The Southwest Effect

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We've seen it here in Philly--look at Chicago:

SWA's Growth at Chicago Midway Spelled out

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Southwest smells blood
Bigger expansion eyed; United and American targets

April 04, 2005
By Julie Johnsson

Southwest Airlines is mulling an expansion that would make Midway Airport its largest hub in the country.

That would position Southwest to shatter the duopoly in Chicago long enjoyed by United and American airlines, pushing fares downward to scoop up a portion of their lucrative business-traveler base.

Already in the midst of the largest single-market growth spurt in its history, the low-cost carrier is considering boosting its Chicago operations by another 30% to about 250 daily departures, almost on par with United and roughly equal to American's mainline capacity at O'Hare International Airport.

By July, when the current expansion wave ends, Southwest will operate 192 daily departures from 25 gates at Midway. That's a 32% jump in operations since last October.

"Chicago is our No. 1 priority and that's pretty evident in terms of what we're doing with our growth," says Richard Sweet, Southwest's senior director for marketing and sales. Noting that the carrier strives for at least 10 flights a day from each of its gates, he adds, "You do the math."

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The Texas-based carrier, which once shied away from directly challenging United and American, is ramping up service to their strongholds, including Portland, Ore.; San Jose, Calif., and Austin, Texas.

Airfares are tumbling as the nation's two largest airlines face their first serious threat from a low-cost rival in Chicago, and fares will fall even further if Southwest follows through on the plans it's contemplating, observers say.

"When Southwest competes head-to-head with these legacy airlines, they lose," says Tom Parsons, CEO of Bestfares.com, a Texas-based online travel service.

STEMMING DEFECTIONS

United and American aim to stem customer defections with price cuts and service perks not offered by no-frills Southwest: assigned seating, business-class service and international awards for frequent fliers. United, which did not return calls seeking comment, also is hedging its bets by rolling out its discount carrier, Ted, at Midway. Service was to have begun on Sunday.

In fact, passengers are returning to the major carriers in some markets where their prices match those of low-cost carriers. "In Miami, people are coming off the low-cost guys in Fort Lauderdale and coming back to us," says a spokeswoman for American Airlines. "It will be interesting to see what happens here."

Southwest has steadily built up its presence at Midway since last fall, accelerating the pace in recent months as it purchased six gates from ATA Airlines Inc. for $34 million, part of a larger bailout of the troubled Indianapolis carrier.

The two carriers also agreed to code-share, meaning that passengers who book travel through Southwest can buy tickets to New York, Honolulu and other destinations served by ATA and not Southwest.

Southwest also is launching non-stop service to 11 cities. And it is adding flights from Midway to cities where ATA has stopped service, including Orlando, Fla.; Phoenix, Ariz., and Los Angeles.

Southwest plans to fill its planes with people who haven't flown before, as well as business travelers drawn by its prices and Midway's proximity to downtown Chicago, says the airline's Mr. Sweet. "The Chicago market in itself is just very inviting," he adds. "It doesn't hurt that the industry is in the state that it's in and we're in a good financial position to actually grow."

The discount carrier will account for 64% of Midway's passengers by summer, and about 16% of the total Chicago aviation market, according to Back Aviation Solutions, a Connecticut-based consulting firm.

That's well behind United Airlines, which controls 38% of the total market, and American's 30% marketshare. However, Southwest will close that gap with its code-sharing agreement with ATA, which has 5% of the total market, and if it beefs up its Midway operations by the additional 30% contemplated by executives.

Furthermore, United and American can't add any more flights at O'Hare under Federal Aviation Administration restrictions to control delays, now slated to remain in place for at least three more years.

EMPOWERED BY COSTS

Although it's the relative upstart in the market, Southwest calls the shots since its costs are significantly lower than its larger rivals' are. "Any market that's priced significantly different than what Southwest is going to offer will find itself moving more to Southwest's numbers," says Back Aviation Chief Operating Officer Michael Allen.

Indeed, average fares for business travelers flying from Chicago already have tumbled 53% over the past year, as Southwest spreads its wings, according to Harrell Associates. "The more Southwest flying you have, the lower the fares are going to be," says Bob Harrell, president of the New York-based aviation consulting firm.