Originally Posted by Captain Dad
Airlines
Friendly Skies
Tom Van Riper, 03.15.06, 6:00 AM ET
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Tom Van Riper
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New York - The headlines: Southwest Airlines is raising fares, and JetBlue Airways is losing money. But don't expect it to last. Both low-fare carriers still have plenty of advantages over their tired rivals.
Not that you've heard much about that lately. Oil at $60 per barrel is throwing a wrench into profits at big and small airlines alike, and Southwest (nyse: LUV - news - people ) just announced it's raising round-trip fares by as much as $20 to offset an expected $600 million increase in fuel costs. Several airlines rushed to match the fare increases, including Northwest Airlines, which said it will experiment with charging more for aisle seats.
JetBlue (nasdaq: JBLU - news - people ), after four years of growth and profits at the expense of the majors, is suffering its first real growing pains. The low-cost carrier lost $42 million during the fourth quarter of 2005 and has seen it shares tumble 35% so far this year. The company just announced a management shakeup to overhaul its legal, corporate-finance and government-affairs units.
As the smaller carriers grow, there's evidence of some price convergence in the industry. Prices at low-cost carriers are edging higher; those at high-cost carriers are getting lower. Will prices converge enough to cost Southwest and JetBlue their unique niches that made them such big passenger favorites in the first place?
Don't count on it, say the experts.
Southwest's strong balance sheet leaves it with plenty of leeway to nudge up fares while leaving its low-cost model intact. And JetBlue, while it's taken some recent knocks after its Embraer (nyse: ERJ - news - people ) aircrafts suffered some early reliability problems after a delayed debut, seems poised to get back on track after scaling back its New York-to-Florida routes that many analysts saw as an over-invested market.
Despite a long-standing joke that describes Florida as New York City's sixth borough, "there's still a natural limit to where the subway goes," says industry consultant Robert Mann.
JetBlue said it will discontinue its two daily flights between Newark and Tampa in May. And while the company did not follow others in matching Southwest's fare increase, Benchmark Capital transportation analyst Helane Becker expects it will announce its own plan later this week.
"By raising [one-way] fares $5 to $10 per seat, JetBlue can be profitable at $60 oil," Becker says. They have room to do it, thanks to the popular service, leather seats and television screens that make JetBlue a must-fly for so many passengers.
Meanwhile, United Airlines (nasdaq: UAUA - news - people ) is still emerging from bankruptcy, while American Airlines (nyse: AMR - news - people ) has been teetering on the edge of bankruptcy for a while. And they're not yet making money. Delta Air Lines, whose executives just told an arbitration panel presiding over a dispute with its pilots that its tank is virtually empty, may soon be history. The company is looking to push its underfunded pension into the Pension Benefit Guaranty Corp., and have effectively told pilots threatening to strike that there won't be a business to come back to if they walk.
Mann says the big carriers' plans are to concentrate on international and major domestic routes and turn over the shorter hops to their subsidiaries like American Eagle (American), ComAir (Delta) and ExpressJet (Continental). Those carriers are emerging as JetBlue's competition into smaller cities like Buffalo, N.Y. and Burlington, Vt.
But enough people like JetBlue for the airline to continue undercutting the majors on longer routes by maintaining its model of flying into smaller airports just outside of major cities in some key markets. When you're the only player out there with a truly distinct brand, customers will put up with bypassing San Francisco and Los Angeles for Oakland and Long Beach, Calif.