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The freefall in

Frontier Airlines'

( FRNT) stock price Thursday gave new meaning to the term "Southwest effect."

Frontier's stock sank after

Southwest Airlines

(LUV) - Get Free Report

said it would start flying in and out of Frontier's home base at Denver International Airport next year.

Investors are scared that discounter Southwest,

which also reported a better-than-expected third-quarter profit, will shake up Frontier's market with its low fares.

Southwest, the seventh-biggest U.S. airline based on passenger traffic, has yet to disclose its Denver flight schedule and fares, but it plans a news conference next week.

Frontier's shares sank $3.08, or 28.6%, to close at $7.68.

The Southwest effect is well-documented and likely causes executives at other airlines to lose sleep.

When Southwest enters a market, its low fares cause more local residents to fly but force competitors to slash ticket prices. Since Southwest began flying to and from Philadelphia in May of last year, total traffic there has surged 30%. In the third quarter of 2004, the average one-way fare between Philadelphia and Chicago's Midway airport fell 46%.

Southwest's Denver announcement was enough to prompt Merrill Lynch airline analyst Michael Linenberg to slash his rating on Frontier from buy to sell.

Southwest's entrance into Denver will come as another rival is likely to turn up the pressure on Frontier.

United Airlines'




, the nation's second-largest carrier based on passenger traffic, expects to emerge from Chapter 11 bankruptcy protection early next year and has a large presence in Denver.

"Although we believe that Frontier should be able to withstand the increased competition in its home market, we anticipate that its profitability, and therefore, share price are likely to be under pressure," wrote Linenberg, whose firm does and seeks to business with companies covered in its research reports.

Frontier, which is the nation's 14th-biggest carrier, plans to report third-quarter results next Thursday.