Southwest to Write Its Own Philadelphia Story

After three years of steady growth, Southwest Airlines (LUV) is getting aggressive, expanding its low-cost service to Philadelphia, the nation's fourth-largest city and home to US Airways' (UAIR) most important hub.

On Tuesday, Southwest said it would begin flying up to 14 daily departures from Philadelphia International Airport in May 2004, using four gates. The debut of service in Philadelphia puts a sizeable chunk of US Air's business at risk at an especially vulnerable time for the carrier, which just emerged from bankruptcy in the spring and whose shares only recently began trading.

In Philadelphia, Prudential Equity Group estimates that US Air has a 72% market share and generates 25% of its total annual revenue, or more than $1 billion, from its operations at the airport. Philadelphia accounts for five times the revenue US Air generates from LaGuardia Airport in New York, so US Air will likely defend the hub by any means necessary.

"Philadelphia will not be an easy market for Southwest to penetrate ... however, we believe that the odds strongly favor Southwest in the long term," said Gary Chase, airline analyst for Lehman Brothers. "Even after its restructuring, US Airways does not have a low enough cost structure to compete with Southwest."

An earlier battle between US Air and Southwest over the Baltimore market illustrates this phenomenon. In 1993, Southwest announced plans to begin service with eight daily departures from Baltimore-Washington International, where US Air had 55% of the market share. The battle grew heated and fares plunged to as low as $19 one-way to Cleveland, but over time, US Air's higher cost structure made such fares untenable.

Unable to keep up, US Air's position in Baltimore was eroded by the low-cost competition. Today, Southwest Airlines is the dominant carrier from BWI, commanding 43% of the market share.

Let the Games Begin US Air generates 25% of its revenue flying out of Philadelphia, where it maintains a hub and has 72% market share. Here's a look at the top 10 destinations from Philly and where US Air must protect share.
Destination	# of Passengers	US Air Market Share
Chicago	805,500	26%
Orlando	798,370	70
Los Angeles	513,340	45
Fort Lauderdale	472,310	67
Bay Area	454,990	46
Las Vegas	427,220	42
Tampa	421,070	75
Houston	249,450	32
Phoenix	247,340	46
Miami	241,110	55
Source: Morgan Stanley Research