Vision Air is landing in a business where profits are often delayed (Photo: Yuri Gripas/REUTERS)

Next March, the airline industry will have a new arrival: Vision Air, which calls itself the “nation’s newest big jet, low-cost carrier,” will fly to currently underserved southeastern cities (Asheville, N.C, St. Petersburg, Fl., Macon, Ga.) and a few northern ones (Buffalo, Toronto) from its hub in northwest Florida. Welcome aboard Vision, and best of luck, but here’s something to keep in mind: the airline industry has lost $59 billion in domestic markets since deregulation, according to a recent paper by University of California at Berkeley Professor Severin Borenstein, published by the National Bureau of Economic Research. Worse, most of those losses landed in the past 10 years. The contributing factors were both tragic and economic: In the beginning of the decade the 9/11 attacks severely disrupted demand; toward the end of the decade a deep recession did little to restore it. Passenger demand in 2009 did not match that of 2000, says professor Borenstein. I need not even begin to discuss customer service levels.

In his analysis, Borenstein found that the legacy airlines like Delta, United and Continental–the last two merged last year–haven’t been able to narrow the cost differential that exists with the low-cost airlines like Southwest, yet at the same time they have been forced to narrow the ticket price differential that once existed. Throw in the odd fuel price spike and the major airlines were faced with year after year when costs exceeded revenues. This is not considered a formula for success in many businesses. The majors have worked hard at shedding capacity to better match passenger demand—why nearly every flight you get on seems filled to the brim—but they don’t drive the pricing in many markets. The low cost carriers do. So the majors are left to compete in an industry where they can be without leverage on the cost side and the revenue side.

But there’s no deterring airline startups. Vision Air got liftoff flying tourists over the Grand Canyon from Las Vegas, then expanded to a charter carrier before adding scheduled passenger service last December. Flying 737s and 767s, plus Dornier 328 turboprops, Vision plans to keep to secondary markets and stay out of the way of the bigs, which shows great strategic vision. But if it succeeds, watch for Vision to eye ever juicier markets and airports. It seems inevitable.

Given the industry’s historic losses, you might ask yourself why companies such as Vision would get into this business, but they do and not without success, as Jet Blue has proven. The barriers to entry in the airline business are laughingly low. (Remember Hooters Air?) There are plenty of planes and pilots around, (I found a half dozen 737s for sale in about 15 seconds) and lots of people crazy enough to invest in and work for an airline. Making money at it is an entirely different proposition.



