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Gusty · Guest

Southwest Goes for the Jugular
In Challenging US Air in Philly

In a small closet in the back of his office, back where he probably
stashes his bourbon, Herb Kelleher had a population map of the U.S.,
with heavy dots in the east and a more sparely dotted west. In the
early days of the eastern attack of Southwest Airlines, the chairman
explained the attraction by pointing to the map: Gotta fly where the
people are.

For Gen. Herb, the eastern attack has been more methodical than any
sort of "shock and awe" blitz. Ten years ago, Southwest established a
beachhead in Baltimore, giving it presence in the Washington region,
and just as importantly a higher profile on Capitol Hill. Over time,
the airline picked off the easy and logical new cities. Boston was
covered to the north and south with Manchester, N.H., and Providence,
R.I. New York saw Southwest planes landing at secondary stops: Albany
and Islip. Midsized cities such as Hartford Conn., Raleigh-Durham,
N.C., and Norfolk, Va., made attractive stopping points, with
Southwest encountering little resistance.

But now, Herb is dropping the daisy-cutter bomb. On Wednesday, the
Dallas-based airline announced plans to open service in Philadelphia
in May with up to 14 daily flights. More will follow that.

Southwest's decision to attack Philadelphia sets up a battle that
could be the last stand for US Airways, a weakened foe that already
has been run out of Baltimore by the Southwest infantry.

Philadelphia seems perfect for Southwest. Like the map on the wall
tells Herb, there are lots of people there. Philadelphia is perfectly
situated to pump many more people into Southwest's network. Large-jet
domestic service has been cut back in Philadelphia as US Air has
gotten smaller and shifted more flying to commuter affiliates. Last
year, the number of mainline domestic flights fell 7.8% at
Philadelphia International Airport, and so far this year, mainline
domestic flying is down another 7.9%. Trains serve the airport to
downtown. Bottom line, the Philly airport can handle a big jump in
passengers.

More importantly, people flying into and out of Philadelphia are
paying among the highest fares in the country for air travel. An
unrestricted coach ticket from Philly to Los Angeles on US Air costs
$2,550. Those kinds of prices invite new competition. It's hard to
understand how airlines can keep selling their product that way when
Southwest is charging $598 round-trip to Los Angeles from Baltimore.
US Air might as well be out on the tarmac with two orange sticks
waving in Southwest.

Still, Philadelphia is incredibly important to US Air, and the carrier
that just emerged from bankruptcy reorganization is probably unlikely
to go without a fierce fight. J.P. Morgan estimates US Air gets 25% of
its revenue in Philadelphia, which makes the City of Brotherly Love
the biggest single component in US Air's network. A significant hit
there, and there are few places left to which the carrier can retreat
and still survive.

It's not like Southwest's 737 tanks will ride through town and topple
statues next spring. In Baltimore, Southwest grew at a measured pace,
and US Air shrank at a measured pace. It took several years for US Air
to officially shed the notion that it had a hub in Baltimore. US Air
had 45% of Baltimore traffic a decade ago and now has only 5%.
Southwest has more than 47% of the passengers at Baltimore.

Over time, this is exactly how the restructuring of the airline
industry plays out. City by city, traffic shifts to low-cost carriers.
With low costs, they offer low prices. Customers flock to those that
offer good value. The discounters cherry-pick the good routes from
cities, not serving small towns or, at least for now, international
destinations.

There will be room for some big network carriers willing to fly to
small towns and take people overseas -- but probably only a few. Those
that survive will have to be efficient, with competitive costs. Big
airlines can co-exist with discounters offering better service and
bigger networks, and they can even get travelers to pay more for that.
But not a lot more -- maybe only 10% more, according to recent
studies.

Two years ago, we had seven full-service network airlines in this
country. Trans World Airlines is gone, whittled down slowly over the
years for a host of reasons. AMR Corp.'s American Airlines tried to
pick up St. Louis by acquiring TWA's assets. But on Saturday, American
said it is sharply cutting its flying in St. Louis, dropping total
daily departures to 207 from 417. That includes American Eagle, which
actually will see a boost in departures there as American turns St.
Louis into something close to a regional-jet hub. Nonstop service to
26 markets will be dropped -- and the majority of those markets are
routes where American found itself competing with Southwest.

Meanwhile, Southwest, which already has 12% of the total traffic in
St. Louis, is looking to add more. As one carrier replaces another,
travelers are still served -- perhaps better served, since they find
lower prices and more opportunity to travel.

So it goes.

The Philadelphia assault is a fascinating strategic move for
Southwest. Typically, the airline doesn't pick fights at fortress hub
airports. It will slip into markets through secondary airports,
allowing existing airlines to keep their product priced high while
customers drive to affordable flights at less-convenient airports. In
Pennsylvania, Allentown's airport built a new terminal and has been
aggressively courting Southwest, figuring it could be the next Oakland
or Burbank, Calif., or Providence.

Instead, Southwest is going for the jugular. Clearly the airline
senses US Air is vulnerable. Also, Southwest wanted to stake its claim
to a main East Coast population center before AirTran Airways expanded
too much there, or JetBlue Airways Corp. began looking for other East
Coast hubs.

Like many wars, this one will be long and drawn out. The airline
industry is evolving. But remember the day that Southwest said it
would invade Philadelphia. It may mark a significant turning point.

Write to Scott McCartney at [email]scott.mccartney (AT) wsj (DOT) com[/email]