Sorry To Disagree With Wall Street - The Outcome's NOT Certain
Fallout From Frontier & United's Response
To WN Denver Entry
Once Southwest announced Denver, they parrots reacted as expected.
It's a foregone conclusion, ya' know, that Southwest will enter Denver, fill up airplanes, slash and burn fare levels, and leave the rest of the carriers there in a pile of financial rubble. One Wall Street "analyst" immediately downgraded Frontier stock to "sell", causing its price to drop 25% in one day.
Chicken Littles, all of them. Worse, some of the financial types are those who make money putting out garbage like this. (Remember WestPac? The day before it filed bankruptcy, some Wall Street firm issued a report rating the carrier's stock as "out-perform.")
Here's some heresy: Southwest could get itself firmly pummeled at Denver. The financial industry bozos who manipulate stock prices have missed the point: Denver is a first for Southwest, at least in recent history. This is not entering PHL, where it had to compete with a giant high-fare cadaver. It's not RDU, where it can collect lots of passengers and stimulate traffic in the absence of a strong hubbing carrier.
Denver is different. Southwest is taking on two full-service, entrenched, hubbing airlines. In virtually every market Southwest will likely enter from Denver, it will face at least two, and often three, entrenched competitors. In many cases, there's an LCC already there. In many cases, traffic has already been substantially fare-stimulated. In all cases, consumers have seat assignment (again, not a minor issue until WN offers it.) In many cases, the competition offers in-flight entertainment.
Incumbents will match WN fares. So, which product will the consumer in the long term go for? Sorry, Southwest's history isn't germane here. It's going to be an issue of product value.
Frontier: The Ball's In Their Court. Denver is not virgin territory for Southwest. They'll have to fight for every passenger. A lot more so than any other market they've entered. And just let one or two local reporters do a service-comparison story on WN v UA or F9, and in the court of consumer opinion, Southwest could find itself far from being the darling of the community.
As we've noted above, in our studies, and at our Forecast Conference, the day's coming when LCCs will begin to fight a whole lot more aggressively with each other for share. It's coming to Denver, where virtually every potential WN market already has Frontier service.
Here's the betting: If Frontier comes out of the competitive box swinging to beat the band, they can certainly clobber WN. If Frontier hammers away at the fact they give seat assignment, inflight TV, and that they're the hometown team, WN could find itself at the short end. Frontier will need to build its flow traffic through Denver, particularly from markets that WN can't enter. It will also need to assure that its Denver ground customer service is lights-out efficient.
If they do this, they'll do fine. On the other hand, if they try a subtle approach, they could be toast. Their one main weakness: Cash. With less than $200 million on hand (which is okay for now) Southwest could see an opening to bleed Frontier out of business.
United: Less Vulnerable Than It Looks. United could be WN's worst nightmare. First, at Denver its customer service is at the top of the industry, which means strong brand loyalty from the all-important business travel sector. Second, it now has much lower labor costs than it did three years ago, meaning that it's not some lumbering winged bison waiting to be shot dead. And finally, it has a huge connecting hub at DEN that can cross-subsidize any market that WN enters.
What about TED, United's silly attempt at airline gallows humor? It's actually a disadvantage for United, because it causes brand confusion, and on a sector-cost basis, it probably has higher costs than the airplanes that have not been re-painted in yellow and white.
First of all, TED is nothing but a different paint job. Period. It's not a low cost carrier. It's not even a carrier. Fares didn't change at all with the implementation of this smoke screen. It isn't a separate operating entity, either. In fact, this TED fiasco has made United possibly less competitive with Southwest. See, the whiz-bang MBAs who hornswaggled United into this scheme apparently were oblivious to the fact that when they increased the seating on TED-painted airplanes to 156 seats, those extra six chairs over 150 necessitated yet another flight attendant. United's main problem since filing bankruptcy has been really bad, albeit expensive, advice. TED's a prime example.
Bottom Line: Southwest's Taken A Big Bite. In entering Denver, Southwest is jumping into a situation where it's taking on a lot more than it has anytime in the recent past. But, as noted above, it no longer has much choice. It must gain new huge revenue streams over the next 36 months. They're in most large markets already, Denver being the most obvious gap other than NYC. (Forget Islip - the trip on the Expressway into Manhattan isn't a real option.)
Watch for other changes at Southwest. Advance seat assignment. And maybe a new fleet mix, too.
What happens in Denver will be a watershed in WN's history. It's also a clear indication that Southwest, as good as it is, isn't invulnerable to competition.