Southwest Airlines this month began a systemwide fare sale, reinforcing its position as the industry's pricing leader and prompting financially troubled competitors to reduce already depressed airfares. Other low-fare carriers, including AirTran, ATA, Frontier and JetBlue, also launched widespread fare sales for post-Labor Day travel, which analysts said are aimed at filling excess capacity but do not differ much from previous years. Other industry observers and officials at competing carriers, however, were left wondering if the low-fare carriers are leaving money on the table, with some even insinuating that Southwest is executing a strategy of predatory pricing.
That Southwest and predatory pricing even are mentioned in the same breath speaks volumes about the current state of domestic airfares. Executives at major network carriers acknowledge that their lower-cost competitors are setting the price points and wrecking any realistic shot at near-term industry revenue improvement. Instead of raising fares to offset higher fuel costs, as they repeatedly have tried for months, the legacy airlines are forced to offer lower prices on more routes.
The newest seasonal price promotions, which this year came a few weeks earlier than normal, continue to lower the bar on fares at the leisure end of the pricing spectrum.
At the same time, major network carriers also have been compelled to lower business fares. Excess capacity, intense competition and more frugal business travel buying patterns have pushed average business fares down 10 percent from last year, according to New York-based Harrell Associates.
Southwest's lower fares, which range between $39 and $99 one way and require a 14-day advance purchase, are available only through southwest.com and the Swabiz corporate booking portal. Fares apply for flights between Aug. 16 and Oct. 29 to almost every destination and must be booked by Aug. 5. If past fare sales around the industry are any indication, that booking deadline could slide farther into the summer.
Southwest said September bookings "are building nicely" as a result of the recent sales. "It is classic Southwest," said new CEO Gary Kelly, who late last week succeeded Jim Parker.
"I wouldn't be surprised to also see the duration of travel date extend to the end of the year," said airfare analyst Bob Harrell of Harrell Associates.
All majors completely or partially matched Southwest's sale fares, though some maintained ticketing restrictions that Southwest does not apply, such as Saturday night stay requirements.
"This is the first major sign that the airlines do not have quite enough buyers to fill seats, even with rising traffic numbers," said Terry Trippler, consumer advocate for online booking engine SideStep. "Southwest realized that. They were looking 90 days out, and they did not like what they saw."
"I have been worried for some time that there is far too much capacity out there relative to demand," added Robert Mann of R.W. Mann & Co., an airline industry consulting firm in Port Washington, N.Y. "This suggests that Southwest is taking the lead and planning to do a share grab."
Others went farther. "Southwest is saying, 'We may lose money, but we'll take some of the big guys down with us,'" said Randy Petersen, frequent flyer guru and editor of Inside Flyer.
That notion has led some to cry foul. "This smacks of predatory pricing," one corporate travel manager said. "A lot of competitors are scratching their heads."
Predatory pricing accusations in the past have been leveled at major network carriers that allegedly price well below their costs and dramatically increase capacity in an effort to drive competitors out of coveted markets. In nearly every case, it has been too difficult to prove in court. In this case, Southwest's sale almost covers its entire system and does not impact last-minute fares.
According to Management Alternatives vice president John Heilner, the carrier's pricing actions therefore cannot be considered predatory. Heilner, an airline industry pricing veteran, also said Southwest is not necessarily after overall share gains. "Fare cuts hardly ever work in getting more share because everyone else matches and you just get dilution," he said. "Southwest may not be trying to drive anyone out of business, but they certainly are stepping up the pressure and making life uncomfortable for competitors in key markets. It is an expensive strategy."
It is particularly expensive for network competitors, which, in matching Southwest, continue sacrificing yields. Yet, even modest attempts at price hikes have failed to provide a modicum of financial stability. Numerous domestic fare increases this year have been short-lived and American Airlines, in its June traffic report, said recent, limited fare increases "will have a minimal impact on total system revenue."
More indicative of recent domestic pricing actions, American last month cut fares in the Dallas Ft. Worth-Los Angeles market to battle against an incursion by AirTran
(BTN, June 10).Similarly, Continental Airlines last month lowered one-way coach and first class fares for many flights from its three primary hubs
(BTNonline, June 23) and US Airways this month continued rolling out its simplified low-fare structure
(BTN, May 10). The new fares now are available to 24 markets from Reagan Washington National and Washington Dulles airports and to 15 markets from Philadelphia.
Like Southwest, JetBlue's newest fare sale requires a 14-day advance purchase through the carrier's Web site. The sale, which lowered fares on 1 million seats throughout the carrier's network, currently is scheduled to end July 29 for travel between Sept. 7 and Dec. 15.
"There is no question that the domestic operating environment will be very competitive this summer and on into the fall. There is no question that there are key markets with significant excess capacity, transcon most notably," said UBS analyst Sam Buttrick. "Under more sober scrutiny, some components of current year sales look more aggressive than last year (Florida pricing), some look the same (transcon pricing) and some look less aggressive (duration and timing elements)."
Nevertheless, as network carriers match lower pricing, more fares have become ineligible for corporate discounts. That has led to greater corporate travel manager interest in tracking airfare levels, Harrell said. "They are more interested in sophisticated benchmark techniques to get reference points to see when published fares undercut negotiated discount fares," he said.
Even at the upper end of the fare spectrum, prices have been well below 2003 levels (see chart). "It is being driven by the continued penetration of low-fare carriers into the strongholds of major carriers," Harrell said. "It is not surprising that these numbers would indicate that there are a lot of empty seats."
His data showed 10 percent declines in the average business fare across 100 top markets in the last week of June and first week of July. Business fares are defined as those commonly used by business travelers with no minimum stay and advance purchase of three days or less. The 100 top markets represent the 20 busiest city pairs flown by seven of the nine major U.S. carriers.
The routes with the most dramatic year-over-year business fare reductions include several transcontinental routes. For example, fares offered by American and United between New York and both Los Angeles and San Francisco were down 47 percent, reflecting fresh competition from JetBlue and America West.
Southwest's spring entry into Philadelphia also is starting to show results, as business fares offered by United and US Airways to Chicago were down 85 percent.
Parker last week stepped down as Southwest CEO and vice chairman for personal reasons after fulfilling a three-year contract. Chairman Herb Kelleher said Kelly already had been identified by Southwest's board as Parker's successor, which had been "contemplated for some years down the road."
Parker led the model low-fare carrier since mid-2001, maintaining Southwest's streak of profitability—the carrier last week reported its 53rd consecutive quarterly profit—and guiding its growth as it developed the largest domestic airline operation.
Kelly, who previously served as executive vice president and CFO, became CEO, vice chairman and a member of the board of directors. He first joined Southwest in 1986 as controller.