Fight For Philly Dominance


Nov 9, 2003
[Sorry folks, I couldn't get the link to work - Jim]

SWA, US Airways fight for Philly dominance (3/29/2004)

By Dan Luzadder

Michael Aubuchon has a friendly grin on his youthful face and his step is brisk as he heads down the corridor to the Terminal E Concourse at Philadelphia Airport. In the five months since his employer, Southwest Airlines, announced its intention to attack the Philadelphia market dominated by US Airways, he has worn a path to the new four-gate station that Southwest will open in a matter of weeks.

In his left hand, Aubuchon carries a clipboard, the bottom wedged into the crook of his elbow. An open-necked shirt and his easy manner belie the fact that he is not only the airline's property manager but also a lawyer and now the "captain" of shock troops preparing for Southwest's impending battle for Philadelphia.

No one, not even Aubuchon, believes that this titanic struggle over market share for air travel will put a deeper crack in the Liberty Bell -- even with its implications for the "business traditions" of the legacy air carriers or this serious, new threat to US Airways' financial health.

Southwest is dead set on cracking the incumbent's long-standing stranglehold here, where it captures 60% of the market.

Coupled with a recovering economy and a return to confidence in air travel, Southwest's arrival in Philadelphia is being seen here as a signal event -- even a bellwether for industry changes ahead.

Aubuchon stops at the entrance to the three-lane security screening station at the top of the concourse above Southwest's new gates. He slips off his black leather shoes and puts them in a plastic tray, then steps forward in his stocking feet as a Transportation Security Administration officer waves him through the metal detectors.

On the other side he bends to tie his shoestrings, chuckling at a joke about remembering to wear loafers. He points out where a new fourth lane will be added to the security checkpoint to handle the expected influx of thousands of new passengers. Then someone reminds him that the grand opening is exactly two months away.

"You're right," he says, a hint of anxiety flashing over his face. He glances at his watch. "Exactly 60 days from today."

He takes a deep breath.

"We'll be ready," he sighs. "We have to be ready."

Ready or not

The larger question may be whether US Airways is ready for the war it is about to fight. The company is clearly the most vulnerable of the major U.S. airlines. Despite emerging from bankruptcy, it still faces ongoing restructuring challenges, including resolving its high labor costs, winning even deeper union concessions and meeting CEO David Siegel's goals of squeezing $300 million to $400 million more out of its budget this year.

It is also dealing with a reputation in Philadelphia as a "hostage taker" among travelers, who have increasingly grown resentful of high fares with which they -- and tourists coming to the historic city -- have had to cope for years.

Despite its own weakened state and Southwest's reputation for going after the jugular as part of its growth strategy, US Airways admitted that the low-cost carrier's aggressive expansion into Philadelphia was not wholly anticipated.

'We were surprised'

"I don't want to sound overly passive, but I have to say we were a little surprised," said Ben Baldanza, US Airways senior vice president of marketing and planning. "Southwest has been growing aggressively on the East Coast, so we had fully anticipated they might go into, say, Allentown [Pa.], which would have attracted a big chunk of the Philadelphia market," he said. "But we were somewhat surprised they chose Philadelphia itself."

If US Airways' reaction was surprise, its response was predictable: It mounted the kind of counterattack often used by hub carriers confronted with new entrants. The airline committed to dramatically reduced fares and added capacity to Southwest's target cities. Industry observers say US Airways may use the challenge as a catalyst, as well, to make wholesale changes in its operating structure.

Both Southwest and city officials in Philadelphia are quick to point out that there is more at stake than the fight between the two airlines. Both are gambling that the bid for Philadelphia travelers will draw hundreds of thousands of new visitors to the city.

'More for everyone'

"We're anticipating that 2004 is going to be a banner year for us," said Jeff Shull, airport chief of staff. "If you look at areas where Southwest has gone, its aggressive pricing has drawn other business to the airports, as well. And that is what we believe will happen here. There will be more for everyone, including the other carriers."

Still, the Southwest connection was a long time coming.

"We've been talking to Southwest for the better part of the past 10 years," said Shull. "You could say it's been an ongoing courtship. We made a pretty aggressive effort to keep a dialogue open."

Philadelphia already had some low-cost service when the city went shopping for Southwest, and it has brought on new gates for ATA and AirTran in the course of facilities upgrades. But neither airline offered the capacity and the fares for which Southwest is known.

With four gates vacated by TWA and with the demise last year of National Airlines, Philadelphia stepped up its recruiting efforts, only to find Southwest already had US Airways in its sights.

"In June and July last year we came to a conclusion that they had a significant interest," Shull said. "And by early fall it was clear it would all work from a space perspective.

Bob Previdi, a spokesman for Philadelphia's City Council, noted that the airport serves 15 million passengers a year, while Newark, just across the river from New York, serves twice that many with the same number of runways. That fact has hardly gone unnoticed.

"It's a big market, and we're looking at capturing a bigger share of it," he said.

Southwest's May 9 opening in Philadelphia will mark the launch of the city's effort to lure some of that business away from Newark, and BWI at Baltimore, where thousands of passengers in the Philadelphia region have fled to avoid the high prices that US Airways has been able to charge.

Airport officials said they won't slack on efforts to develop other low-cost carriers for the city, as witnessed by the decision in February by Frontier Airlines to initiate flights into Philadelphia May 23.

The word is out

To make its splash as big as possible, Southwest has done more than initiate rock-bottom fares and aggressive schedules. It also has started an advertising campaign over Philadelphia's airwaves, on its billboards and in its newspapers. It's already working, Southwest officials said.

Ask almost any traveler passing through the airport about lower fares coming to town -- at least on the six new routes Southwest will open to Providence, R.I.; Chicago; Las Vegas; Tampa, Fla.; Orlando; and Phoenix -- and they can quote you chapter and verse. Some 14 flights a day will connect Southwest passengers to the airline's 58 connecting cities.

Joe Soeffing, a consultant to architects in Philadelphia who has a major client with an ongoing project in Providence, said the low fares are likely to have an immediate impact on long-suffering business clients like his.

"The money doesn't come out of my pocket because the client pays," said Soeffing. "But when you are talking about the difference between a $900 roundtrip -- and that's what US Airways has been charging, no matter when you book it -- and a $60 trip, that adds up pretty quickly."

With some fares as low as $29 each way, Southwest is planning to fly passengers for only a little more than the cost of a Greyhound bus ride, noted Philadelphia Airport's Shull.

Joe O'Brien of Philadelphia, whose own travel activities dropped significantly since he retired, said he was nonetheless enthused at Southwest's decision to launch service to Phoenix, where he travels a couple of times a year.

"I usually call a travel agent, and price isn't a huge deal to me," said O'Brien. "I'm usually more concerned over whether I'm going to get a window seat. But Southwest has a great reputation; if I can save some money with them, I'm ready for that."

Survival instinct

There is plenty of concern that the new competitive environment could drive US Airways into financial ruin. Philadelphia operations supply about 25% of US Airways' revenue, which would be about $1.7 billion annually based on its reported 2003 revenue of $6.8 billion. The airline said it anticipates losing $40 million in revenue to SWA this year alone on Philadelphia operations and projects a loss of as much as $150 million next year (an independent study puts that figure as high as $250 million).

At present, US Airways controls about 68% of the flights in and out of Philadelphia. Despite the bottom-line implications for US Airways, the city council's Previdi said the city carefully considered that issue and its potential economic impact and remains confident that US Airways will survive the new environment.

"The competition will be a case of Macy's and Gimbel's, and I think that will be good for everyone," he said. "We certainly understand US Airways' issues, and we are looking forward to a long and profitable relationship with them."

Not everyone is quite that confident that US Airways will survive the increased competition, not only in Philadelphia but from low-cost carriers that are beefing up their operations in other hub cities across the country.

US Airways angst

Henry Harteveldt, a travel industry analyst with Forrester Research in San Francisco, said it is important to realize that Southwest's challenge to US Airways "is not happening in isolation. Frontier, AirTran, ATA are all trying to take a piece of the action," he said. "US Airways is being challenged on multiple fronts by multiple players."

He called Southwest an "inspired culture," where employees like to wear company T-shirts to work and are enthusiastic about their jobs. "In a way, they are like rebels with a cause," he said.

US Airways, on the other hand, has become a company with internal angst and with a product that fewer people want because of pricing. Still, while its future "doesn't look very bright," competition is more likely to help than hurt the company, Harteveldt predicted.

"US Airways has gouged the business and leisure public for years, and Southwest is coming in to be the relief valve to the high-priced Philly market," he said. "What will happen next is what is already happening. US Airways has started to transform itself into a more efficient operation. I think it will use this Philly attack to become even more efficient."

Baldanza of US Airways acknowledges that efficiency is the challenge -- and not just in the City of Brotherly Love.

"I think Philadelphia as a microcosm of what is happening across the industry landscape is very true," Baldanza said. "How we see the world may be different than others see it, and Philadelphia makes that point.

"Over the last few years, especially, the expectations of consumers have been changing rapidly," he said. "Consumers have more options at different value propositions. Five or 10 years ago, if you paid $1,000 to fly from X to Y, you may not have liked that, but you didn't have other options. It may have irked you, but it didn't seem like something was wrong.

"When you have the option to take a flight at $199 or $299, that $1,000 fare looks out of whack," he said.

'A kick in the pants'

"Bruce" -- he won't let his real name be used -- is a pilot for US Airways. He is standing near the end of his company's ticketing counters near the curbside arrival areas. When asked about the fight for Philly, he reacts by glancing over both shoulders and tucking his "crew" tag inside his jacket.

"No names," he says. "I need this job. But what I think is that this is a kick in the pants for US Airways and that is the best thing that could happen to us. Southwest treats their passengers like a product, we treat ours like cargo. That has to change."

Bruce is waiting for his wife, who arrives momentarily. She works for Southwest in Buffalo and is scheduled to help open the new station in Philadelphia. They are seeing the situation up close. "At least the two of us will be able to live in the same city now," she quips.

Bruce argues that the competitive development is actually giving him new confidence to stay with US Airways.

"Have we screwed the customers? Yes, we have," he said. "But we're changing. We've dropped fares and increased flights already to some of these Southwest cities, and you know what? Those planes are packed. I can tell you because I'm on them. They're packed. And that's good."

At the Lagoon, a nearby hotel where US Airways pilots and crews tend to stay, the talk is much the same. Stephen Werman, a flight crew member, said he hears grumbling but has only praise for US Airways.

"I think we'll succeed here," he said. "We provide better service, and people remember that. I think we're all hopeful that things will work out."

Even if it doesn't work out, Harteveldt sees positive effects. "Some people say that with the entry of Southwest, a coffin maker should produce a model in gray, red and blue because US Airways is already on the critical list, and this puts them back in intensive care," he said. "I won't say the prognosis is all bad, but I can't say they are in recovery, either.

"What I think is that if US Airways were to shut down tomorrow, there would be a minimum impact overall," he said. "So many other airlines would swoop in there would be a traffic jam. You might see a lot of confusion for the first three months, but by six months, hardly anyone would notice. Maybe that is why the city doesn't seem too worried."

Although it has been widely reported that US Airways is seeking a buyer for its Philadelphia operations, it doesn't sound as though abandoning Philadelphia is an option it is seriously considering.

A matter of money

Baldanza said the company has other strategies in mind.

"The question we have to answer is why are [Southwest's] costs lower than ours? The way we see restructuring in this environment is to essentially change our business model to get from 10 cents per seat mile to 6 or 7 cents, and that has to happen in two ways.

"Roughly that amounts to having a more productive set of labor contracts, both in productivity and pay rate, and in how we distribute our product, how we sell it, how we configure and how we schedule the airplanes," he said.

"We know that Southwest's airplanes spend less time on the ground than ours, and we can improve there," he said. "But there are things about who we are that make us different. We don't want to change to be Southwest because we think we can be better. The only advantage to customers of Southwest is lower fares, and once the price is the same, we have more to offer."

He is certain of one thing, he said. "We won't be pushed out of Philadelphia. We need to grow Philly."

For Southwest's Aubuchon, there is still a lot to do at Terminal E before opening day.

In between meetings with city officials, a pending speaking engagement before the Airport Advisory Board and uncounted miscellaneous tasks, he still has to oversee final remodeling contracts on the concourse and arrange for the installation of new ticketing counters at the curbside level downstairs.

Deadline pressure and battlefield etiquette aside, Aubuchon said he can't wait for opening day. "All I can tell you is it's going to be exciting," he said. He declined to confirm that a high school marching band has been hired, nor say how the marketing department will get the tubas through the security checkpoints.

"Just like everything else, we'll just have to wait and see what happens," he said with a grin. "Just wait and see."