Budget airline competition heats up

/ Source: The Associated Press

Should budget airlines, the darlings of an embattled industry, be watching their backs? With the rapid growth of low-cost carriers coming at the expense of the nation’s largest airlines, the Goliaths are increasingly likely to step up their counterattack, according to a Lehman Brothers report published Tuesday.

“The risk of competitive retaliation by the major airlines is growing,” Lehman Brothers airline analyst Gary Chase said, alluding to a possible price war in which the biggest airlines — American, Delta, Continental — would attempt to squeeze the weakest low-cost carriers out of business by reducing fares to rock-bottom levels.

While the likelihood of such a move remains low, Chase said major carriers are becoming more confident as the economy, and their industry, begin to recover from an extremely difficult period. All that’s needed to spark an industrywide assault on budget airlines “is for one carrier to take that step,” Chase said.

“In that environment,” he added, “we believe that many marginal carriers would be unable to withstand the retaliation.” While Chase did not specify which carriers he considers to be “marginal,” he did allude in his report to smaller carriers such as Spirit Airlines and Atlantic Coast Airlines that are “beginning to rattle their sabres” with regards to growth plans.

That said, Chase made clear that a price war would not be effective against Southwest Airlines, JetBlue Airways and AirTran Airways, the three low-cost carriers that have inflicted the most pain on the big hub-and-spoke carriers. He considers these airlines well-financed, well-liked by travelers and poised to hold “for decades” the market share they’ve grabbed from the nation’s biggest carriers.

In 2002, low-fare airlines had 27.8 percent of the domestic market, up from 26.2 percent in 2001 and 9.3 percent in 1991, the report said.

A spokesman for JetBlue Airways said the current market aggression of carriers such as American Airlines and Delta Air Lines, which launched a low-cost subsidiary called Song, suggests that the industrywide retaliation is already underway.

“When you look at American’s choice of routes and marketing choices, you could certainly say some sort of retaliation is already there,” JetBlue spokesman Gareth Edmondson-Jones said. JetBlue’s expansion has occurred in leisure markets dominated by American, which has responded to the threat with matching low fares.

Chase acknowledged this activity, but largely dismissed it as ineffective.

“Our analysis shows that the network airlines remain uncompetitive with the best low-fare carriers,” he said.

While airline industry losses for the year are expected to exceed $6 billion, Southwest, JetBlue and AirTran all have been profitable.