Not even the darlings of the US industry, the low-fares, low-cost carriers (LCC), are immune to industry woes, and 2005 will be a major challenge for the sector.
Consider the case of Southwest Airlines, the carrier with 32 straight years of earnings and an unrivalled history of profitability.
For the year, Southwest earned $313 million, compared with a profit of $298 million in 2003, excluding government grants, although fourth quarter profit fell from $66 million to $56 million. Southwest's 10% growth in revenue, to $6.5 billion, should not mask a fall in average fares, cautions chief executive Gary Kelly. Fewer Southwest passengers paid full fares in the fourth quarter, down to 35% from 37% a year earlier.
Southwest is not the only low-fares airline vulnerable to gains by majors if a new fares structure pioneered by Delta Air Lines in January succeeds. The low-fares strategy has relied on passenger willingness to drive to secondary airports and to take connecting flights to avoid legacy carrier prices. But JP Morgan analyst Jamie Baker believes Southwest could suffer a $180 million hit to its revenues in 2005 if the Delta plan keeps passengers from driving to a Southwest airport. JetBlue, Baker thinks, could suffer a $50 million loss in sales.
The LCCs also stand to lose flyers who now change at low-fare cities because of the price tag. About 25% of America West's traffic consists of one-stop passengers who change aircraft at its Phoenix or Las Vegas hubs, making it vulnerable to the majors.
AirTran Airways faces the same dilemma. America West, profitable a year ago to the tune of $7 million, lost $50 million in the final quarter. Although AirTran, hit by Florida hurricanes and by competition from Delta and from rival LCCs, managed to scrape a $1 million profit for the quarter and $12.3 million for the year, those figures were 95% and 89% lower, respectively, than comparable results for the previous year.
Source: Flight International
