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The Miami Herald

Monday, March 22, 2004

San Jose, Calif., Travelers Rejoice over
Raging Fare Wars

By Steve Johnson, San Jose Mercury News, Calf.

Knight Ridder/Tribune Business News



Mar. 22 - At the height of the dot-com boom, the average one-way flight from San Jose to New York cost $342. By last fall, that had plunged to $175. Today a ticket can be had for $135.

Fueled by raging airline competition, the average domestic fare at Mineta San Jose International Airport has tumbled at least 25 percent since 2000. That's nearly twice the decline nationally and considerably more than the drop at 10 other major California airports.

The fare cuts have been a boon to both business and leisure travelers. But they have intensified to the point that they resemble a game of chicken, with some carriers lowering fares so much experts worry they could go out of business.

"They're going to get killed," predicted Kevin Mitchell, chairman of the Business Travel Coalition, whose members manage corporate travel. But consumers, he added, are rejoicing.

"Oh my God, this is like, 'Pinch me,' " Mitchell said. "It's a great time." Long-distance savings The price war is especially pronounced on coast-to-coast routes and other long flights.

The average one-way fare between San Jose and New York plummeted 49 percent from 2000 through September 2003, according to an analysis for the Mercury News by SH&E, a New York aviation consulting firm.

Fares between San Jose and Chicago fell even more: 56 percent over the same period, to an average of $141.

Much of that drop is due to the growing inclination of low-cost carriers to fly on long routes, once the sole territory of bigger airlines.

JetBlue Airways, for example, announced March 9 that it will begin hauling passengers from San Jose to New York's John F. Kennedy Airport in June. That puts JetBlue in competition with American Airlines, the only other carrier on that route.

A more pronounced tit-for-tat has occurred at Oakland International Airport. American launched two daily flights from there to JFK in March 2002. Nine days later, JetBlue announced it was adding one flight a day to JFK, for a total of three. JetBlue upped the ante last year and now flies that route six times a day.

As flights have been added, fares have steadily dropped. Even so, overall passenger levels nationally have remained down from 2000.

Many people -- especially business travelers -- cut back on flying because of the Sept. 11 terrorist attacks, the sluggish economy, SARS and the Iraq war. And when they do fly, they tend to choose the cheapest tickets they can find.

"We are definitely more cost-conscious," said Marcia Saurman, global travel manager for Cadence Design Systems of San Jose. "We are taking advantage of the lower fares, but it's not driving an increase in our travel."

In the Bay Area, only Oakland has seen an increase in passengers since 2000. That appears to be due to its relatively large number of discount airlines, such as Southwest Airlines and JetBlue. In fact, low-cost carriers nationwide have lured an increasing share of the domestic travel market -- from less than 10 percent in 1991 to more than 25 percent today.

The trend isn't good for the big airlines, many of which are saddled with staggering debt and labor expenses much higher than their low-cost competitors. Some have attempted to keep their costs low, while boosting the number of flights they offer, by switching from big fuel-guzzling jets to smaller planes.

In March 2000, for example, American had 22 daily flights from San Jose to Los Angeles, Orange County and San Diego on jets with 133 seats, according to airport spokesman Rich Dressler. As of March, American had 29 flights to Los Angeles, Orange County and San Diego -- with all but two of them using 44-seat planes. That's seven more flights a day but only about half the total number of seats.

Widening losses seen Yet even with smaller jets, which some passengers find uncomfortable, most major carriers are suffering.

In a March 18 report on the airline industry, UBS analyst Sam Buttrick said rising fuel costs and too many flights had prompted him to revise his estimate that the 10 biggest U.S. carriers would lose $500 million this year. Now it's closer to $2.3 billion, he concluded, adding, "hopes for a meaningful U.S. airline financial recovery in 2004 are fading fast."

Oakland long has had the lowest domestic fares of the three Bay Area airports and still does, according to SH&E's analysis, which did not include international fares. As of September, Oakland's average one-way fare for the top 10 airlines was $83, compared with $85 at San Jose and $160 at San Francisco.

However, San Jose and San Francisco are narrowing that difference.

Average fares for 2000 through September 2003 dropped about 25 percent at San Jose airport and 17 percent at San Francisco, compared with 8 percent at Oakland.

Nationally, ticket prices slumped about 14 percent on average over the same period.

San Jose's dramatic price drop is partly the result of enormous price increases during the tech boom. Its ticket prices jumped 19 percent from 1999 to 2000, more than three times the increase nationwide.

Silicon Valley business passengers in those days rarely quibbled over ticket prices, said Christopher Minner, an Oakland Airport official whose job is to persuade airlines to expand there. Their attitude was " 'My dot-com has lots of money and I'll pay whatever it costs,' " he said.

David Stempler, president of the consumer-oriented Air Travelers Association, said he believes fares could fall even more, particularly at smaller airports such as Sacramento that are not yet well-served by discount airlines. He noted that JetBlue plans to begin flying out of many such airports, which would probably prompt other carriers in those markets to drop their fares.

Indeed, competition does seem to be a primary factor in fare reductions. For instance, ticket prices between San Diego and San Francisco have bucked the lower-fare trend, increasing 66 percent from 2000 through September. That's largely because Southwest pulled out of San Francisco in 2001, leaving only one airline -- United -- with direct service to San Diego, said the airport's spokesman, Mike McCarron. He acknowledged that his airport is badly lacking in low-cost airlines compared with San Jose and Oakland.

At the very least, said 31-year-old Dan Baker of Campbell, who works in computer networking and flies twice a month, he'd like prices to stay where they are. He typically pays less than $400 for a round-trip ticket from San Jose to New York; the same ticket cost him about $1,200 just a few years ago. But he fears it's only a matter of time before prices rebound.

"Once our economy starts back up and the airlines see a bigger boost in trips," he said, "it will mean an increase in fares." Jahan Alamzad, president of CA Advisors, a San Jose aviation consulting firm, agrees.

"It will likely go up either toward the end of this year or 2005, depending on which way the economy goes," he said. Besides, he added, "I don't think there is much room for the fares to go much lower."

2004, San Jose Mercury News, Calif. Distributed by Knight Ridder/Tribune Business News