This week, Southwest ( LUV) sneezed, and Frontier Airlines ( FRNT) caught pneumonia. Southwest, worried by the slow economy, said it will move capacity to growth markets, primarily Denver, the site of Frontier's hub. Starting May 10, Southwest will offer 74 daily flights to 22 destinations from Denver, up from 56 flights to 16 destinations today. Except for Raleigh/Durham, a new destination, every current and planned Southwest flight serves a Frontier market. The news did not appeal to owners of Frontier stock, which plunged 17%. The shares partially recovered on Thursday, trading up about 5% as the sector rallied on takeover rumors. Experts say the market overreacted to Southwest's move, and Frontier spokesman Joe Hodas says it wasn't the first time. "If you look historically, after every major Southwest expansion here, our stock has been hammered," Hodas says. Frontier shares dropped 29% on Oct. 20, 2005, the day Southwest disclosed it would begin Denver service the following January. "The shares have not recovered," wrote Avondale Partners analyst Bob McAdoo in a report Thursday. "Although Frontier has successfully defended its market share against Southwest, we believe losses in the Southwest-competitive markets have driven weaker financial performance and a stagnant share price." Nevertheless, Wednesday's decline was excessive, said McAdoo, who anticipates that CEO Sean Menke, who took over in September, will react to Southwest differently than his predecessor did.
"He will focus less on market share and more on allocating aircraft to profitable markets," McAdoo wrote. Coming adjustments should allow Frontier to prosper alongside Southwest, he added. Avondale Partners makes a market in Frontier securities. To be sure, Southwest has its own problems, including increased competition for low-fare travelers and mounting fuel costs. "Southwest Airlines is concerned about slowing economic growth, and we want our flight schedule to be built around flights that are in high demand," said CEO Gary Kelly in a prepared statement, where the schedule changes were announced. Southwest said it will eliminate 57 existing roundtrip flights, including 10 from Oakland, and add 49 roundtrips in "key growth markets such as Denver." There, it will add five new cities: Los Angeles, San Jose, St. Louis, Raleigh/Durham and San Antonio. Denver International -- the world's 10th busiest airport, with 47 million passengers in 2006 -- is big enough for three airlines, says Colorado-based consultant Mike Boyd. Southwest, Frontier and United Airlines, a unit of UAL ( UAUA), which has a Denver hub, all do different things. For the 12 months ended in October, United had 42% of airport traffic, while Frontier had 20% and Southwest had 5%, according to the Bureau of Transportation Statistics. Boyd says Frontier, with 180 daily flights to 62 locations, competes successfully partially because it uses small airplanes to collect feed traffic from throughout the region. In contrast, Southwest lacks small planes. Meanwhile, United is a global carrier offering connections around the world. "Frontier is no pushover," Boyd says. "Their planes are full, with loads above 80% in most of their markets. All three airlines can coexist in Denver."