Frontier Holds its Own Against Southwest, United

DENVER -- CEO Jeff Potter was a little surprised in 2005 to learn that his company, Frontier Airlines, was about to become the target of Southwest Airlines' next assault on a new market.

Denver, Frontier's hometown and home of the USA's fifth-busiest airport, didn't seem to fit the mold for the kind of market that Southwest historically had attacked. Southwest abandoned the Denver market in the 1980s after a brief run there, citing its inability to operate efficiently in the Mile High City's often brutal winter conditions.

But 14 months after Southwest's return to Denver, Frontier so far is standing up to the fierce competition, not only from Southwest, but from No. 2 United Airlines, which maintains its second-biggest hub at Denver International. And travelers are seeing the benefits of the competition: Fares have plummeted on most of the routes where the three compete directly.

Before Southwest announced in 2005 that it would resume service on Jan. 3, 2006, Frontier officials had been bracing for stepped-up competition. They had developed plans for responding to new competition from a theoretical "best-in-class" airline, but not necessarily Southwest.

As a result of that preparation, aviation consultant Michael Boyd, a Denver-area resident and close watcher of the market there, says that Frontier "has fought Southwest to a standstill -- at least this far."

As for Potter, he's satisfied with his airline's response to the competition. "What Southwest's entry has done, with their low fares and our matching, has been to stimulate the market for everyone," he says.

Thirteen-year-old Frontier, the smallest dog in the three-way fight, is most vulnerable because of its dependence on its hometown. And it's already been scarred by the fight. It lost $17.8 million in 2006 with Southwest in the Denver marketplace vs. a loss of only $9.8 million in the year before Southwest's arrival.

"Denver is Frontier's Alamo. They have nowhere else to go," says Steve Hendrickson of Sabre Airline Solutions.

Such three-way competition for a local market is rare, and it's shaping up to look a bit like what was happening more than 20 years ago in Denver. Then, Continental, United and an earlier airline that was also called Frontier battled for market share. That competition drove the earlier Frontier out of business in 1986.

Hendrickson says three-way competition can result in out-of-control fare and market-share wars that seriously damage the combatants.

No free-for-all yet

So far, a real donnybrook has yet to break out in Denver. Southwest's share of the local market stands at about 5%.

But Southwest's arrival has had a big impact on the routes where it competes directly against both Frontier and United. Five of those routes -- Las Vegas, Chicago, Phoenix, Salt Lake City and Kansas City -- are among the most heavily traveled routes to and from Denver. Less-traveled routes where the three compete out of Denver: Nashville and Orlando. (See chart.)

Southwest has put a crimp in its rivals' revenues where the three compete directly. In December, total revenue for all carriers serving those routes was down 4.4% from December 2005, according to Sabre. That decline contrasts with an overall increase of 12% in industry revenue over the period.

Potter, Frontier's CEO since 2002, says his counterparts at other low-cost carriers are watching Frontier. He says they know that someday they, too, could be involved in such a battle against expansion-minded Southwest.

The Dallas-based discount king moved into Philadelphia three years ago, not only to attack the weakness of US Airways, in bankruptcy protection then, but to beat JetBlue to the punch. Last year, it began serving Washington Dulles to seize an opportunity for low-cost-carrier growth after the demise of Independence Air at that airport. Now, it is moving back into San Francisco International in the fall after a six-year absence.

Southwest plans to grow well beyond its current 37 daily flights at Denver, so the downward pressure on fares on competitive routes is likely to continue.

'It's always the same'

Pete McGlade, vice president of schedule planning, says Southwest hasn't been surprised by anything since it began flying in Denver. "It's always the same. They see our fares, lower their prices and increase their capacity."

The financial impact on United is even harder to see. The carrier declined a request to interview senior officials about the Denver market competition. Spokeswoman Robin Urbanski said, "(The) new market dynamics in Denver represent only 1% of our business in this important hub."

United and Frontier have some competitive advantages over bare-bones Southwest. Frontier offers assigned seats and live TV. United's customers get its global service network, attractive frequent-flier program and what Boyd says has become very good customer service.

And Frontier enjoys a bit of a boost, mainly because it's the little guy in the competition and because it's the hometown carrier. Traveler Sheri Facinelli of Denver says she sticks with Frontier when she can, because "I think Denver needs the competition."

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