Southwest Sees Low-Fare Challenge to American’s Dallas Home Hub

Southwest Airlines Co. (LUV), the largest low-fare carrier, will step up price pressure on American Airlines Group Inc. (AAL)’s biggest hub by expanding non-stop service from a rival Dallas airport as U.S. flight limits there end.

Nonstop trips to LaGuardia in New York and Reagan National in Washington, D.C. as well as eight other cities will begin Nov. 2, Chief Executive Officer Gary Kelly said at a news conference at Love Field airport today. Five others, including Chicago, will offer nonstop trips starting Oct. 13.

The flights will create a discount challenge from Southwest at the airport closest to downtown Dallas, 25 miles from American’s hub at Dallas-Fort Worth International Airport. A 1979 law prohibited passengers flying on large jets out of Love from traveling non-stop to anywhere beyond Texas and, initially, its four neighbors. That rule was subsequently widened to eight states.

“There will be a negative impact on American as a result of this,” Jeff Straebler, managing director for aerospace in the bonds and corporate finance group at John Hancock Financial Services. “Given American’s size, is it the end of the world? Certainly not. This is definitely a positive for Southwest.”

Southwest, based in Dallas, fell 2.8 percent to $20.37 at 3:09 p.m. in New York, joining declines by all eight other members of the Bloomberg U.S. Airline Index today.

Southwest recently agreed to buy additional flying rights at both LaGuardia and Reagan that were sold by American to win approval from U.S. antitrust regulators for its December merger with US Airways Group Inc. Flights from those airports are limited by the government to control congestion.

Competitive Market

“There is no way the fares won’t come down,” Kelly said today of competitors. “It’s competitive in North Texas. We’re going to have to earn our customers and earn their business.”

The airline won’t announce fares or flight frequencies until May, he said, and customers can’t book the routes until then.

“Thanks to our recent merger, American Airlines now has an expanded, robust global network,” including 800 daily flights from Dallas-Fort Worth airport, Matt Miller, a spokesman, said in an e-mail. He declined to comment on fares.

While the addition of the nonstop flights will be “a very big change,” Southwest probably won’t be the primary “price disciplinarian,” said Bob Mann, president of aviation consultant Robert W. Mann & Co. in Port Washington, New York. That role falls to Spirit Airlines Inc., a so-called ultra-low-cost carrier that sells a low base fare and charges separately for everything else, he said.

Lobbying Campaign

In 2004 Southwest began a two-year lobbying effort for the repeal of restrictions under the Wright Amendment, which it argued was anti-competitive, before securing a phase-out of the limits. The legislation, authored by former Texas Congressman Jim Wright, was intended to protect the then newly opened Dallas-Fort Worth airport from competition. The amendment expires Oct. 13.

Southwest carries more than 96 percent of passengers at Love Field, which is about 20 minutes from downtown Dallas and adjacent to the airline’s headquarters. It has flown from Love Field since 1971.

American, combined with US Airways and its American Eagle regional airline, carries about 85 percent of passengers at Dallas-Forth Worth, according to the U.S. Bureau of Transportation Statistics.

To contact the reporter on this story: John Hughes in Washington at jhughes5@bloomberg.net

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