Metrojet: Will This Short Hauler Fly?

It insists that it can profitably coexist with Southwest

Employees at Southwest Airlines Co. know the drill by now. When US Airways Group Inc. launches its new low-fare, no-frills MetroJet operation on June 1, it will be the fourth time in five years that a major carrier has started an "airline within an airline" to counter low-cost Southwest.

Southwest execs say they're ready for battle, but they're hardly quaking. "Not very many facsimiles of Southwest Airlines have been successful since deregulation of the industry," notes CEO Herbert D. Kelleher. Certainly, Delta Express, Shuttle by United, and now defunct Continental Lite have done little to dent Southwest's growth and profitability. The discount brands "are defensive in nature, and Southwest is offensive," says analyst Samuel C. Buttrick of PaineWebber Inc.

Perhaps that's why MetroJet claims it's not aiming to blow Southwest out of the sky. US Airways Inc. Chief Executive Rakesh Gangwal insists the two can coexist--profitably: "We do not view MetroJet as an assault on Southwest Airlines."

Maybe not. But MetroJet is clearly an effort to slow Southwest's attack on the East Coast. Starting with Baltimore in 1993, Dallas-based Southwest has spread to Florida, Providence, and soon, Manchester, N.H. For Southwest, which doubled in size in the past five years, to $3.8 billion in annual revenues, most growth opportunities are in the east.

That makes Southwest a dangerous challenger to US Airways, a mostly short-haul East Coast carrier with costs 69% above Southwest's. To compete, US Airways has negotiated a new pilot contract for MetroJet, which cuts wage rates by 23%, and a new operating strategy that will increase the use of its aircraft. This, US Airways believes, will dramatically slash Southwest's cost advantage.

MetroJet hopes to erase the losses that US Airways suffers in markets where Southwest and other low-fare rivals have brought down fares. A key focus is on flights from the Northeast and Midwest to Florida, where US Airways loses about $100 million a year.

Gangwal, an architect of Shuttle by United, takes both comfort and caution from prior airline-within-an-airline efforts. Shuttle, created in 1994, provides lucrative feeds to United's longer flights from San Francisco and Los Angeles. The subsidiary line "slowed or stopped Southwest's growth on the West Coast, and they moved elsewhere," boasts Shuttle President Amos S. Kazzaz.

Indeed, Southwest says its intra-California market share was 49.5% in the third quarter of last year, the latest data available, vs. 52.6% before Shuttle started. Still, Chief Financial Officer Gary C. Kelly notes that Shuttle pulled out of four routes where it competed with Southwest and most of its growth has come at the expense of other carriers.

LEISURE TRADE. Delta Express, a lower-cost unit of Delta Air Lines Inc., took a less confrontational approach to Southwest. The carrier's flights are generally longer than Southwest's and focus mainly on low-paying leisure travelers flying from the Northeast and Midwest to Florida. Both Delta Express and Southwest claim to be thriving in the markets where they overlap.

US Airways, going head-to-head with Southwest on many routes at the same airports, may have it harder. "I don't think they have any chance. I think it's a doomed enterprise," says Michael Roach, president of consultants Roberts, Roach & Associates in Hayward, Calif. Kelleher figures he has a 30% to 40% cost advantage over MetroJet. Gangwal denies the gap is that large and says he'll offset it by attracting business travelers with US Airways' frequent-flier program--soon to be linked with American's--and such amenities as reserved seating.

Southwest promises to fight back if need be. But mostly, it's banking on the basics--on-time flights and friendly customer service--that have fueled its success. "At this point, we're not treating this as some kind of all-out war. But we'll be prepared for that if that's what it leads to," vows Southwest's Kelley. However this showdown shapes up, it's already looking good for consumers.

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