Southwest Airlines ( LUV) is making a bold overture to win over the coveted business travelers who butter the industry's bread. The discount airline has permanently slashed 25% from the price of its highest last-minute fares, beckoning convenience-minded business travelers to bypass the competition and visit its counters instead. The Dallas-based carrier now promises a $299 cap on all one-way tickets -- down from $399 -- that could further sap business traffic at major carriers still bleeding from last year's terrorist attacks. Southwest said it hopes to stimulate new business traffic in the long-haul markets where it primarily caters to leisure travelers. Industry experts estimate that business travelers pay three times more for airline tickets than their nonbusiness counterparts. "We really think we can generate a tremendous amount of interest, especially among business travelers, by lowering our fares," Southwest Chief Financial Officer Gary Kelly said in a conference call Thursday. "We're looking at this as a source of revenue growth in the future." Kelly projected that the new fares would boost annual revenues by up to $20 million, despite their lower price. Currently, only 1% of Southwest's customers pay more than $300 for a ticket, he said.
Stealing Market Share
Brian Campbell, president of an aviation consulting firm in Virginia, said Southwest is clearly capitalizing on tumult in the industry. "I think that will continue to happen until the large carriers come up with a new strategy for making travel more economic for a major part of the business market -- until they design a product that's attractive to 80% of the business travelers and not just the elite 2% or 3% at the top," he said. Southwest expressed confidence that even newcomers, accustomed to high-price carriers, could be won over. The airline pointed to its industry-leading punctuality, coupled with new ticket flexibility and roomier long-haul planes, as particular strengths. And it welcomed customers from the competition. "I certainly want any customer who wants to come over here and fly," said Joyce Rogge, Southwest's vice president of marketing. "We're hoping to increase our business overall." While Southwest accounts for less than 10% of the total U.S. airline market, it commands 63% of the market share in the regions where it actually operates. Southwest predicted the latter number would grow to 67% as major airlines continue to cut capacity this fall. Industry watchers expect some of that growth to be fueled by business customers, who constitute half of Southwest's passenger load already. "Southwest's proportion of business travelers has been steadily increasing over the past five to 10 years," Campbell said. "And the more things they do like this, the more business travelers they'll draw." Following news of the fare cut, Southwest's stock added 38 cents to hit $15.23 in early afternoon trading.
Southwest's upbeat news contrasted sharply with this week's flurry of announcements from its major competitors. Bankrupt US Airways recently told employees to brace for a new reduction in capacity that will mean additional layoffs. The airline plans to reduce its fleet size from 311 to 280 -- dropping its daily flight count from 1,550 to 1,350 -- by year's end. The fresh round of cuts follows a 23% reduction in capacity shortly after last year's terrorist attacks. Continental ( CAL) said Tuesday that, by this time next year, its domestic capacity will be 17% lower than it was before Sept. 11. The company has grounded 49 airplanes since the terrorist attacks and expects to ground more in an effort to save $80 million over the balance of this year and more than $350 million every year afterwards. Unlike Southwest, Continental is actually hiking fees and eliminating discounts as part of its new strategy. The airline indicated that such measures are absolutely necessary if it hopes to escape the fate of some of its more challenged peers. "US Airways declared bankruptcy, and United ( UAL) is likely to soon follow," said Continental Chief Executive Gordon Bethune in a prepared release this week. "The initiatives announced today will not be sufficient to return (our) company to profitability in the existing environment. "Unless market conditions improve quickly, we'll be forced to make further changes in every aspect of our operation." Despite such warnings, the major airline stocks ended Thursday clearly in the black, with gains of more than 2% each. United, which could be bankrupt in a matter of weeks, led the pack by climbing 14% to finish at $3.68 a share.
Meanwhile, Southwest continues to skirt the heavy turbulence rocking -- and sometimes grounding -- others in the industry. The company has become known for its frugal culture and animal-like instinct to survive. "Financially speaking, we're better set up to handle these storms," said Southwest spokeswoman Beth Harbin. "Ultimately, we plan in the good times so we can weather the bad." Southwest operates only one type of aircraft, which is typically grounded less than half an hour at a time. And the company has managed to dodge major union problems -- like those now dogging United -- by offering attractive compensation packages that supplement "competitive wages" with profit sharing and other generous benefits. The airline stands out as the only major domestic carrier to avoid scheduling and staff cuts since Sept. 11. And it's profitable. "We've been operating cash-flow positive every week since mid-October 2001," Kelly said. "We're in very sound financial condition, and we're improving ourselves."