Southwest Airlines Co. will resume service in Denver next year after a 20-year absence, likely triggering lower fares yet posing fresh problems for airlines already struggling with higher fuel prices.
Although Southwest has shunned Denver International Airport for more than a decade because of its high costs, the Dallas-based carrier - in the midst of an expansion - reconsidered because those costs have declined.
It will compete head-to-head against United Airlines as it emerges from bankruptcy and Denver-based Frontier Airlines Inc., which together have about 75 percent of DIA's market.
Frontier shares slumped 29 percent on the news, closing at $7.68 a share on the Nasdaq Stock Market, less than $1 above their 52-week low.
Representatives of both United, which operates a lower-cost subsidiary dubbed Ted, and the low-fare Frontier noted they already face Southwest in other cities and that they will be competitive on ticket prices when Southwest is in Denver.
Details on when and where it will fly, and for how much, are scheduled to be released next week.
"We've been concerned about the costs at DIA in the past but they have done a remarkable job in getting their costs downs to levels that make sense to Southwest Airlines," Southwest Chief Executive Gary Kelly said.
Another factor was current ticket prices at DIA, which he called high. "We'll have a modest start in Denver early next year and we'll just have to take it from there," Kelly said during a conference call with reporters.
Airport officials, who have courted Southwest since DIA opened in 1995, said the airline will generate new competition, which will be good for passengers.
"It's a solid airline with a great reputation," airport spokesman Steve Snyder said. "It's one that people have been asking about since the airport opened."
Southwest operated in Denver from 1983 to 1986 but refused to return when DIA opened in 1995 because of costs. At the time, airlines paid an average of $16.85 per passenger in fees associated with landings, gate rent and other lease costs.
That average has dropped to an estimated $14.30 per passenger in 2005 as airport officials have reduced operating expenses, debt has leveled off and passenger traffic has grown, airport finance manager Amy Weston said.
Each airline pays a different per-passenger rate because of the variables involved in its operation. United Airlines' fee today is about $20 while Frontier pays closer to $8 to $9, Weston said. Southwest also would pay about $8 to $9 per passenger.
In addition, non-airline revenue from such services as parking and concessions has increased from $6.88 per passenger in 1995 to $9.29 estimated for 2005, she said.
The development comes as airlines have grappled with rising fuel prices and aggressive competition that has kept rates low.
United, with 56.7 percent of the Denver market, and Frontier, with 17.3 percent, will face challenges with the addition of Southwest, airline analyst Ray Neidl of Calyon Securities said.
"They're going to affect the pricing structure that Frontier and United are somewhat living with," he said. "It's a fairly high-fare market. That's one of the things Southwest looks for."
Aviation analyst Mike Boyd of The Boyd Group predicted fares would not drop significantly because he believes they already have been lowered by the competition between United and Frontier.
"There is no guarantee that Southwest won't get pummeled in Denver," he said.
Frontier spokesman Joe Hodas said he expects the airline to stay competitive. "We've been building this airline for 12 years to compete against anybody, Southwest or otherwise," he said.
United spokesman Jeff Green said the airline is awaiting details about Southwest's routes and frequencies. "United will be competitive," he said.
United, which is based in Elk Grove, Ill., also owns the Denver-based discount carrier Ted, and has contracts with regional airlines that operate under the United Express flag. United's parent, UAL Corp., does not release separate financial results for Ted, which started service in February 2004.
After a 20 year absence due to high fees, Southwest is again flying from DIA.
Leisure fares to and from Denver International Airport last week were down 11 percent from a year ago.