Expect a Fare War Now That Southwest Can Spread the LUV

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LM Otero/APA Southwest jet, freshly painted, over Love Field.
Two of the favorite words for any consumer should be "price war," and one is breaking out in Texas.

Southwest Airlines (LUV) on Monday will offer nonstop service for the first time from Dallas to Los Angeles; Chicago; Washington's Reagan National; Denver; Las Vegas, Nevada; Baltimore; and Orlando, Florida. And beginning next month it will add direct service to eight destinations: New York's LaGuardia; Atlanta; Phoenix; San Diego; Tampa, Florida; Fort Lauderdale, Florida; Nashville, Tennessee; and Orange County, California.

That's all because a 35-year old federal law that limited traffic from Love Field in Dallas is expiring. The intent of the Wright Amendment, named after former House Speaker Jim Wright, a Texas Democrat, was to open the market for the new Dallas-Ft. Worth Airport. It restricted flights from Love Field to within Texas and the four states that touch it: Louisiana, Arkansas, Oklahoma and New Mexico. That sent American Airlines (AAL), United (UAL) and others to base operations at then-new Dallas-Ft. Worth Airport, known as DFW.

But Southwest, still in its infancy at that time, stayed behind at Love, which is closer to downtown Dallas. To circumvent the rule, it offered hop-and-go flights to other cities in Texas and to those four neighboring states, that would then fly to other major destinations around the country. Southwest has since grown into an industry powerhouse, flying more domestic passengers than any other carrier.

More Flights Every Day

Dan Landson, a spokesman for Southwest, said lifting the restrictions will make the carrier "much more competitive with other carriers flying in and out of north Texas." He says the company will immediately increase the number of flights to Dallas to 150 a day from 118.

"They now get to fly nonstop anywhere in the country," said Rick Seaney, chief executive of FareCompare.com. That means Southwest will be better able to compete for business travelers, the most lucrative target for airlines. But Seaney notes that leisure travelers will benefit too. He says "prices will drop by 15 to 30 percent on these new roundtrip routes."

He predicts lower prices will hold for the next six to nine months, until demand catches up to the new capacity, and other carriers will have no choice but the match the lower prices from Southwest. However, the fare war will only affect flights going from Dallas to the new destinations. "This is the one city in the country that's getting increased competition," according to Seaney. "Everywhere else competition has gone down."

City officials in Dallas estimate that passenger traffic at Love Field could increase by nearly 50 percent. To cope, Dallas has replaced old gates with a new 20-gate terminal.

Over the last 35 years, DFW has become one of the world's busiest airports, and it is the largest hub for American Airlines, which is headquartered nearby. Seaney says American is likely to match Southwest in the airfare war. He says American still has several advantages for business travelers, including many more flights per day, as well as a highly regarded loyalty program.

Run the Numbers On On-Time Arrivals, Baggage and Stock

As Southwest fights for new passengers now that it's free to fly anywhere in the U.S. (there are still restrictions on international flights from Love Field), it is grappling with some dings to its reputation that have come along with its rapid growth. It is in the midst of long-running, often-bitter contract negotiations with its biggest labor unions. In addition, Southwest's on-time arrival numbers have slipped, and it has the highest rate of mishandled baggage of any major carrier. Seaney notes that the baggage problem occurs because Southwest handles more pieces of luggage than its rivals, due to its "bags fly free" policy.

Seaney says airlines have tried to raise fares almost every month for the past 18 months, but not many increases have stuck. He says "base prices are about as high as consumers are willing to pay." He also notes that carriers have to match the lowest price offered on any given route, because of the many flight comparison sites that list prices from lowest to highest.

To publicize its route expansion, Southwest has launched an advertising campaign with the kicker "All You Need is Love." "Our [stock] ticker symbol is LUV," Landson notes. "We fly out of Love Field. All you need is love."

Southwest stock also has been soaring. Over the past year it has doubled in price.
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