S'WEST IN FOR THE LONG HAUL NO-FRILLS AIRLINE PREPARES TO GO TOE TO TOE AGAINST GIANT UNITED

By Published on .

If Southwest Airlines carries out its threat to offer cheap, long-haul service, the airline industry could wind up on its tail.

No one disputes Southwest's mastery of reliable, low-fare, no-frills air travel on short trips. The question is whether consumers will sacrifice food, seat assignments and global frequent-flier programs for cheap fares on longer flights.

If so, the bloodiest battle is about to begin. If not, Southwest will have made its first major marketing blunder in 23 years of flying.

Southwest Chairman-CEO Herb Kelleher last week said the carrier would enter long-haul markets to challenge United Airlines.

United on July 12 faces a crucial shareholders' vote on an employee buyout plan that would enable the airline to start a low-fare "airline within an airline," nicknamed U2. The new service, set for an Oct. 1 West Coast start, takes direct aim at Southwest.

"United is saying it is going to blow Southwest out of the market, and you know Herb, he's not going to take it lying down," said Vivian Lee, analyst at Smith Barney, New York.

Everyone's been anticipating a major battle between Southwest and United's U2 this fall on the West Coast, where Southwest commands more than half of the California market. But taking on United in long-haul markets?

"We intend not to give up one single customer to U2 or anyone else," said Ed Stewart, Southwest public relations manager. "To the degree that U2 tries to take passengers from our short-haul, then we will certainly share with them some of their long-haul passengers. This is not a threat; it's a promise."

A United spokesman declined to comment on the situation.

Southwest, whose 7.2 cent operating cost per available seat mile is already the industry's lowest, could charge 50% to 70% less than existing fares on routes of more than 1,000 miles, Mr. Stewart said. "The cost of our doing business on long-haul gets cheaper and would drop to below 4 cents a mile."

Even after United's expected employee buyout, its cost per available seat mile will drop to 7.4 cents from a little over 10 cents.

Already, Southwest has had a hand in reshaping air travel as major carriers have examined how to apply its successful no-frills formula to their operations; and many start-up carriers are Southwest clones.

American Airlines and Delta Air Lines for now won't offer cheap short-haul fares. Nor will Northwest Airlines. Continental Airlines last fall introduced no-frills CALite Peanuts Fares and USAir later this month hopes to unveil its new low-fare product. United's plan hinges on the shareholders' vote.

"We're seeing that low price is king now and for the foreseeable future," said Edward Starkman, principal at the Transportation Group (Securities), a New York aviation research consultancy. "It's the growing segment of the market."

But Jack Trout, president of Trout & Ries, a Greenwich, Conn.-based marketing consultancy, believes Southwest's entry into long-haul markets would be a mistake.

"It's the beginning of a loss of focus," said Mr. Trout, whose company has done work for Southwest. "What has made Herb so powerful is he has done short-haul best. I just don't think long-haul is his natural turf. Going long-haul will make him more like the other guys.

"You can't win on just price in this business. The other airlines won't let Southwest take business. They will match [prices] and give better service. They're very upset at Herb. They see him as a real threat, and their reaction will be very strong. He can do it cheaper, but not better."

However, many analysts and consultants claim cheaper is better. There will always be the business traveler who must get to a meeting, but the market generally will be price-driven rather than service-driven.

Southwest wouldn't reveal possible long-haul routes, but analysts believe flights from Chicago's Midway Airport to West Coast markets would take a bite out of both United and American Airlines.

United overshadows Southwest by virtually all measures except profitability.

United flies 547 planes in 33 countries. Southwest, not yet national, has 176 planes flying to 44 cities. United had 1993 revenue of $14.5 billion and a $50 million net loss. Southwest had nearly $2.3 billion in revenue and $154.3 million in profit.

As for timing, Southwest will retaliate as soon as United's U2 affects Southwest's market share, Mr. Stewart said.

Southwest isn't worried about a lack of amenities on longer flights.

An executive at a major carrier vehemently disagreed, saying passengers require and will pay for amenities on longer trips.

That, of course, is the pivotal issue if Southwest is to succeed.

Still, the Transportation Group's Mr. Starkman said Southwest's foray into long-haul markets will pressure other carriers to become more cost-efficient.

"Southwest must enter longer-haul markets to continue its growth," echoed James O'Donnell, chairman of Seabrook Marketing, a Houston-based consultancy. "Ultimately, suggesting that Southwest's formula only will work in short-haul markets is like saying that Wal-Mart will only succeed in small towns."

In this article:
Most Popular