Pricing appears rational in Atlanta after Southwest’s market entry

Southwest’s highly anticipated entry into the Atlanta market operating under its own brand has not altered advanced fares in the market dramatically even as the carrier pledged that its walk-up business fares would fall 30% below those of dominant carrier Delta Air Lines. In some markets, Southwest and its subsidiary AirTran are charging higher business fares than their larger rival while economy fares charged by the low-fare carriers are only marginally cheaper.

But Southwest appears willing to undercut Delta at the last minute on some fares, as Delta recently attributed a miss in its May unit revenue projections to competitor fare actions during the second half of the month. Delta’s unit revenues grew 6% year-over-year during May-2012, a single percentage point miss from the 7% guidance the carrier had previously provided. Many US carriers have warned of weaker year-over-year revenue comparisons in May-2012, due to the major increases recorded in 2011 off a weaker base in the year prior.

Delta did not mention Southwest directly in outlining competitive fare actions, but the Associated Press quoted JP Morgan analysts who remarked that Southwest on 17-May-2012 filed fare adjustments on more than 200 routes, of which 46 were from Atlanta.

Southwest mades its debut in Atlanta in Feb-2012 and now offers flights to eight destinations under its own banner: Austin, Texas; Baltimore, Maryland; Chicago, Midway; Denver, Colorado; Houston, Hobby; Las Vegas, Nevada; Los Angeles, California; and Phoenix, Arizona.

With the exception of Austin, all of the markets are also served by Southwest’s AirTran subsidiary. Southwest officially closed on its acquisition of AirTran in May-2011, and had time to both study the competitive landscape and make decisions regarding AirTran’s Atlanta operations before its market entry.

Access to Atlanta was one of the key factors in Southwest’s decision to acquire AirTran. Southwest long ago abandoned its strategy of serving secondary airports and has entered large US metropolitan markets in order to continue its growth. Based on US government and Southwest’s own data, with its entry into Atlanta Southwest now has a presence in nine of the top 10 US markets with respect to enplaned passengers (it serves Chicago through Midway, Houston through Hobby and offers flights from both bay area airports Oakland and San Francisco). The carrier also positioned itself during the last couple of years to obtain slots at New York LaGuardia and Newark Liberty International airports to gain key access to the New York metropolitan area, after having a limited presence in the region for many years through its Long Island Islip flights, which is 72km from LaGuardia.

Southwest top cities by daily departures: Feb-2012

Top 10 US airports by passenger enplanements: Jan-2012 to Feb-2012

Through numerous public statements Delta has expressed little concern over Southwest’s entry into Atlanta after competing with low-fare rival AirTran for many years at the airport. In fact, early in 2012 Delta EVP network planning, revenue management and marketing Glen Hauenstein remarked that Southwest has been less aggressive in discounting prices in Atlanta than AirTran. Southwest’s moves in May-2012 could be an indication that Delta might see more assertive pricing behaivour from Southwest in the future as the carrier settles into the Atlanta market.

Southwest serves its largest markets from Atlanta, but does not flood the market with capacity

Southwest is serving seven of its top 10 markets from Atlanta. In Feb-2012 it launched 15 non-stop flights, offering two daily flights to both Austin and Denver, three to Houston and four each to Baltimore and Chicago. During Mar-2012 Southwest introduced two daily flights each to Las Vegas and Phoenix and on 10 Jun-2012 inaugurated a single daily non-stop flight from Atlanta to Las Angeles.

But Southwest has not dumped a huge amount of capacity in the Atlanta market. Based on seat dispersement for the week of 10-Jun-2012 to 17-Jun-2012, Southwest’s 49,658 seats in the market account for just 0.4% of Atlanta’s capacity. Combined Southwest and AirTran represent roughly 14% of Atlanta’s capacity.

Atlanta Hartsfield-Jackson International Airport capacity by carrier (seats per week): 11-Jun-2012 to 17-Jun-2012

With a maximum of four daily flights in any of the markets it serves from Atlanta, Southwest is maintaining a relatively small presence on its new routes. It is offering the largest number of one-way weekly seats – 4795 – to Midway, where it offers four daily services. The carrier’s second largest market from Atlanta is Baltimore, where it also offers four daily flights that account for 4606 weekly one-way seats. The only markets where Southwest has a greater seat share than its AirTran subsidiary is Houston Hobby, where Southwest now accounts for 33% of the seats from Atlanta compared with 32% for AirTran, and Phoenix, where Southwest enjoys a 13% share compared with AirTran's 7%. The carriers offer close to the same number of seats from Atlanta to Baltimore, and each airline holds a roughly 20% seat share.

Carrier seat offering (seats per week, one way) in Southwest markets from Atlanta: 11-Jun-2012 to 17-Jun-2012

Market/Carrier Seats Seat share
Austin 8229  
Delta 6448 78.3%
Southwest 1781 22.8%
Baltimore 22,215  
Delta 13,000 58.4%
AirTran 4609 20.4%
Southwest 4606 20.5%
Chicago Midway 15,589  
Delta 5600 35.9%
AirTran 5194 33.3%
Southwest 4895 30.8%
Denver 18,725  
Delta 9708 51.8%
AirTran 2697 14.4%
Frontier 2760 14.7%
Southwest 1918 10.2%
United 1642 8.8%
Houston Hobby 11.603  
Delta 4117 35.5%
AirTran 3650 31.5%
Southwest 3836 33.1%
Las Vegas 14,418  
Delta 9760 67.7%
AirTran 2740 19%
Southwest 1918 13.3%
Phoenix 14,417  
Delta 7044 49.8%
US Airways 4316 30.5%
AirTran 959 6.8%
Southwest 1828 12.9%
Los Angeles 19,744  
Delta 15,223 77.6%
AirTran 3562 17.5%
Southwest 959 4.9%

Pricing for advanced economy and near-in business fares appears rational

Aside from its pricing actions during the latter half of May-2012, Southwest appears to be acting rationally in terms of fares for both economy and business class tickets. While Southwest CEO Gary Kelly has previously declared that Southwest’s fully-refundable, walk-up fares would be an average of 30% lower than what is currently charged in the markets the carrier serves from Atlanta, Southwest’s business fares in many of those markets for travel 26-Jun-2012 through 28-Jun-2012 on non-stop flights are actually higher than Delta’s fares.

Southwest’s business class fares on non-stop flights during that time are higher than Delta’s from Atlanta to Baltimore Washington International, Chicago Midway, Denver, Houston Hobby, Las Vegas and Phoenix. Its USD773.60 business class fare for a flight to Austin is about 14% lower than the USD861.60 charged by Delta. The USD1137.60 Delta is charging for a business class ticket on flights to Los Angeles is roughly 20% higher than the USD905.60 charged by Southwest. Ironically, Delta’s USD759.60 business class fare in the Las Vegas market is 36% lower than the USD1037.60 charged by Southwest.

Interestingly, AirTran’s business fares in those markets are substantially higher than those charged by Delta and Southwest. Unlike Southwest, AirTran offers a distinct two-class cabin, and now that Southwest is managing AirTran’s pricing there could a premium for the business class seats. But AirTran’s prices are significantly higher in a number of markets. Its business class fares from Atlanta to Denver, Las Vegas, Phoenix are more than USD1000, whereas Delta is only charging more than USD1000 on flights from Atlanta to Las Vegas. AirTran’s USD887.60 lowest business class fare to Chicago Midway is also more than United’s USD869 lowest business fare on flights from Atlanta to Chicago O’Hare.

Cheapest business class fares on Southwest markets from Atlanta: 26-Jun-2012 to 28-Jun-2012

Market/Carrier Fares
Delta USD861.60
Southwest USD733.60
Delta USD477.62
Southwest USD681.60
AirTran USD947.60
Chicago Midway  
Delta USD581.60
Southwest USD641.60
AirTran USD947.60
Delta USD667.60
Southwest USD673.60
AirTran USD1071.60
Houston Hobby  
Delta USD580.10
Southwest USD720.10
AirTran USD940.10
Las Vegas  
Delta USD759.60
Southwest USD1037.60
AirTran USD1213.60
Delta USD1137.60
US Airways USD586
Southwest USD977.60
AirTran USD1253.60
Los Angeles  
Delta USD1137.60
Southwest USD905.60
AirTran USD1253.60

Delta’s lowest economy fares from non-stop travel from Atlanta for travel 10-Jul-2012 to 12-Jul-2012 are higher on flights to Austin, Midway, Denver, Hobby, Las Vegas, Phoenix and Los Angeles, but not by a terribly wide margin. The largest gap is a USD40 difference on Delta’s flights to Las Vegas, followed by USD30 difference on Delta and Southwest’s flights to Phoenix. In that market US Airways’ USD287 economy fare is lower than prices charged by Delta, AirTran and Southwest. In Austin, Denver and Hobby, Delta’s fares are USD26 higher than Southwest, and USD22 higher on flights to Midway and Los Angeles.

Southwest and AirTran have more price parity on economy fares in markets both carriers serve from Atlanta. On flights to Midway, Hobby, Las Vegas and Phoenix the carriers are charging the same fares. AirTran’s fares are lower than Southwest’s on flights to Baltimore Washington International. On flights to Denver AirTran’s fares are roughly USD10 higher than those offered by Southwest and Frontier. The gap is widest in Los Angeles, where AirTran’s fares are about USD106 higher than Southwest’s prices.

Cheapest economy class fares on Southwest markets from Atlanta: 26-Jun-2012 to 28-Jun-2012

Market/Airlines Fares
Delta USD321.60
Southwest USD295.60
Delta USD293.60
Southwest USD295.60
AirTran USD269.60
Chicago Midway  
Delta USD291.60
Southwest USD269.90
AirTran USD269.90
Delta USD319.60
Frontier USD293.59
Southwest USD293.60
AirTran USD304.40
Houston Hobby  
Delta USD320.10
Southwest USD294.10
AirTran USD294.10
Las Vegas  
Delta USD455.60
Southwest USD415.60
AirTran USD415.60
Delta USD359.60
US Airways USD287
Southwest USD329.60
AirTran USD329.60
Los Angeles  
Delta USD449.50
Southwest USD426.60
AirTran USD532.60

Delta might have adjusted some of its advanced business fares after Southwest’s last minute price cuts last month in order to stay ahead of its rival’s pricing actions. Southwest’s moves seem to be the carrier’s first lob in fare adjustments to gauge Delta’s competitive response. If history is any indication, Delta will aggressively lower its fares to compete against Southwest and ensure its customer base remains at its current levels.

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