With the notable exception of Southwest Airlines, the US majors and low-cost contenders alike slipped back in the September quarter

The US airline industry went into winter with a loss of more than $1.2 billion in the third quarter, an autumn in which revenues sagged and fuel price hikes bit hard, while full-year losses will approach $8 billion. This would bring total losses since the 11 September terrorist attacks to around a staggering $30 billion. And yields remain weak despite recent fare increases. Since reporting some seasonally stronger unit revenue gains in the summer, revenues for the industry, excluding Southwest Airlines, have been deteriorating.

This may sound like an old song in yet another variation, but a few key notes are different: low-cost airlines, which burn the same pricey fuel as everyone else, have helped pour the red ink. ATA Airlines has gone into bankruptcy, America West's streak of profits has come shuddering to a halt. AirTran Airways posted a sizeable loss of nearly $9 million as hurricanes accelerated the effects of competition. Even Wall Street darling JetBlue Airways saw its net profit plummet by 71% and warned of a possible fourth-quarter loss.

The exception - and this is hardly a surprise - was Southwest, where profits were about 25% ahead of estimates as revenues rose almost 8% on a 7% capacity increase. Southwest's next moves stand to determine the direction of both the low-cost and the legacy sides of the entire industry. The low-cost sector will be shaped by the airline's decision to build up its Chicago Midway operation, as it takes on low-fares rival AirTran there. Just as important are Southwest's steps to position itself to target American Airlines. That will be far less easy as knocking US Airways off its Philadelphia throne, but Southwest's decision to stay at its Love Field home base in Dallas and challenge American from there, rather than move directly into its rival's fortress hub at Dallas/Fort Worth (DFW) foreshadows a show of arms if not a major shift in strategy.

Cautious strategy

In the past, Southwest's strategy has been marked by cautious or at least deliberately paced growth. Now it plans to build up Midway, add as many as 60 aircraft next year and to come out strongly against the 25-year-old restrictions on Love Field flights. This represents a new and more aggressive posture.

The airline has always fought all comers, but has never before found itself moving to challenge a strong major at a fortress hub at the same time it battles another low-fares player. Taken with his other changes to the Southwest model - possibly replacing its "cattle car" seating with reserved places, slightly higher sale fares, a foray into red eye flights and new structures to ensure labour peace - chief executive Gary Kelly is arming the carrier for battle.

Most analysts see Southwest as the top of the race card in any fight in Chicago, and AirTran has already begun conditioning its Midway expansion plans. And few predict that Southwest would run into trouble at Philadelphia or other US Airways strongholds. In fact, Lehman Brothers analyst Gary Chase thinks an expansionist Southwest could realise up to $500 million in annual growth by taking on US Airways at Charlotte and Philadelphia.

It is in its Dallas strategy that Southwest stands to write history again. However, Kelly firmly rules out stepping in to DFW to fill the capacity hole left by Delta's retreat there. But Kelly says Delta's exit "completely changes the competitive landscape" and has announced that Southwest will abandon its long-held "passionate neutrality" towards the Wright Amendment, the 1979 law limiting Love Field flights to seven nearby states if the aircraft have 56 or more seats. Kelly's first move against DFW is far more subtle than a Herb Kelleher-like declaration of war. He denounces the Wright Amendment as "anticompetitive and outdated" and says "we wouldn't stand in the way" of the attempts of others to repeal the provision. This has already begun in Congress, with the entire Tennessee delegation moving for repeal. Even a paced challenge to DFW from the smaller Love Field could rewrite the theories of inter-airport competition.

Still, Kelly also promises sanity, insisting expansion will not be reckless.


Source: Airline Business