The NY Times published a piece yesterday on the battle between start-up and network carriers that I didn't quite agree with. The premise is that start-up and small carriers have a tough time succeeding in the US because of lots of unfair government and institutional disadvantages.

You can read it here: Start-Up Airlines in a Struggle to Survive

It reads like a PR piece from Virgin America or JetBlue, sobbing softly about their inability to get into airports like O'Hare and LaGuardia. It suggests that the network carriers, with their evil lobbyists and corporate power, have forced the playing field to be so mountainous that there's no way for small carriers to effectively to compete. If only this were true, the network carriers would be in much better shape than they currently are!

First of all, let's review some basic principles of capitalism. Larger, more scaled companies in nearly every industry known have a market benefit over the smaller, newer players. This is not unique to airlines -- It's ubiquitous. The large players are obliged to treat the consumer well, otherwise they will incentivize new entrants to come in and compete against them. Ironically, in most industries the entrenched players have a massive cost advantage, since scale is often critical to keeping costs low -- But in the airline industry, new players have a massive cost advantage since labor is so much cheaper and that is the biggest non-fuel cost bucket for airlines.

In summary, the playing field for new entrants in the airline industry is actually flatter than it is for nearly every other industry. That doesn't mean that barriers to entry are small, it just means that once they enter, they have a real competitive advantage to combat the lack of marketing or scope. In fact, in an industry where tickets are purchased as commodities, this is a real advantage. People buy on Spirit despite a weak (or negative) brand because it's cheaper. For their target market, it doesn't matter that someone belongs to AAdvantage. One also can't credibly argue that barriers to entry are high in the US. Capital alone is not a significant barrier to entry, and that's all you really need -- to buy an old operating certificate or a small carrier and start growing it. Sure, it takes some time, but a few years and some money is not generally considered a high barrier to entry. Once you have an airline, the barrier to entry for a given route is very very small -- that's what keeps each route competitive as a microcosm of the industry overall (Of course this is different for a few select airports -- to be addressed shortly).

So what is this article talking about? There is a list of disadvantages to smaller carriers, such as: "takeoff slots and gates at desirable airports, restrictions on foreign investment...and rules preventing foreign carriers from flying in the United States."

Wait a second, so because it is hard (not impossible, just hard and costly) to obtain flying rights into ~4 airports out of the 383 commercial airports in the US (representing ~10% of US enplanements), new carriers cannot be successful? That's weak, if you ask me.

Restrictions on foreign investment and rules preventing foreign carriers from operating in the US are irrelevant since network carriers face the same hurdles. Virgin America's hoop-jumping is solely the result of the fact that Richard Branson is the patriarch there. It has nothing to do with the dynamic of airline competition. It is completely arbitrary to apply Virgin's hurdles to new and small carriers in general.

What else does the article cite? "Global networks, government policies that favor them and the marketing advantage that comes with size."

Let's take these in turn:

1) Global networks: Yes, flying globally makes it hard for a domestic airline to compete against global flying. How is this relevant? Okay, connecting global passengers help subsidize domestic routes, that's true. But how is that an unfair advantage? It's a strategic advantage earned by growing internationally and aligning with carriers overseas. This is like saying the independent hotel can't compete against the Hilton because Hilton owns hotels around the world. True? Sorta maybe in some ways. Unfair? No. You must compete on some other value proposition. If the Hilton hotel is perfect in every way AND it has hotels around the world, well then maybe the customer is happy and you shouldn't be trying to compete. Odds are that's not the case -- but in airlines alike, a new entrant must find the right way to compete. It's not going to be global reach, but maybe it's price, product, schedule, airport selection, etc.

2) Government policies that favor network carriers: The article cites none, so I can't refute a claim when there isn't any. Maybe they're referring to allowing the network carriers to merge? Maybe to the slot situation at Newark, O'Hare or LaGuardia? I don't know. To be fair, the DOT tried to help small carriers when US Airways and Delta wanted to swap slots -- the DOT said only if you give some to the small carriers. And the network carriers balked. But the DOT has no leverage to force them to divest otherwise, so at least it was a shot.

3) Marketing advantage that comes with size: Yes, like every other large company on the planet. In fact, this is likely far less for airlines than in most other industries since the purchasing channel has allowed an upstart airline instant and free access to the consumer by simply displaying a competitive price (e.g. Kayak & Expedia, don't discriminate network carrier vs. low cost start-up). Do you know how many start-up marketing managers in thousands of industries all over the world would give their left arm for that kind of access??

Another mentioned advantage: Frequent flier programs. Again, this is a legitimate strategic investment by network carriers to build loyalty. Even the new carriers have programs. It takes time to build up membership in your niche markets to start, just like any new company in any market. You can say that by not taxing them, you are helping the large programs maintain an advantage, but as long as the tax playing field is level, it'd be hard to make that argument sound plausible.

But here's the final, devastating argument against the article's thesis: Results.

In FY 2009, JetBlue, Southwest, AirTran, and Spirit ALL OUTPERFORMED EVERY NETWORK CARRIER. Virgin did not, but it is brand new and still working off its early years (like every other capital-intensive start-up in history).

Similarly, the smaller and newer carriers have DRAMATICALLY OUTPACED NETWORK CARRIERS in capacity growth over the last 10 years.

Consultant Hubert Horan states in the article: "King Solomon couldn't start a U.S. domestic airline these days". Well, I guess David Neeleman and Richard Branson (et al) are smarter than King Solomon. They have both started U.S. domestic airlines in the 2000s and so far so good. Spirit and Airtran have also built scale and grown profitably "these days". In fact, only ill-conceived Skybus and Independence Air -- poorly capitalized tries -- have failed in any high-profile way (Go! also, but Hawaii is a unique market).

Mr. Horan also states: "...these well-run efficient airlines - people like them, they have low costs - but they can't get the badly run inefficient airlines to go away...In a competitive market, the people with the better-run companies ought to drive the high-cost companies out of business"

Seriously? Can you name one other industry where the tiny player, over the course of several years, drove the large entrenched player out of business? United is an order of magnitude bigger than Frontier, they don't just disappear even if Frontier kicks butt at their hub. And over the long-haul, that does happen in the airline industry. Southwest takes major share from the big carriers, and forces America West and US Airways to merge to survive (in part). Northwest is now gone in part because of start-up competition, and the same will be true of the old Continental and United. Just because they don't liquidate -- they get bought/merge, doesn't mean the small carriers aren't impacting the large ones. We're not mass producing widgets here -- JetBlue can't take over AA's JFK operation because they're more efficient. And finally -- the people speak. The government is not propping up AA -- people are choosing, day in and day out, to fly them. And even choosing them over other "more efficient" carriers.

New entrants are not supposed to automatically kill the network carriers. They are supposed to force them to do better, compete against them, steal share, and keep them honest. That is exactly what they have done.

If you think Virgin America is going to put AA and UA out of business on SFO and LAX to JFK routes because it has a better inflight product, you are very mistaken. They aren't meant to. They are meant to get some share, thereby forcing AA and UA to make their product better, improve their frequent flier benefits, and lower their fares. And guess what? After only a few years flying, they are expecting to do it profitably this year. Right on schedule.

If that's not proof that the landscape for small and new carriers in this country is alive and well, I don't know what is. It's not supposed to be easy to start and grow airline.  It seems all carriers, big and small alike, should turn their attention away from the government and perhaps towards their customers. I'd argue that is the clear path to success, regardless how many people you can convince you're being treated unfairly. Call me crazy, but I just don't see many people feeling much pity for the airlines nowadays.