A Philadelphia success story

Southwest's quick growth in city shows its potential in Denver

Chris Walsh, Rocky Mountain News

Published December 30, 2005 at midnight

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PHILADELPHIA - Stroll through Philadelphia International Airport and it quickly becomes clear which airline dominates the City of Brotherly Love.

Dozens of US Airways ticketing counters stand sentry inside the airport's five terminal buildings, and the carrier's name takes up a good chunk of space on arrival and departure screens.

But another airline, tucked away in a corner of Terminal E with only a handful of check-in counters, has been getting most of the attention lately.

Low-cost king Southwest Airlines entered Philadelphia a year and a half ago with just over a dozen flights. But it swiftly has become the city's second-largest carrier, driving down airfares, ratcheting up the pressure on US Airways and helping boost the airport's passenger traffic by 30 percent since its arrival.

Southwest's story in Philadelphia provides a potent example of the airline's potential in Denver, where it will start service Tuesday.

Just how fast Southwest grows at Denver International Airport remains to be seen, and it certainly faces a tough battle against industry giant United Airlines and homegrown low-cost carrier Frontier Airlines, DIA's largest carriers.

But Southwest could become as much of a force in the Mile High City as it is in Philadelphia, experts say. And it likely will ramp up quickly at DIA if demand is strong.

"Initially, they are the proverbial gnat on the elephant's butt," said Scott Hamilton, an aviation consultant at Leeham Co. LLC in Sammamish, Wash. "But Southwest doesn't go into a market like Denver with plans to simply be a bit player. The question is, are they happy to have 50 flights a day, 80 or 200?"

The 'Southwest Effect'

At Southwest's ticketing area in Philadelphia, large banners advertise job openings for ramp agents and new flights to Florida. Lines form throughout the day, and passengers frequently swarm the automated check-in kiosks.

Numbers, though, tell the story best.

During its first 20 months in the city, Southwest:

• Increased its employees from a couple of dozen to nearly 190.

• Boosted its daily nonstop flights at the airport to 53 from 14.

• Added service to 11 new cities and increased its number of gates to eight from two.

• Captured a 10 percent market share of passenger traffic at Philadelphia International Airport, while US Airways fell about 5 percentage points.

The airline's arrival in Philadelphia is a classic example of the so-called Southwest Effect, a phenomenon in which fares drop drastically and more people end up flying when the carrier comes to town.

Southwest helped lower airfares in Philadelphia on some routes by as much as 70 percent in the months after its arrival. Fares have crept up a bit since then but are still well below pre-Southwest levels, according to data from the U.S. Bureau of Transportation Statistics.

This year, Philadelphia's airline passenger traffic has jumped 15 percent compared with 2004, much of which the airport attributes to Southwest.

"They've changed things here quite a bit," airport spokesman Mark Pesce said. "We've seen how the lines at security checkpoints increased because of Southwest."

The airline's arrival in Philadelphia also helped fuel a $185 million renovation and expansion that will combine the security areas for the airport's D and E concourses. Southwest, which leases gates on both concourses, will be a prime beneficiary.

Keeping airport costs low

Southwest's decision to restart service in Denver after a failed run in the mid-1980s is as baffling to many industry experts as the carrier's move into Philadelphia.

The airline typically bypasses large airports in favor of smaller, cheaper and less crowded ones on the outskirts of metropolitan areas or in nearby cities. In Chicago, for instance, Southwest flies out of Midway rather than the much larger O'Hare International Airport.

That strategy allows Southwest to keep its average airport costs at an industry-best $5 per passenger. It's also a key reason behind the airline's stellar financial track record: 32 consecutive profitable years.

The assumption in Philadelphia was that Southwest would skip the main airport and base itself in Allentown, Pa., 60 miles to the north.

"Many people thought Philadelphia was off our radar screen because it was too congested and because US Airways had such a dominant presence," said John Minor, Southwest's Philadelphia station manager.

Similarly, the assumption along the Front Range was that Southwest would fly out of Colorado Springs rather than Denver. Industry watchers thought DIA's costs were too high - Southwest left the old Stapleton International Airport for just that reason - and the competitive situation too heated.

But Southwest saw the right mix of business conditions and an opportunity to lower fares.

In Philadelphia, several gates in close proximity to the airfield became available, allowing Southwest to alleviate some congestion concerns. And US Airways had plunged into bankruptcy, weakening the city's main carrier.

In Denver, airport fees dropped considerably in recent years and are now more aligned with Southwest's cost structure. The airline also has seen strong demand for Denver service from its customers in other areas of the country.

Here for the long haul

Southwest's CEO has made it clear he sees a wealth of potential in the Denver market, recently saying the airline "looks forward to a lot of future flights" at DIA.

It certainly seems to be headed in that direction.

Southwest has cemented three- year deals with two local TV stations to sponsor the broadcasts of Colorado Rockies, Denver Nuggets and Colorado Avalanche games, indicating that it intends to be here for the long haul. And the carrier recently added to its schedule temporary nonstop Saturday flights from Denver to Oakland, Calif., and San Diego for two months starting in February, in part to test the markets.

"I think you're going to see a wider variety of cities from Southwest out of Denver," said Dave LaPorte, Southwest's Denver station manager. "And our typical modus operandi is to operate a high number of flights to each destination."

The carrier has some room to grow at DIA, where it leases two gates on Concourse C. Southwest typically operates at least 10 flights a day at each gate. With an initial 13 daily flights from DIA, the carrier still can handle at least seven more at its current gates.

There also are two additional open gates on Concourse C, and DIA is finalizing plans to build two more. DIA said it is building the new gates to meet overall projected growth and that they are not reserved for any specific airline.

But Southwest certainly could be a leading candidate.

"If the market responds, as most do when Southwest comes in, then we would expect the carrier to add flights and gates next year," said Vicki Braunagel, co-manager of DIA.

Regardless of its growth levels, the airport will get a big boost from Southwest's arrival. DIA officials estimate that Southwest will help the airport draw another 1.5 million passengers next year. And consumers already have won: Southwest has forced down round-trip fares from DIA on the routes it will serve by as much as $100.

Competition ramps up

What does it all mean for United and Frontier?

It's difficult to say.

Some industry watchers think Southwest presents a major threat to the city's entrenched carriers. It also could take market share from airlines such as America West, Delta and Continental, which have a smaller presence at DIA.

Not only does Southwest offer some of the industry's lowest fares, but it also is known for its fun, friendly customer service.

In Philadelphia, Southwest quickly built legions of loyal fans such as John Kidwell, who flew Southwest to Tampa Bay, Fla., with his two children this month.

"I just like them better than most of the other airlines we've flown," Kidwell said. "The people who work on the plane are so laid-back. They're not as pushy and by-the- book as everyone else."

The carrier also has industry-leading on-time stats, meaning passengers are reasonably assured they'll leave - and arrive - when they're supposed to.

United and Frontier have matched Southwest's initial fares, but they could feel the pain financially as Southwest grows and they lower more ticket prices. Profit margins and growth plans could take a huge hit, some observers say.

On the other hand, Denver could prove to be much more difficult for Southwest to enter than Philadelphia and other cities.

Philadelphia was ripe for growth with just one dominant carrier and little low-cost competition before Southwest came. In Denver, though, the competition is already heated.

United and Frontier also have built strong loyal followings in the Mile High City, and neither will cede territory easily.

"Nobody in their right mind starts clapping as an investor when Southwest comes into town," said Jeff Linroth, who runs a financial advisory company in Longmont and owns Frontier shares. "But I think there's enough product differentiation between the two that Frontier will be able to continue to do what they've been doing and execute their growth plan."

In addition to live TV in every seat, Frontier prides itself on customer service and a fleet full of new planes. It also provides much more service from Denver than Southwest will, about 125 nonstop daily departures to 48 destinations.

Frontier and United also go up against Southwest in other markets.

"We've been competing with Southwest for years in other markets, and we're ready to compete with them in Denver," United spokesman Jeff Green said.

United points to its ability to connect passengers through its other hubs to destinations worldwide. The airline, which is set to emerge from bankruptcy protection in February, has a coveted frequent-flier program and about 400 daily departures at DIA.

"The ball is in United and Frontier's court," Evergreen-based airline consultant Mike Boyd said. "If they respond aggressively and come out swinging, they'll be able to do battle. If they underestimate Southwest, someone's going to die."

The dream scenario for DIA is one where all carriers thrive from increased passenger traffic.

Much of Southwest's growth in Philadelphia has come from an overall increase in passengers. US Airways lost market share, but it increased its passenger numbers by roughly 1.5 million in the first 10 months of this year compared with the same period in 2004. Its daily departures have jumped by about 50.

"I've got my doubts that Southwest could be as strong here as they've been in Philadelphia," said Bruce Strand of Denver-based aviation consulting firm TeamSAI. "But I do think Southwest, United and Frontier can all grow in Denver."

Potential for big growth

Southwest will start with a small presence in Denver.

• Service: 13 daily nonstop flights, starting Tuesday

• Cities: Phoenix, Chicago, Las Vegas. One-stop service to dozens more cities. From February through March, will fly on Saturdays to Oakland, Calif., and San Diego.

• Gates: Two on Concourse C

• Employees: About 40

• Fares: Lowered them on some routes by as much as $100

But if Philadelphia - one of Southwest's newest markets - is any indication, the carrier could grow quickly here.

• Service: Boosted daily nonstop flights to 53 from 14 since its May 2004 arrival in Philadelphia

• Cities: Added 11 new markets

• Gates: Increased to eight from two

• Employees: 190, up from a couple of dozen

• Fares: Lowered prices on some routes by up to 70 percent

• Market share: 10 percent, now the city's second-largest carrierSource: Southwest Airlines, Philadelphia International Airport

walshc@RockyMountainNews.com or 303-892-2744

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