Southwest eager to seize market share from ailing rivals
Posted on Sunday, May 11, 2008
The big cities that Southwest Airlines has invaded in recent years — San Francisco, Denver, Pittsburgh, Philadelphia and Washington by way of Dulles International Airport — all happen to be air travel markets that were dominated by either United Airlines or US Airways.
It was no coincidence. United and US Airways are among the weaker competitors in the airline industry and they put up little fight when Southwest arrived and started grabbing market share.
Now United and US Airways have been holding merger talks, and the prospect that they might combine pleases Gary C. Kelly, chief executive of Southwest. He said in an interview that he relished the prospect of the two hub-and-spoke carriers cutting back flights to reduce costs and also the likelihood that such a merger could result in a period of operational chaos for the combined airlines.
That would give Southwest an opening to seize yet more market share.
“I would welcome that kind of a combination,” Kelly said.
To politicians who worry that domestic competition would suffer if United and US Airways merged, Kelly said: “We can put those fears to rest.” He said Southwest would quickly move in to expand service.
Spokesmen for US Airways and United declined to comment on merger talks.
Other carriers are giving Southwest a wide berth, according to Daniel McKenzie, an analyst at Credit Suisse. Overall domestic airline capacity is down about 3 percent, McKenzie noted in a report issued last week, but capacity cuts have been twice that large in markets where hub-and-spoke airlines compete against Southwest.
Southwest, the healthiest company in an increasingly sickly industry, says it does not know what its next major competitive move will be, probably because it will result from another airline’s severe misfortune.
In anticipation, Kelly is trying to keep his powder dry, with about $ 3 billion in cash on hand and the ability to expand Southwest’s fleet of Boeing 737 s this year by hanging onto, rather than retiring, 22 older planes. Southwest has 29 new 737 s arriving this year and its fleet totaled 527 planes as of March 31.
Southwest has already reversed a decision to retire two older 737 s, choosing instead to add service from Denver to Indianapolis and Portland, Ore.
“If somebody shuts down, you need a giant number of new aircraft,” Kelly said.
If Frontier Airlines, based in Denver and operating under bankruptcy protection since last month, is forced to significantly shrink operations, Kelly wants to be ready to expand Southwest’s flights there rapidly. Frontier already has said it will end service at five smaller airports, including its flights from Little Rock to Denver that will end on June 1.
“We’ve done a lot of contingency planning,” as oil has soared above $ 120 a barrel, sending the airline industry deep into the red, Kelly said. Southwest is alone among major airlines in having most of its fuel costs hedged at lower prices — 70 percent of its needs at $ 51 a barrel for 2008.
Gains of $ 302 million on hedges during the first quarter allowed Southwest to report a small profit of $ 34 million, or 5 cents a diluted share. United, meanwhile, posted an unexpectedly huge loss of $ 537 million and US Airways lost $ 236 million.
While higher fuel costs are pushing some carriers to seek mergers, notably Delta Air Lines and Northwest Airlines, Kelly said his interest in an acquisition, tepid to begin with, had all but vanished because of rising fuel prices. Southwest does not have enough fuel hedges to protect a merger partner, so it would inevitably be buying a moneylosing operation.
“My enthusiasm for that is just not there,” he said. “The thought of simply acquiring outright another airline that is destined to lose money this year just doesn’t seem like a good opportunity.”
Southwest has its own problems, though the fuel hedges are buying it time to address them. Kelly needs to raise Southwest’s revenue by about $ 1. 5 billion aside from any growth at the airline, and that higher revenue must mostly come from higher ticket prices.
Southwest is ditching some routes altogether, like Philadelphia to Los Angeles International Airport, and flying others less frequently. Round trips between Oakland and Ontario, Calif., have been cut to 12 each day, for instance, instead of 14.
It also is charging $ 10 to $ 30 on its highest fares for the right to choose a seat early on its flights. And it has increased to 15 the number of fares it might have on any one flight, nearly double the old number, allowing it to compete more effectively against hub-and-spoke carriers that list as many as 26 fares.
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