The Duel at Dulles: US Airways Decides to Roll the Dice

The airline makes a move in Washington.
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A funny thing has happened over the past few weeks around Washington, D.C.

It appears that

US Airways

(U) - Get Report

has decided to roll the dice in Washington, putting more muscle for a buildup of service at Dulles airport.

This is newsworthy on several fronts, the first being that Dulles is now the fourth major US Airways hub on the East Coast. Second, it appears that US Airways has decided to fight a two-front war -- going against

Southwest Airlines

(LUV) - Get Report

at Baltimore-Washington International and

UAL's

(UAL) - Get Report

United Airlines

at Dulles.

US Airways already has three major hubs on the East Coast -- a fact that, to be honest, has always mystified me. If you know anything about O&D (origin and destination routing) market strategy and flyover routing, you have to admit the existing route system seems inefficient at best.

If the airline had a substantial trans-Atlantic operation, that would be one thing -- but it doesn't. However, it has just recently put hundreds of millions of dollars into its Philadelphia hub, anticipating that Philadelphia will become its flagship point of entry to Europe going forward. However, the airline also has a major hub at Pittsburgh, and the US Airways Shuttle runs up and down the East Coast with Washington's National Airport as its base.

Then, this past year, US Airways announced its

MetroJet

service out of BWI -- a lower-cost alternative to mainline service that the airline is using as a hedge against such competitors as Southwest Airlines and

Delta Air Lines'

(DAL) - Get Report

Delta Express

operation.

So, with all of this going on, why did US Airways open up another front by declaring war in Dulles, where that slumbering giant United Airlines holds sway, along with its agile regional partner,

Atlantic Coast

(ACAI)

?

I see three reasons behind this move:

    A white flag in the war with Southwest. This buildup at Dulles may be a concession to Southwest's operation at BWI. MetroJet or no MetroJet, Southwest continues to be an irresistable force out of BWI, as it continues to expand its service. US Airways seems to have come to the conclusion that going after United is easier than a fight with Southwest at BWI. Long-term strategy. US Airways CEO Rakesh Gangwal has said he wanted to fly internationally out of Washington. (Of course, this begs the issue of the recent substantial cash outlay at Philadelphia.) Grudge match. Let's not forget those important elements in operational decisions: grudges and incestuous relationships. In case you have not noticed, many ex-United executives have now migrated to US Airways -- a trend that started when former United and now US Airways Chairman Stephen Wolf took over at the airline a few years ago. It is a virtual revolving door of late. Out at United, in at US Airways. Inevitably, this has gotten the competitive juices flowing.

I must admit that initially I thought they were nuts. Everyone I talked to said basically the same thing: "What the heck is going on?" I don't think that anymore, but US Airways had better be prepared to see this thing through -- because it has now started something at Dulles that is either going to end up well for it or end up very badly.

After the announcement of the new MetroJet service,

Merrill Lynch

downgraded the shares of Atlantic Coast, sending the stock into a tailspin from which it's only now recovering. Coast retaliated with news of its own expansion out of Dulles a few days later.

The next move across the Dulles chessboard belonged to US Airways once again, however, as it then announced it was setting up another Shuttle operation with hourly service to LaGuardia from Dulles. This would be in addition to its existing service out of National.

As of this morning, no further retaliation from the other side has occurred. Yet.

As a result, it seems that US Airways thinks it can go in and establish a beachhead at Dulles before UAL has time or the ability to react. It's a calculated risk. UAL could decide it wants to put its own lower-cost Shuttle by United operation at Dulles. But, again, how long would this take?

My take? If you are going to do it, don't do it halfway. US Airways has started this -- now it can't turn back and it can't back down. I'd pull even more aircraft and resources from the BWI operation and go full steam ahead at Dulles.

Meanwhile, it's United's move. Pssst -- will someone please wake them up?

Which Airlines Will Fly the Highest in 1999?

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hhegeman@planebusiness.com. I will tally up all the choices and announce the

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Holly Hegeman, based in Dallas, pilots the Wing Tips column. At the time of publication Hegeman was long Southwest, though positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.