Coming of age in the 1980s, I remember when "Ted" referred to Keanu Reeves, as Ted "Theodore" Logan in Bill & Ted's Excellent Adventure. Alas, no more. Now, Ted is an airline.
On Thursday, bankrupt UAL Corp.'s (OTC BB: UALAQ.OB) subsidiary United Airlines launched a new lower-fare affiliate called Ted, with an inaugural flight from Denver to Ft. Lauderdale. Billed as a hip alternative to such low-fare rivals as JetBlue (NASDAQ:JBLU) and Southwest Airlines (NYSE:LUV), Ted supposedly combines bargain prices with outstanding service.
United may be one of the finest in the air for passenger service, but is this really a differentiator in the world of no-frills airlines? Uh, no. More airlines are getting into the discounting business daily and passengers expect more for less. Witness Delta's (NYSE:DAL) Song, which is a distant cousin to Ted. Then there's AirTran (NYSE:AAL) and Denver-based Frontier (NASDAQ:FRNT), both modestly successful no-frills carriers.
Cool new paint aside, Ted is the same old thing. Both Ted's and Frontier's websites showed that the airlines charge the exact same price for a proposed trip to Vegas from Denver, leaving a week from today and returning on Monday, Feb. 23.
Of course, the biggest problem is that Ted actually raises United's costs. UAL says it will dedicate 45 planes to Ted and plans to keep them in the air 20% more than its remaining fleet, which will use additional fuel and jack up payroll. The additional seating in each of Ted's A-320 aircraft could offset those expenses, but that depends on taking customers from competitors. It's a failed strategy, according to aviation consultant Mike Boyd, who has followed the industry for 20 years. In an interview, Boyd cited bankrupt carrier Braniff and United's defunct Shuttle by United Service as prime examples of the failed Ted model.
So what should investors do? For one thing, it would be Foolish to keep a microscope on UAL's finances. Last month, the company reported that it reduced fourth-quarter operating expenses by 16% from the same period a year ago. Ted could reverse that trend without adding substantial revenue gains.
Certainly the no-frills airlines business is a good one, just ask Southwest. But none of the larger carriers have successfully encroached on Southwest's turf. Continental Airlines (NYSE:CAL) ditched its low-fare subsidiary five years ago, and AMR Corporation's (NYSE:AMR) American and Northwest Airlines (NYSE:NWB) are ignoring the lower end of the market. See the pattern here?
United may be picking a fight it can't win at the worst possible time. Bogus, dude.
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Motley Fool contributor Tim Beyers may have grown up in the '80s, but he doesn't own shares of any of the companies mentioned. When others were sporting that goofy Flock of Seagulls haircut, he wore the Larry Bird-esque Afro.
