From today's NY Time Business section, http://www.nytimes.com
" In Philadelphia, Southwest Is Trying the Front Door
By MICHELINE MAYNARD
Published: January 31, 2004
hroughout Southwest Airlines' three decades in the air, its trademark has been sneaking up on big-city markets, starting service at lesser-used airports and luring passengers with tantalizingly low fares.
But now Southwest is shaking up air travel throughout the Northeast with a direct assault on Philadelphia, the nation's fourth-biggest market for air travel.
Southwest will not start flying out of Philadelphia until May, but it has already started running commercials there promising low fares and friendly service. In response, US Airways, the dominant carrier in Philadelphia, has cut some fares and vowed not to be undersold.
At the same time, though, it is pursuing a less-confident-sounding Plan B, by putting its Philadelphia operations up for sale. Saddled with high operating costs, US Airways is already wobbling financially, having emerged from Chapter 11 bankruptcy protection just 10 months ago; some fear that Southwest's assault could topple it right back in.
That's not all. Southwest's designs on Philadelphia also challenge airlines serving New York, like Continental at Newark Liberty International Airport and even JetBlue at Kennedy International, which draws bargain hunters from across the region.
Southwest's thrust into a major Northeast market also worries airlines like American and United, which are already battling for passengers to cities like Los Angeles and Chicago, and are loath to have another big city invaded by Southwest, the low-cost, low-fare leader. All of this delights ticket buyers, from individuals just looking for a good deal to corporate travel managers as far away as northern Virginia.
Kimberly Long, president of the Philadelphia Business Travel Association, said that many business travelers had "the basic feeling of being held hostage" to US Airways for years, because it accounts for more than two-thirds of the flights into and out of Philadelphia International Airport.
In a previous job as the corporate travel manager for a bridal company, Ms. Long said, she flew regularly on US Airways to St. Louis, often paying as much as $1,200 round trip for a full-fare ticket; colleagues paid $800 round trip to fly to Boston. Alternatives were time-consuming and inconvenient, she said, so "you just had to pay it."
Those days will soon be over. Though Southwest has not announced the prices on its Philadelphia routes, no ticket on Southwest costs more than $299 round trip, and the airline regularly offers one-way fares for as low as $34 if purchased on the Internet.
Southwest's move on Philadelphia is not without risk. The airline has become the industry's most profitable, and the most highly valued among investors, by running its operations like clockwork. But the unpredictable weather, crowded skies and frequent air travel delays in the Northeast "will make it difficult to operate its schedule smoothly," said Roland T. Rust, chairman of the marketing department at the University of Maryland's business school.
And by entering a market heavy with business travelers, a profit redoubt for traditional carriers, Southwest may invite a showdown with major carriers that many in the industry have been waiting for.
"Southwest has traditionally engaged in asymmetric warfare," said Professor Rust, referring to the approach of using secondary and suburban airports to serve major cities. Its move into Philadelphia may signal that it thinks US Airways is weak enough "that it can be taken on directly," he said.
US Airways is vulnerable, Professor Rust said, adding, "Southwest will hammer US Airways in Philadelphia."
Before Southwest even starts flying in Philadelphia, not only US Airways but other competitors there - including low-fare competitors like ATA Airlines - have vowed to battle back, promising what one aviation industry consultant predicts will be one of the fiercest contests the airline industry has seen in years.
The last such battle, said the consultant, Michael Allen, chief operating officer of Back Aviation, was a decade ago, when Southwest arrived in Baltimore. At the time, US Airways was the largest airline in Baltimore. By last year, however, Southwest accounted for 44 percent of all flights and US Airways only 10 percent.
Southwest was able to overtake US Airways even though it was then seen as a quirky, no-frills alternative to major airlines, known primarily for attracting backpackers and grandparents, not business travelers. Now, however, it is the sixth-largest carrier in the United States, and it has the potential to do major damage with its Philadelphia service, Mr. Allen said.
That is why its competitors are wasting no time. Even before Southwest has a chance to board its first passenger in Philadelphia, US Airways, which has 68 percent of the flights into and out of the city, is aggressively trying to cut costs. US Airways refused to comment, but its chief executive, David N. Siegel, is pleading with unions to accept pay cuts and changes in work rules, on top of two rounds of similar concessions that the airline won when it was in bankruptcy protection last year.
US Airways has even moved to sell some of its main assets - including its East Coast shuttle and one of its three hubs: Philadelphia; Pittsburgh; or Charlotte, N.C. - knowing that it will have to slash fares once Southwest starts flying there. Late last year, Mr. Siegel told employees that fares typically fell 30 percent when Southwest started new service.
Though US Airways may be able to avoid the full 30 percent loss in revenue because it offers business class and other premium service, like flights abroad, it must be prepared to accept its average fare falling 20 to 25 percent, he said.
Officials at Southwest contend that the decision to begin flying out of Philadelphia was not meant to cause US Airways trouble but to bring lower fares to customers like Ms. Long who have long become used to paying high prices.
In spring 2003, the average one-way fare on United from Philadelphia to Chicago was $185, or $370 round trip, according to Back Aviation. That is $71 more than Southwest's peak fare to travel anywhere in the country, a difference of almost 24 percent. Similarly, the average one-way fare on US Airways from Philadelphia to Las Vegas was about $160, or $320 round trip, last year - $21 more than Southwest's ceiling.
Even so, Southwest's choice of Philadelphia caught some people in the industry off guard. Southwest has long been known for choosing smaller places to serve big markets. It flies out of Providence, R.I., and Manchester, N.H., to draw passengers from Boston, for example, and uses secondary airports elsewhere, like Midway International in Chicago or Oakland International near San Francisco.
Given that, the industry thought Southwest would pick Allentown, Pa., where airport officials have been courting the airline for a generation. Instead, it went for the big cheese steak, a move the airline said it did not consider to be unusual.
Gary C. Kelly, Southwest's chief financial officer, said that Southwest also flew to top 10 airports like Los Angeles International, Phoenix Sky Harbor and Bush Intercontinental in Houston. "The selection of that airport isn't extraordinary at all," Mr. Kelley said of Philadelphia.
Southwest, which had not announced a new city in more than two years, based its decision "on our ability to operate efficiently, and the ability to lower fares," he said. Philadelphia, he added, "is one of the higher-fare markets in the country."
US Airways has the most to lose, but others will also be affected.
Last week, Gerard J. Arpey, chief executive of American's parent company, the AMR Corporation, vowed like Mr. Siegel to stand and fight in Philadelphia. "We don't relish seeing anyone come into one of our major markets," Mr. Arpey said, "but we are not retreating from any markets where we are facing competition."
Southwest is starting with six cities and 14 flights a day from Philadelphia, barely a blip on its daily schedule of 2,700 flights to 59 destinations across the United States. But in any city where it begins service, "we will add flights," Mr. Kelly said, adding, "That city will see a dramatic increase in traffic on the cities we serve."
How rapidly Southwest grows in Philadelphia will depend in part on its success in attracting business travelers. Unlike US Airways and other full-fare carriers, Southwest does not offer corporate discounts, contending its fares are already lower than the negotiated fares that other airlines offer companies.
US Airways has yet to say how much it will cut its fares once Southwest begins service from Philadelphia in May. Analysts suspect that US Airways is delaying its fare adjustments as long as possible to protect revenue in a market that has been one of its most valuable.
AMR's chief financial officer, James A. Beer, insists that Southwest will not get an edge in terms of fares. "We are fully competitive with the Southwests and JetBlues of the world," he said. "We want to be absolutely clear on that."
Mr. Kelly at Southwest said his airline was ready, too.
"In terms of planning, we have to be prepared for the worst, which is a very competitive battle for customers," he said. But, he added, that is not new to Southwest. "This is our life," Mr. Kelly said."
"Southwest Airlines draws passengers from many large cities, but it often uses secondary airports, like Oakland International, where Cornecia Banks worked the ticket counter last year"