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NYC To Test Southwest Effect

By Jay Boehmer / December 07, 2008 / Contact Reporter
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Southwest Airlines' plan to make its New York City debut through the purchase of 14 slots at LaGuardia Airport has spurred corporate travel buyers' hopes that the carrier's presence will lower fares in the biggest U.S. business market.

Southwest intends to purchase the slots at LaGuardia, which can accommodate seven daily roundtrips, through a $7.5 million acquisition of former codeshare partner ATA Airlines, which filed for bankruptcy and discontinued flights in April (BTNonline, April 3).

The bankruptcy court in Indiana overseeing ATA's proceeding this month approved the carrier's sale to Southwest, though a Southwest spokesperson said, "Nothing is final until early March when the court is expected to approve ATA's overall plan of reorganization." Given the timeframe, Southwest is keeping mum on "timing or type of service we could offer," the spokesperson said.

The "Southwest Effect," coined by the U.S. Department of Transportation in a 1993 report, describes the drop in fares and stimulation of demand that often occurs after Southwest enters a market. Though some buyers anticipating a similar effect are cheering the move to New York, some analysts said the effect could be tempered by the carrier's minimal market presence and a cost structure that is tightening the margin with its legacy competitors.

Terry Trippler, an airfare analyst and owner of Trippler's View, said of the Southwest Effect, "We have seen it in Denver, we saw it in Baltimore and we saw it in Philadelphia. What's amazing about that is these are three large cities, and generally cities they wouldn't go to. Now they're coming to Minneapolis/St. Paul in March and then they're heading into LaGuardia."

Southwest has focused operations in secondary airports in or near major cities, in many cases avoiding major hub airports. Southwest provides New York area service from Long Island MacArthur Airport, where it operates nonstop flights to Chicago, Las Vegas, Baltimore/Washington International and five airports in Florida.

Business Travel Coalition chairman Kevin Mitchell said New York service would fill a significant gap in Southwest's appeal to corporate buyers. "With all the things they've done to attract the business customer, from going into the GDS and bulking up their sales force, this was their big hole," Mitchell said.

"It will adjust the pricing in that market," said Dominion director of travel and corporate services and BTN's 2007 Travel Manager of the Year Donna Kelliher, pointing to Southwest's 2004 entry into Philadelphia International Airport (BTNonline, Nov. 10, 2003). "Look at how it adjusted the pricing in that market. This is what I want to see. A little competition goes a long way."

Of the Southwest Effect on New York, Robert Mann, president of airline consultancy R.W. Mann & Co., said it most likely would bring fares down, but it would not necessarily stimulate new demand.

Southwest chairman, president and CEO Gary Kelly told investors this month at the Credit Suisse Global Airline Conference that their only interest in ATA's assets are the LaGuardia slots. "We're not bidding for any other assets: no aircraft, we're not looking to hire employees related to this bid. All we want is access to LaGuardia slots." With the airport operating under capacity caps, slots are an elusive commodity, Kelly said. Though DOT plans to make some available through slot auctions, Kelly said, "Of course, transferring FAA landing slots is very controversial. Airlines are arguing that they own those rights; FAA said that they do not. It is about the only technique we're confident in that will get us to LaGuardia. There may be slot auctions in the future, but the airline industry has made clear that it will challenge that."

The slots, however, do not come replete with airport facilities at LaGuardia, but Kelly said the carrier is in discussions with the Port Authority of New York and New Jersey, which operates the airport. "We can handle seven dailies with one gate," Kelly said. "They have assured us they can make a gate available and if we decide to grow beyond the 14 slots, I'm reasonably comfortable we can get more facilities at New York LaGuardia."

Southwest is keeping its one-destination launch into Minneapolis minimal, and Kelly described the New York move similarly, calling it a "modest opportunity for us."

Southwest in October announced "a modest operation" at Minneapolis-St. Paul International Airport with service to Chicago Midway International Airport beginning next March. The carrier in October said it "plans to release more details of its future service to Minneapolis-St. Paul in the coming months," and last month filed its fares for the launch for the service.

The move serves as a minor case study in the Southwest Effect, with the carrier heading into a legacy-dominated market with what Southwest deems to be high fares.

"With new markets that we go into, our competitors charge as much as $400 one-way," Kelly said. "You won't find one market where we do that."

Farecompare.com CEO Rick Seaney last month in a research note confirmed Kelly's figures. He noted that as Southwest filed fares for that market, "the cheapest one-way airfare on Northwest, American and United was $426," though he noted better deals on the legacies could be found for roundtrip service. Within days of the fare filing, Seaney noted that "United and Northwest have both matched" Southwest on the route.

"Knowing Southwest, if something works, they expand rapidly, and I expect them to go to Kansas City and Salt Lake from Minneapolis," Trippler said.

Fares at Denver International Airport offer another a recent example of the effect. Southwest entered the market in January 2006. In the first subsequent quarter of operations, average airfares in Denver declined 2.2 percent, according to the U.S. Department of Transportation's Bureau of Transportation Statistics' Air Travel Price Index. Only Honolulu witnessed a greater decline, while average airfares nationwide grew 10.3 percent, BTS reported. The decline largely is attributed to Southwest's entry to the market.

Still, Trippler said Southwest's impact on demand and fares in New York and Minneapolis likely would be tempered by Southwest's minimal presence in those markets. Additionally, the carrier's fuel hedges are not as advantageous in the lower fuel-cost environment, making it more difficult to undercut the legacy carriers on price, he noted.

"On the surface, that's the way it looks. It would be somewhat difficult to battle the legacies with the fuel hedges, even though those have been in such their advantage for the past couple of years," Trippler said.

While Southwest's move into New York City again could prove the carrier's effect on market fares—at least on a limited route-for-route basis, according to Trippler—JetBlue treasurer and vice president of corporate finance Mark Powers during the Credit Suisse conference noted fewer opportunities for low-cost carriers to pour capacity into markets.

With the capacity out of the domestic system this year, Powers said, "Now we find ourselves in this situation that even if we wanted to bring capacity back, we really couldn't because there are pretty skinny order books anyway." As such, Powers said, "You don't have guys like JetBlue—the LCCs—undermining the legacies' efforts to bring down capacity by flooding the market."

Southwest's Kelly told investors this month that the carrier's first-quarter 2009 schedule would be down by as much as 5 percent, as the carrier scales back services "that aren't popular or productive."

Still, Kelly told investors the carrier is able to get into new markets like New York and Minneapolis by "optimizing our fleet schedule" and still slow overall growth next year. "We want to grow," he said. "We're not satisfied with our route map, we're not satisfied with our revenues. While this is a very tough environment today, for companies that are prepared as usual, there should be a tremendous number of opportunities."
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