Not Bad, For A Dumb Idea

Los Angeles architect Richard L. Dachman used to fly Southwest Airlines on his monthly business trips to Northern California. He loved the cheap fares and frequent flights, but hated the lack of elbow room and the "cattle-call" rush to grab unassigned seats. Now, Dachman flies the Shuttle by United instead. His round-trip ticket to Sacramento costs $84--the same as Southwest's fare--plus, he enjoys an assigned seat and can use frequent-flier miles to upgrade to first class. "This is a lot more organized," Dachman says.

A deranged MBA's pipe dream, a suicide mission--at the very least, a dumb idea. That's what industry consultants and airline executives called United Airlines Inc.'s plan to launch a short-haul carrier in California, the heart of Southwest Airline Co.'s short-haul system. If nothing else, says Michael J. Boyd, president of consultant Aviation Systems Research, "the Shuttle is a distraction that keeps them from focusing on their core problems. Starting a second airline doesn't fix the first one."

The thing is, United's California dream is making headway. Armed with wage cuts from an employee buyout in July, United launched the Shuttle in October. Four months later, the service is stealing Southwest's passengers and reducing profitability on some of its most traveled routes. Citing fare wars and lower profit per passenger, Southwest reported fourth-quarter profits down nearly 47% from a year earlier, to $20.3 million.

The Shuttle is still hitting some bumpy patches. On-time performance has slipped badly since October because of persistent bad weather. And with more flights operating, passenger load factors have dropped, from 70% in October to 60% in December. Southwest's have declined, too, but not as much.

Indeed, analysts think United is losing millions on the Shuttle, though the company won't break out data. The airline may not turn a profit on its new unit until 1996. Says Southwest Chief Financial Officer Gary C. Kelly: "United and the rest of the industry have made significant progress in reducing costs, but I don't see them matching us."

WHY DRIVE? In the meantime, travelers are reaping the benefits. Air fares in the hotly contested Los Angeles-Oakland corridor have plunged to as low as $35 one-way. "At that price, it's cheaper than gasoline," says Lawrence R. Crawford, president of Avitas Inc., a Reston (Va.) airline consultant. From December, 1993, to last December on the San Francisco-Seattle route, full coach one-way fares dropped 74%, to $139, according to the American Express Airfare Index.

Both airlines are stepping up flights, too. The Shuttle makes 342 trips daily among 15 cities--all but three of them in California--up from 184 flights in October. Southwest, still king of the hill, offers 465 flights in and around the Golden State--up from 433. Who will blink first? Neither rival will give in easily, analysts say. That means California's blue skies could be filled with red ink for months to come.

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