Get Ready to Pay for Peanuts

A new crop of low-cost airlines is taking "no-frills" to new heights by charging for everything from snacks and drinks to checked bags

by Justin Bachman

For years, airlines have sought to emulate the low-fare, low-cost business model of Southwest Airlines, the much-studied pioneer in the cutthroat aviation game. Terror attacks? Exorbitant jet fuel costs? Little matter, the profits still flowed at Southwest (LUV), as its ultrafrugal ways kept pace with expenses.

Now a new generation of discount carriers is set to make Southwest look downright generous. The latest breed is borrowing a page from Ryanair (RYAAY), the Irish carrier that roiled airlines across the continent with near-zero fares and scant amenities—and became the biggest European airline in the process. They're charging for seat assignments, checked bags, early boarding, and more. Want some water? Get your wallet.

Hop on the Skybus

The latest entrant in this niche of extreme budget travel, Skybus Airlines, takes to the air on May 22. The Columbus (Ohio) company is led by a small band of commercial airline veterans, including several from Southwest. Its pitch is based on using second-tier airports, lean staffing, Internet-based ticketing, revenue from beer and snack sales—and super-cheap fares starting at $10.

Skybus will at first fly from its Columbus hub to three cities: Burbank, Calif., Kansas City, Mo., and Portsmouth, N.H. It expects to expand to eight cities nationwide by June 12, with further expansion through 2012, when it will have a fleet of 80 jets. The company will zealously avoid major airports in cities including Atlanta, Chicago, and New York, where major carriers can easily dump fares, add capacity, and squash newcomers. "We don't like the big hub airports," says Skybus Chief Executive Bill Diffenderffer, a former attorney at defunct Eastern Airlines. "An awful lot of the traveling public is tired of being No. 20 in line to take off. There really is an easier way to operate."

Well, at least cheaper. Legacy carriers have long elicited headlines and passenger groans as they scrimped to cut costs and fix their horrendous finances. AMR Corp.'s (AMR) American Airlines tossed pillows from many of its flights, and Northwest Airlines chucked pretzels.

Nickel and Dimed

But the new generation of airlines is taking "no frills" to new heights. Allegiant Airlines, a relative newcomer that serves smaller cities, assesses $2 to check a bag, $2 for a soda or water, and $11 if you want to reserve a seat. In March, Spirit Airlines dropped fares as much as 40% on some routes, but began charging fees for things such as checked bags, snacks, and drinks. Some carriers have toyed with the idea, à la Ryanair, of selling ad space on tray tables and overhead luggage bins.

Skybus will charge $5 per checked bag and $10 for "priority" boarding, and if you have around $500,000 to spend, it will let you paint your company's logo on one of its Airbus A319s. (Nationwide Insurance is already painted on one plane.) That's straight out of the playbook of Ryanair. "You want luxury? Go somewhere else," Ryanair CEO Michael O'Leary told BusinessWeek last year (see BusinessWeek.com, 11/16/06, "'Wal-Mart with Wings'").

The concept has far-reaching implications. In essence, these newcomers are unbundling travel services, allowing customers to pay for only those services they care to use, while offering in return a bargain-basement fare. Ryanair's O'Leary envisions a day when seats will be free on some flights, and airlines will derive their revenues from hotel bookings or liquor sales.