Avelo Airlines began service on April 28, using older 737 aircraft in an Allegiant ALGT-style business model initially based at Burbank airport in Los Angeles County. Breeze Airways, the newest carrier from serial airline entrepreneur David Neelman, started selling tickets Friday and will begin flying May 27. Breeze will use the Embraer E190/195 aircraft but its flagship plane will eventually be the modern new Airbus A220. These two airlines are starting just as the U.S. is starting to come back to normal. Both airlines will have significantly lower costs than the largest U.S. airlines. Disruption Helps Consumers From People Express in the 1980s, Southwest Airlines in the 90's, and on to airlines like Allegiant, Spirit and JetBlue, the U.S. airline industry has been defined by continuous disruption. In all cases, consumers have benefited from lower fares, sometimes improved service (especially in the case of JetBlue), and maintaining pressure on mature airlines to keep their business models fresh. Avelo and Breeze will be two new disruptors, promising friendly service, low fares, and flights on many routes that have limited or no current nonstop service. The existing airlines will react, and Avelo has already seen this from several carriers. Consumers will decide if they like these airlines and locations they choose to fly, and again larger carriers like American, United, Delta, and Southwest will be watching closely. This is especially true in an environment where traffic demand is still building back so every passenger lost to a new airline will be seen as a threat. Good Time For Low-Cost Airlines Despite that the economy is still in recovery and air travel demand is still far below 2019 levels, low-cost airlines have been especially aggressive. This is due to three strong reasons, and Avelo and Breeze both benefit: 1. Low costs of production mean that these airlines have returned to positive cash flow and will be profitable at lower revenue than larger, more global airlines. 2. No wide-body aircraft means not being burdened by the high costs of ownership for those planes. With long-haul business travel's return highly uncertain, wide-bodies represent the largest risk in the industry. Low-cost carriers do not have this risk. 3. With fewer business travelers, large airlines will have to adjust their business models to be profitable with a higher base of leisure customers. Low-cost airlines already make money on the lower ticket prices from leisure travelers, so if businesses travel less, they don't feel the pinch. Good Track Record Players Many people think they could run a good airline, but few have been successful at it. David Neeleman has a stellar track record, and has been a success with each of his four previous airline start-ups in Canada, the U.S. and Brazil. That certainly helped him generate support for Breeze and will ensure that Breeze is financially strong on day one at least. Andrew Levy, the brainchild and CEO of Avelo, was a successful President at Allegiant and spent time as the CFO of United Airlines as well. He understands the business well, and knows how well-structured low-cost carriers think and how the big airlines can react. He was there thanking every customer at Avelo's inaugural, and knows that low fares don't lead to unfriendly service. Good Airplane Prices With air travel down and some demand return uncertain, aircraft manufacturers and aircraft lessors are more aggressive about getting their products placed. This undoubtedly was favorable for Avelo looking for their used 737s, and Breeze as they placed their A220 order. The choice and cost of aircraft can have a large effect on an airline's cost structure. Securing a competitive advantage on this line of the income statement is a hard thing to do, and yet the current environment makes that possible even for smaller, start-up airlines. Normally this advantage can be created only to those buying hundreds of planes at a time. Weaker Competitors In a strong economy, big airlines are good at putting pressure on new carriers by both lowering their prices and adding capacity. But in the current environment, especially after taking a lot of taxpayer money, the largest U.S. airlines will have to be more careful about how hard they try to snuff out these two new airlines. Spirit Airlines saw this benefit when they entered the Dallas market in 2011. Using $11 fares while Dallas' biggest airline, American, was in Chapter 11, reminded everyone that low fares were great and big airlines couldn't react too well. The current environment is not exactly the same, but it is a more ideal time for Avelo and Breeze to start than if everyone else was healthy. Excess Capacity Creates Unstable Pricing Near-term, Avelo and Breeze have good prospects for all of the reasons above. Yet, for the industry, more carriers could mean more capacity in the long term unless the larger carriers actually shrink or the economy grows quickly. In any industry, more efficient capital replaces less efficient capital, but in the airline industry this can take a long, long time. One industry executive stated that, "excess capacity is the root of all airline evil," and what he meant was that airlines have a hard time maintaining stable prices when there are more seats than there are customers. Airlines have high average costs with the high price of fuel, airplanes and people. But they have surprisingly low marginal costs, meaning that getting almost any money for a seat that would otherwise go empty is worth it. That tends to drive industry prices down when capacity is high. But again, even in this environment, it is the low-fare airlines that win, since it their prices being matched, not undercut. For many reasons, the two newest U.S. airlines have a good chance to be successful. They are well capitalized, will be well run with strong leaders, and are starting at a time that is uniquely beneficial for their business models. The real winners are travelers, who get more choice and lower fares. FROM THE ABOVE ARTICLE, PLEASE HELP ME SOLVE THE BELOW QUESTIONS. 1. Describe Avelo and Breeze's approach and how theirs differ from the approach taken by others. 2. Describe any barriers to entry that these companies, including Avelo and Breeze, are likely to encounter in this market. Are they structural and/or strategic barriers? Explain