Southwest to Write Its Own Philadelphia Story

"It required nine years of Southwest effort to dismantle US Airways' hub in Baltimore, and US Airways fought aggressively, at least at first, to maintain a beachhead there," said Jamie Baker, airline analyst at J.P. Morgan. "Nonetheless, once Southwest's market share of BWI began to [move] into the low teens, US Airways' share began its decisive and irreversible slide."

Southwest's move in Philadelphia doesn't just affect US Airways, however. By moving into such a large market that's so close to New York City and Washington D.C. at the same time JetBlue (JBLU Quote) plans to debut service from Boston's Logan Airport in January 2004, the entire northeastern travel corridor will see competition increase. Furthermore, it puts JetBlue and Southwest on an inevitable collision course where the young upstart and the old master will compete head to head.

"More psychological than anything at the moment, Southwest's Philadelphia service certainly brings it and JetBlue closer to hand-to-hand combat in the Northeast," said Baker. "While route overlap between the two remains highly limited, Southwest's apparent bias towards Northeast expansion is not expected to make life easier for JetBlue."

It won't make life easier for many other carriers, either. Because of Philadelphia's proximity to New York City, large service increases along with lower prices -- exactly what happened when Southwest entered BWI -- will put pressure on New York-based operators to keep fares low as well.

By and large, analysts cheered the news, telling investors they felt Southwest would be successful in Philadelphia and the return of aggressive growth could lead to more upside for shares in the months and years to come.

"In the long run, as Southwest's frequency into and out of the Philadelphia market increases, we believe significant upside potential exists for the franchise," said Daniel Hemme, analyst at Prudential Equity Group, in a research note.

Cheap, Cheap, Cheap When a low-cost carrier enters a new market, fare levels plunge, a phenomenon known as the "Southwest Effect." On some routes, Southwest's fare could be a third of the average fare paid in 2002.
Destination	Avg. Fare*	Southwest Fare**	% Difference
Boston	$186	$56	-69.9%
Charlotte	241	89	-63.1
Chicago	144	102	-29.2
Denver	184	125	-32.1
Houston	212	133	-37.3
Los Angeles	190	144	-24.2
Miami	138	101	-26.8
Pittsburgh	141	53	-62.4
San Francisco	211	151	-28.4
St. Louis	217	98	-54.8
* -- As of 2002. ** -- Estimated. Source: Lehman Brothers Research