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Save Yourself (a Bundle): The Day of Ultra Low Cost Airlines Is Dawning

The difference in costs between traditional "legacy airlines" and low cost carriers has shrunk to new lows. Whenever business models converge like this, it means there's opportunity for new business ideas to fill in the gaps.

In other words, the day of the ultra low cost carrier (ULCC) may finally be at hand. Think impossibly low fares, fees for things you didn't even know existed, even more cramped seating, and marketing in ways you never even realized possible.

Legacy airlines have cut back their costs over the last decade, primarily using bankruptcy as a blunt instrument. That reduction in costs, however, is only half the story. Traditional low cost airlines are looking more and more like legacy airlines every day:

  • AirTran runs a hub and spoke operation;
  • JetBlue (JBLU) has codeshares with other airlines;
  • Southwest (LUV) is adding a second fleet type and now flies to congested airports like Newark and Philly;
  • You can reserve a Virgin America flight through the traditional third party reservation systems.
Many of the original low cost tenets have gone out the window as these airlines chase higher revenues.

That creep in scope means that the opportunity for a true low cost carrier is coming. In Europe, Ryanair has held that title for years. The airline has seats that don't recline and has even removed window shades and seatback pockets to simplify its operation. Without seatback pockets, cleaners don't have to clean inside. And without window shades, there's one less thing that can break. No window shades also means a little less weight to help save on fuel. Onboard you're bombarded with sales of everything from drinks to lottery tickets. That's how the airline makes much of its profit.

In the U.S., it's a different story. Allegiant (ALGT) follows that model, but its limited route network connecting small cities to big destinations only serves a small part of the nationwide airline market.

Spirit has taken this strategy into the Caribbean from Florida and the results have been stellar. The formerly unprofitable airline has been raking in the dough by offering rock bottom fares. Despite some fitful efforts to branch out, however, Spirit has remained a niche airline.

You might remember when Skybus started up with much fanfare in 2007. It had the model right, but it made the mistake of basing itself in Columbus, Ohio, and when traffic didn't materialize, its board pulled the plug. Today, Skybus would actually have the opportunity to take advantage of the rising costs of competitors. Columbus, however, is small time in the scheme of things. You need a really big city with a lot of demand to make this work best.

So far, nobody has moved into that niche to fill the void. That time is coming.

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