Low-Fare Airlines Take Off
While the biggest airlines are shrinking, airlines with lower costs are growing because they can afford to offer cheaper fares — and Wall Street's rewarding them for it.
The stock prices of Southwest Airlines, Frontier Airlines and Air Tran Holdings have rebounded sharply since mid-September, when the entire sector was battered because of the terror attacks. Shares of Delta, United and others are still languishing.
Two major trends appear to be benefiting the low-cost, low-fare carriers, analysts said: the frugality of business and leisure travelers in these tough economic times and the post-Sept. 11 decision by several major airlines to eliminate or dramatically cut back schedules at their low-fare subsidiaries.
For example, UAL Corp.'s United Shuttle and US Airways Group Inc.'s MetroJet have been eliminated, and Delta Air Lines Inc. halved its Delta Express unit, analysts said.
Analysts said the void left behind has been partly filled already by Air Tran, Frontier and Southwest, in cities such as Baltimore, Denver and Los Angeles, respectively. Air Tran, for example, launched service at BWI Airport in Baltimore only after US Airways said it would shut down MetroJet service.
"The fact is, low-fare carriers continue to grow relative to an industry otherwise in retreat," said UBS Warburg analyst Jamie Baker.
Because of schedule cuts made when demand slumped after Sept. 11, industrywide capacity for November was down 16 percent, compared with a year ago. But Southwest's capacity grew by 7 percent in November and Air Tran's bulged more than 5 percent, Baker said.
Southwest's passenger traffic did fall about 1 percent in November, Baker added, but it pales in comparison to declines of more than 20 percent at American Airlines and United Airlines, the country's top carriers.
Investors appear to have noticed, boosting shares of Southwest — the only major U.S. airline expected to report a profit for 2001 — by 46 percent since Sept. 17, the first day of trading after the terror attacks. Over the same period of time, Frontier's shares have risen more than 100 percent while Air Tran's climbed 83 percent. Shares of these companies are trading higher than they were a day before the attacks.
Shares of AMR Corp., the parent of American, remain 24 percent below Sept. 10 levels, while those of United are off 51 percent.
Analysts said airlines whose fares were already low have been in a strong position lately because they haven't had to reduce prices dramatically to appeal to penny-pinching Americans. Since their costs are lower, their revenues per passenger are higher than major airlines with expensive operations.
Low-fare carriers have also been helped by the fact that demand among leisure travelers appears to be recovering faster than it is among business fliers.
"Low-fare carriers such as AirTran and Southwest will continue to steal share from major carriers, until such time that the majors seek to improve te value of business travel," Baker added. "Simply waiting for corporations to spend recklessly again on air travel only gives low-fare carriers more opportunities to grow."
Corporate travel managers have also been more vociferous lately about the disparity between leisure and business fares.
"I think the fare structure is absolutely broken," said Hal Rosenbluth, chief executive of Philadelphia-based Rosenbluth International, a corporate travel management firm.
The largest airlines have begun offering more discounts for business travelers who book far in advance, but prices for "walk-up" fares, or tickets that are purchased at the last-minute, are often several times more expensive and out of the price range for many small businessmen, Rosenbluth said.
This is the case at Denver International Airport, where Frontier competes with United, said Michael Shonstrom of Shonstrom Research, which is based in Denver.
"In this environment, it's the low-cost operator that prevails," he said.
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