Southwest puts low-fare airlines in direct competition
By Dan Reed, USA TODAY
Southwest Airlines' (LUV) May arrival in Philadelphia could be bad news not only for high-cost US Airways (UAIR), but also for two rival discounters, AirTran (AAI) and JetBlue (JBLU).
It's the clearest sign yet that the competitive free ride that low-cost carriers have enjoyed the past couple of years is ending. Discount airlines are beginning to bump into one another as they grow. The big, high-cost carriers are starting to fight back.(Fare Compare: The Southwest effect)
Consumers will benefit. History shows that fares tumble when low-cost carriers enter markets. In the few markets where discount carriers face off, prices fall more. But that cuts into the discounters' profits.
Southwest is jumping into Philadelphia now partly to head off a costly battle later. Chief Financial Officer Gary Kelly told reporters last week that, "We don't want to wake up in five years and find that another (discounter) has established a strong presence in a market we want to enter."
Analyst Jamie Baker at J.P. Morgan Securities says Southwest's Philadelphia move is a "modest disappointment" for AirTran, which has higher costs than Southwest. It could face pressure to lower prices on its flights from Philadelphia to four Florida cities and to Boston if Southwest chooses to fly those routes. Any growth plans it might have had there now will be subject to what Southwest does.
For New York-based JetBlue, it is a "psychological negative," Baker says. "Hand-to-hand combat is likely years away." But the two are "one step closer" to a showdown.
Other examples of rising competition among discounters:
• JetBlue is withdrawing from Atlanta-Long Beach and Atlanta-Oakland in December, after six months. Delta and AirTran protected their Atlanta hubs by flooding the market with cheap seats.
• America West (AWA) launched its first non-stop transcontinental flights Sunday from New York's Kennedy Airport to Los Angeles International Airport (vs. JetBlue's JFK
-Long Beach service). Prices in the New York-Los Angeles market now go as low as $278 round trip, restricted; $299 one way, unrestricted.
• ATA (ATAH), which competes with Southwest at Chicago's Midway Airport, has scratched out a couple of quarterly profits this year but not enough to meet a $300 million bond debt payment due in November. A debt-restructuring deal is in the works.
The high-cost carriers also are beginning to fight the discounters.
• US Airways CEO David Siegel says his carrier must defend itself in Philadelphia, where it gets 25% of its revenue.
• American (AMR) CEO Gerard Arpey says discounters have had it "pretty easy" competing against high-cost airlines lately, but, "We are not running from these (discounters) anymore." American could announce a major simplification of its pricing and services by Thanksgiving.
• In the spring, Delta (DAL
) launched Song, a low-cost secondary brand, to compete against JetBlue and other low-cost carriers. United wants to launch a similar low-cost brand next year.