; and the $10 fares were not so common, I checked), and there are no connecting flights.

[y_feldblum]

If the cost of oil is the proximate cause, it must affect other competitors. How is it that those others are not folding? Any thoughts?

They often purchase oil futures years in advance.

[softwareNerd]

They often purchase oil futures years in advance.

Yes, but Skybus could have done so too, in this environment of rising fuel prices. In absence of any idea about future prices of fuel, shouldn't Skybus have hedged the same proportion of future fuel purchases as its competitors typically do? That way, costs rise for all. Edited April 15, 2008 by softwareNerd

[adrock3215]

I remembered this thread when I saw this video on CNNMoney today. According to the video report, Southwest locked in oil for 2008 at $51 a barrel. SWA stock is up 16% this year compared with a 40% decline in the overall airline industry index. Remarkable!

[adrock3215]

From CNNMoney for anyone still interested in the remarkable story of Southwest:

DALLAS (AP) -- Southwest Airlines Co. on Thursday outlined plans to shed 31 flights but add 40 others, including a big push into Denver.

The addition of nine flights overall comes as many of Southwest's competitors scale back their flight offerings as they retrench in the face of record-high fuel prices and a slumping economy.

"We have a much different story to tell today than our competitors," Chief Executive Gary Kelly said in a statement. "We are well prepared financially... [and] we are still growing."