It's no secret that JetBlue Airways Corp. (JBLU ) is growing fast, posting healthy profits and winning acclaim from fliers. But even JetBlue can stumble. Witness the recent dustup in Atlanta, where the airline is packing its bags on Dec. 4 after seven months of ferocious competition from hometown giant Delta Air Lines Inc. (DAL ) When JetBlue launched service from Atlanta to Long Beach, Calif., in May, Delta slashed fares and hiked its capacity to Los Angeles airports by nearly 50%. "It was definitely a violent reaction," says David F. Ulmer, JetBlue's vice-president for planning. "We decided to use our resources best elsewhere."
Those kinds of skirmishes were once common in the cutthroat airline industry. Yet they've been scarce in recent years as the so-called "legacy" carriers, such as Delta and American Airlines Inc. (AMR ) focused more on survival than on snaring market share. But with the economy growing and their finances stabilizing after three years of retreat, the big network airlines appear ready to rumble with such low-cost players as JetBlue, Southwest Airlines (LUV ), and AirTran Airways (AAI ). "We're not running from these carriers anymore," vows American Airlines CEO Gerard J. Arpey. The latest to jump into the fray: On Nov. 12, United Airlines (UALAQ ) announced it will launch "Ted," a low-cost unit that will take on Frontier Airlines Inc. (FRNT ) in Denver.
The stepped-up competition could mean slowing revenue growth and pressure on margins and stock multiples for the upstarts. Already, JetBlue's high-priced stock has tumbled 22% since Oct. 22 as nervous investors rethink its growth prospects. Discounters with higher costs or weaker franchises, such as Frontier and Spirit Airlines Inc., stand to get squeezed the most.
It's no wonder the goliaths are fighting back. For every seat they have cut in recent years, discounters have rushed to fill the gap. The low-cost carriers' market share, about 20% of domestic capacity, has doubled since 1995. By the end of next year, estimates analyst Samuel Buttrick of UBS Securities (UBS ), total industry capacity will be back to pre-September 11 levels, even though the majors have shrunk 14% over the period.
But now, deep cost reductions and a surging economy are giving the majors the confidence to fight back more often. American and Delta, for example, are matching the discounters' low prices on more seats or even jumping into new routes after their low-cost rivals. All told, the majors and their regional partners are expected to boost domestic capacity 5% next year, with much of that expansion aimed at markets with low-cost competition. And they're doing it cheaply by using planes more intensively, not heaping on new aircraft orders.
With higher aircraft use, simple fares, and some $5 billion in annual cost cuts by 2005, United vows that Ted, which starts in February, will be profitable serving such leisure markets as Reno, Nev., Las Vegas, and Tampa. Delta, too, is considering expansion of its 36-plane, low-cost Song unit, even though analysts question its ability to wrest share from JetBlue. And American has capped its transcontinental fares at $299 one-way and beefed up its Dallas and Chicago hubs.
The low-cost carriers will no doubt feel some pain. Because of increased competition, J.P. Morgan Chase & Co. analyst Jamie Baker has cut his fourth-quarter earnings-per-share estimate for JetBlue by 11% and downgraded the stock. He cut his fourth-quarter earnings-per-share estimate for AirTran by 26%. Still, the current field of discounters isn't going to collapse -- the fate of the once hugely popular People Express. They still boast a hefty cost advantage and growing customer loyalty. Southwest, for instance, will enter Philadelphia, a US Airways Group Inc. hub, next May. Profitable Atlanta-based AirTran Airways Inc. is expanding to San Francisco, Las Vegas, and Denver.
What's more, legacy carriers still struggle with huge pension obligations and crushing debt. Escalating pension costs prompted Delta on Nov. 12 to up its forecast of fourth-quarter losses to as high as $415 million -- nearly double an earlier estimate. So taking on discounters will cost the big boys. They'll throw punches, but don't look for a knockout anytime soon.
By Wendy Zellner in Dallas, with Michael Arndt in Chicago