Of all the airline industry's fortress hubs, Minneapolis is perhaps the most impregnable. But now Southwest ( LUV) wants to fly there. The largest low-fare carrier says it will begin taking passengers between Minneapolis-St. Paul International Airport and Chicago's Midway Airport next March. Why enter territory that is 80%-controlled by one carrier? Simple, Southwest CEO Gary Kelly explained on an earnings conference call. "It is a very high-fare market," he said. "One-way fares are as high as $400, and it's a short-haul market." Currently Northwest, now part of Delta ( LUV), handles nearly fourth-fifths of the travelers at Minneapolis, and it has long been considered the most aggressive carrier in defending its turf. Already, it operates 10 daily flights between Minneapolis and Chicago's O'Hare and a half dozen more to Midway. On Northwest's third-quarter earnings call, Executive Vice President Tim Griffin seemed to relish the Southwest challenge on fares. "Fares change quickly, and can be changed quickly," Griffin warned. "I don't think that many competitors make entries into an area based on
revenue per available seat mile performance that they are seeing from others, because those conditions can change fairly quickly." RASM is a common industry measure that reflects fare revenue. Minneapolis, the nation's 14th-busiest airport with 35 million passengers in 2007, offers several attractions for Southwest. Among them, it can feed passengers into Chicago's Midway Airport, the second-busiest airport in the Southwest system. In fact, the top destination from Minneapolis is Chicago, according to the Bureau of Transportation Statistics.
"A lot of people want to go to Minneapolis from Southwest cities like San Antonio and Nashville, and those people can go through Midway," says consultant Mike Boyd. While Southwest will initially serve only the Midway route, it is worth noting that of the top 10 destinations from Minneapolis, six are Southwest cities, including Chicago, Detroit, Denver and Phoenix. Additionally, Southwest's three busiest airports, in Chicago, Phoenix and Las Vegas, are all in the top seven destinations from Minneapolis."Connect the dots," Boyd says. Although it has recently slowed its growth, in the long run Southwest must expand. Growth is Southwest's primary tool to keep costs low, because that brings new airplanes and low-seniority employees. "Southwest can't generate contract productivity unless they grow more rapidly, which they have not recently done, which creates the appearance that they are a hedge fund, not a real airline," says aviation consultant Bob Mann. In the third quarter, excluding one-time items, Southwest reported a $69 million profit only because it realized cash settlement gains of $448 million from fuel hedging. Once known for choosing midsized airports such as Birmingham, Louisville and Raleigh-Durham, Southwest has altered its focus in recent years. It went to the US Airways ( LCC) hub in Philadelphia in 2003 and to UAL ( UAUA) hubs at Denver and Washington Dulles in 2006. Boyd says that as Southwest gets bigger, it needs to be in larger markets to have a relative impact on its bottom line. But more sizable markets also mean tougher fights for market share. For instance, US Airways was on the ropes when Southwest entered Philadelphia, and it has gone through two bankruptcies since. But instead of shutting down, as some expected, US Airways emerged as a stronger carrier with lower costs.
In Denver, Frontier seemed vulnerable when Southwest entered its hub two years ago, and that carrier sought bankruptcy protection this year. Now, it's rebuilding. "They definitely haven't killed off Frontier," Boyd says. "Frontier is holding on." In the Minneapolis-Midway market, the hazards are easy to see, because low-cost carrier AirTran ( AAI) dropped the route in May after three years of trying to make it work. Northwest, of course, had made it tough, matching fares and managing schedules to offer better alternatives. Plus, fuel prices were soaring in the spring. Southwest may be better able to remain, Mann says, because of its Midway connections. "Southwest serves 47 cities with 220 flights a day from Midway, and has built that presence continually since 1985," he says.