Opportunistic LCCs may follow the lead of Southwest Airlines

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Southwest Airlines’ plans to aggressively invade LaGuardia Airport can be expected to quickly reshape air service, capacity and fares in the New York area.

The discount carrier last week agreed to pay $7.5 million for 14 slots at LaGuardia previously held by ATA Airlines, the Indianapolis-based carrier that ceased operations in April. ATA had been a Southwest codeshare partner.

The slot sale still has to be approved by the U.S. Bankruptcy Court. The Federal Aviation Administration must also approve the transfer, which it said it will do if the deal is structured as a purchase of ATA rather than a purchase of only the slots. Southwest said it would seek to meet that condition.

Southwest’s appetite could portend more moves by low-cost airlines into traditional strongholds of legacy network carriers. And the move could wind up playing a role in the federal government’s hotly contested plan to auction takeoff and landing slots at New York-area airports.

Even so, the Southwest announcement has garnered nods and predictions of more of the same from industry experts.

“Southwest is very opportunistic and, given its strong balance sheet, has the ability to pounce on opportunities that present themselves, such as the LGA slots,” said Darin Lee, a principal at LECG. “I suspect we’ll see additional similar moves over the next year.”

Southwest certainly has the cash for this deal or for any similar opportunity that pops up on its radar. Like most of its competitors, the airline started to build up its cash reserves as a safety net when fuel prices began soaring over the summer.

“Our core cash is in excess of $1 billion,” Laura Wright, Southwest’s chief financial officer and senior vice president, told analysts last month.

Southwest is interested in expansion. Besides the international codeshare deals, Southwest recently announced a new foray into the Midwest, beginning service from Minneapolis-St. Paul in March.

Other airlines could sniff out more opportunities.

“There are undoubtedly others that are looking to move opportunistically,” Lee said. “As in other industries, times of market turmoil often provide financially strong firms with opportunities to acquire assets at distressed prices.”

But there’s more at play here. The Southwest move represents the continuing incursion of low-cost carriers, or LCCs, into the domestic air travel market.

According to a recent LECG report, LCC capacity has increased by about 77.5% since the fourth quarter of 2000, not taking into account the recent cuts announced for the final quarter of this year, while the capacity of network airlines dropped by 23.7%.

LCCs now carry about a third of all U.S. domestic passengers, LECG reported, compared with less than 10% in 1990 and about 20% in 2000.

The LCCs have increased their presence in the largest 1,000 domestic city pairs this decade by more than 30%, LECG reported, and they now compete in markets that account for 80% of all domestic travelers.

But Southwest has avoided direct competition in congested areas such as New York, electing instead to operate out of the secondary Long Island MacArthur Airport. In taking on LaGuardia, Southwest is dealing with a somewhat known entity, because of its previous codeshare arrangement with ATA.

“With ATA’s partnership, we were able to experience what a great fit LGA would be for Southwest from a revenue and traffic perspective but still weren’t able to serve it with our own people and aircraft,” Bill Owen, a planner in the Southwest’s scheduling department, wrote on the airline’s blog about the proposed purchase. 

Owen added: “Even after ATA’s demise, we couldn’t immediately try to begin service to LGA. LGA is one of only four airports in America that are slot-controlled. LGA slots are in huge demand and are seldom available at any price.”

Southwest CEO Gary Kelly told analysts in July that Southwest “had a great amount of business to LaGuardia” through the ATA codeshare. Buying the LaGuardia slots could help Southwest regain some of that revenue, which analysts estimate to be between $40 million and $50 million.

“Even in this volatile environment, we have said we must monitor the competitive landscape and take advantage of prudent market opportunities,” Kelly said of the slot purchases.

Other major competitors at the airport offered no comment about the deal. But Wolfgang Mayrhuber, CEO of Lufthansa, welcomed the entry of another airline at the airport. Lufthansa owns a stake in JetBlue, which handled 711,231 passengers at LaGuardia over a 12-month period ending in August.

“We are used to competition with discount carriers,” he said after a Nov. 19 speech at a Wings Club luncheon in New York. JetBlue, he said, would continue with business as usual at the airport.

If Southwest gets the slots, it would give ammunition to those who oppose the FAA’s slot-auction plan at LaGuardia, Kennedy and Newark airports. The government said auctions would be the only way that more discount carriers like Southwest could get their planes to those airports.

“We’re pleased for our customers that they’ll get more choices than ever before with the news that Southwest will acquire ATA’s assets, which include 14 flight slots at LaGuardia Airport,” said New York/New Jersey Port Authority spokesman Pasquale DiFulco. “This is yet another reason why auctions are unnecessary for carriers to gain access at the New York airports, as the administration has argued.”

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