Get Ready to Pay for Peanuts

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Unrecognized Demand

So far, such efforts have been largely confined to smaller cities and leisure markets. But if Skybus is successful as it pushes into markets such as Los Angeles, Boston, and Seattle, expect some major airlines like Delta Air Lines (DAL), US Airways (LCC), and Northwest to imitate some of the efforts to cut back even more on creature comforts in exchange for cheap fares.

Today, however, the upstart airline model is based on a belief that huge numbers of Americans are underserved by existing carriers. They live in areas too small to support service and too far from hubs, or they're too middle-income to support the kinds of fares on which legacy carriers build their businesses. For example, Allegiant, operated by Las Vegas-based Allegiant Travel (ALGT), serves smaller towns including Lansing, Mich., Duluth, Minn., and Cedar Rapids, Iowa, with nonstop flights to Las Vegas, Orlando, and Tampa-St. Petersburg.

The demand they're finding is surprisingly strong. Skybus CEO Diffenderffer says the airline sold 90,000 seats its first day online when news of the $10 fares was circulated via mass e-mail. "People were buying seven and eight tickets for trips they didn't really even plan to take," Diffenderffer says. "The opportunity to increase the number of people who will fly really is dramatic when the price comes down enough. There really is a much greater demand for travel than what you see in the numbers."

Looking Elsewhere for Revenue

The new airline has marquee backing: Skybus raised $160 million in startup capital from investors such as Morgan Stanley (MS), Fidelity Investments, and Nationwide Financial Services (NFS). Diffenderffer's pitch is that his operation is an "e-commerce company" that will use its Web site and online advertising to bolster travel-related hotel and rental car business in a way that no other U.S. airline has thus far. "It's not just so much that the costs come out, but that the revenues come in. And that's the important distinction," he says.

Company officials chuckle at what they dub "the Ryanair question": the oft-heard query that Skybus is merely a Ryanair clone transplanted across the Atlantic. Still, the similarities are striking. Skybus will fly primarily to secondary airports, as does Ryanair—often quite far from the metro area it aims to reach. For example, "Seattle" service goes to Bellingham, Wash., about 90 miles north. Flying to Boston? On Skybus that'll actually land you in Portsmouth, N.H., 56 miles north.

Rules and Regulations

Skybus also offers "Rules of Flying" spelled out on its Web site. No. 3? "Bring a book. We're not big fans of fancy in-flight entertainment systems. So grab that best seller at the airport, or buy a Sudoku puzzle onboard if you're feeling brainy." And No. 4: "Don't call us. We don't have a phone number. Seriously. We'd love to chat, but those phone banks are expensive." And forget about refundable tickets. "If you need to change a ticket, your punishment for breaking a date with us is $40," Skybus says.

All that may strike some as unduly chintzy, but Skybus, Spirit, and others see the approach as a way to satisfy customers—and keep investors happy in what has long been a troubled industry. Allegiant has been adding flights, and in its most recent quarter, pushed its load factor up nearly 1% to 82.6%. That's higher than most rivals, and comfortably ahead of the 78.1% from American, the world's biggest carrier. Allegiant's parent went public in January; the shares have gained more than 20%, closing May 18 at $30.19.

While launching a new airline may seem crazy at a time when so many are struggling, Diffenderffer, a leadership coach who wrote a business book called The Samurai Leader, takes a "zen" approach to the business opportunity of getting more people to fly: "The trick in zen, so to speak, is to see things that other people don't see because your mind is open to it."

Bachman is deputy news director for BusinessWeek.com.