Transcon At A Glance: Los Angeles-New York/Newark

Competition is heating up over the air between Los Angeles and New York. Ever since Transcontinental Air Transport established the first cross-country air service in 1928, L.A.-N.Y. has been the most glamorous airline route in America, the highway of the rich and famous. Today it remains the busiest domestic airline market in the United States, with many flights and a variety of services, all vying for a chunk of this hotly contested market. How are the airlines doing here lately?

Most L.A.-N.Y. travelers fly between Los Angeles International Airport (LAX) and either New York John F. Kennedy Airport (JFK) or Newark Liberty International Airport (EWR). A third New York airport, La Guardia (LGA), bans LAX nonstop flights through an F.A.A. regulation called the “Perimeter Rule.” No low cost carrier competes in the L.A.-N.Y. market; instead they serve airports further afield such as Long Beach, Burbank, and Ontario (all in California), as well as Islip (N.Y.).

United’s (Nasdaq: UAUA) presence in the L.A.-N.Y. market has diminished in recent years. It used to offer wide-body 767 flights to JFK—comparable to American—and four daily flights to EWR. However, bankruptcy in 2003 forced cutbacks, including the retirement of the 767s. In their place was the introduction of “p.s. service” on the JFK route in 2004. Using the smaller, narrow-body 757 configured in three classes of service (like before), p.s. signaled United’s change in market strategy whereby reduced capacity and improved product would generate higher fares and revenues. The strategy was a smashing success, to some extent. United’s average one-way fare jumped from $293 in 2004 to $539 in 2006—more than double Delta’s take today. However, United’s market share has fallen to last place. Also, p.s.’s success was EWR’s loss, as traffic was siphoned off United’s own LAX-EWR service, which is now down to only one daily nonstop.

p.s., when it was first announced, was a much unanticipated move that caught everybody—particularly American—off guard. Now they are catching up. Last December, American (NYSE: AMR) announced a $20 million upgrade to its 767-200 fleet, which is dedicated to its 11 daily LAX-JFK nonstops (as well as San Francisco-JFK flights). Most of the improvements will be done to first and business classes—frequented by celebrities, power brokers, and cadres of corporate contract customers. It is American’s intent to recapture some of the high yield traffic lost to United, and bring its fares closer to parity with its longtime nemesis. On LAX-EWR, American operates two daily nonstops.

For Delta, 2006 saw the ill-conceived “Song” replaced by traditional mainline service. Many long-time and loyal customers left Delta because of Song’s coach only service. Sitting in coach didn’t sit well with elite-level frequent flyers wanting some perks. Europe-bound business travelers also avoided Delta because the LAX-JFK part of their itineraries—and a sizeable one at that—had to be flown in coach. Alas, first class is now back, and traditional Delta service is fully restored with some of Song’s service innovations like leather seats and enhanced in-flight entertainment. Still, it will be a tough task ahead to win back old customers. For now, Delta relies heavily on discounting to fill seats, but it is gaining market share. And as it will soon emerge from bankruptcy, Delta stands to become a stronger and more competitive force in the market.

Continental (NYSE: CAL) has strengthened its position on the LAX-EWR route, now that American has reduced frequencies to two daily and United is down to one. Continental currently carries two-thirds of the traffic on the route. However, the toughest challenger is not another airline but the city’s other airport—JFK. Fully 70 percent of the L.A.-N.Y. traffic passes through JFK, while EWR has the remaining 30 percent. Therefore, despite dominating EWR, Continental must keep fares low in order to attract passengers who would otherwise choose JFK. The average LAX-EWR one way fare is about $100 lower than LAX-JFK—$275 versus $377. Continental does enjoy a little, but not much, pricing advantage because of a solid base of frequent flyers it has in the New York City area.