The ‘Southwest Effect’ Expands Its Reach

Yesterday’s announcement that Southwest Airlines (LUV) plans to acquire AirTran (AAI) is welcome news for travelers, but it probably made Delta executives choke on their Monday morning coffee.

Just last week, Delta (DAL) lost its place as the largest domestic air carrier when shareholders of United and Continental agreed to merge those companies under the United banner. Not that Delta has been on top for very long. It claimed number-one status only after its 2008 merger with Northwest Airlines.

Losing bragging rights is one thing, but the Southwest-AirTran tie-up threatens to cost Delta significant cold, hard cash.

Delta is based in Atlanta, where it dominates Hartsfield-Jackson International Airport, the world’s busiest with around 99 million passengers and nearly 1 million takeoffs and landings each year. Neither Southwest nor JetBlue, the country’s two leading discount airlines, fly to Atlanta. The only effective fare competition Delta faces on its home turf comes from AirTran.

And AirTran is feeble competition, especially compared to Southwest. While it does offer low ticket prices, AirTran flies on only a small route system, primarily in the East. In my limited experience with it – AirTran has been on my personal no-fly list for years – AirTran has also featured primitive ticketing systems and lousy customer service. Also, AirTran plays along with the industry’s new game of hide-the-extra-fees. Just this month, AirTran raised the charge to coach passengers for the first checked bag to $20, from $15. A second checked item will set you back $25.

That looks good only in comparison to Delta, which charges $25 for the first bag on domestic flights and $35 for the second. Delta will, however, knock a few bucks off each price if you check in online.

Neither Southwest nor JetBlue (JBLU) charges passengers for the first checked bag, as long as it weighs 50 pounds or less. Southwest will give you two freebies, and it advertises this fact heavily. Southwest also has an extensive national route system, and its most glaring weaknesses – being absent in Atlanta and having only a microscopic presence in the New York City metropolitan airports – will be addressed by taking over AirTran’s slots.

For Delta, this means that it can no longer get by with matching low AirTran prices on just a few routes between Atlanta and certain East Coast destinations like Orlando and New York. The price of flying between Atlanta and most of the United States is going to go down, probably pretty sharply, once Southwest moves in. This is known as the “Southwest effect,” and it has made a major difference for travelers in other cities, including Baltimore, Pittsburgh and Philadelphia, where Southwest invaded another airline’s so-called fortress hub.

Delta also may find customers a lot more reluctant to pay those baggage fees if Southwest gives them the option to avoid the charges. If Delta – one of the four remaining large domestic “legacy” carriers, along with United, American Airlines and USAir – decides to drop the baggage charges entirely, I think the rest of the industry will quickly follow suit.

Those extra fees, along with an industry-wide trend to fly fewer, fuller planes and a rebound in business travel that has pushed fares higher, have brought profits back to the airline industry.

If you work for an airline, you might think I am pining for a return of the bad old days of just a couple of years ago, when the industry’s combined losses were enough to wipe out all the earnings ever generated in the aviation business – all the way back to the Wright brothers.

That is not true. I think regular travelers understand that airlines cannot afford to fly empty seats all over the hinterland while collecting bargain-basement fares from the travelers who happen to be on board. Most flights these days are chock-full and, as they say, space in the overhead bins is limited. (It has been made more limited by those checked-baggage fees.) We will put up with the crowding, and the security lines that cannot be helped. We even tolerate the virtual (because I am mildly exaggerating, and also because computerized scanners can see through clothing) strip-searches before we enter the airport’s sterile zone. Hey, my sympathies are with the federal officers who have to look at all those bodies which, on the whole, are not much to look at.

We will even gladly pay for new services, such as on-board Internet, that many airlines are rolling out. Are you listening, JetBlue? (Yes; word got out last week that JetBlue plans to offer high-speed connectivity – but not until 2012.)

Airline executives, like bankers, do not seem to understand that people hate feeling that they have been duped or exploited. Baggage fees make it difficult to compare true fares across airlines, especially on online-search engines. This, no doubt, is one of the reasons baggage fees exist. People have gotten used to the idea of bringing their own sandwiches on board in coach class, but charging for soft drinks – or even for water, as USAir once briefly and infamously tried to do – strikes many as abusive or even dangerous, because dehydration increases the risk of dangerous blood clots. Travelers are humiliated when they are forced to unpack a suitcase at check-in so they can jettison something and avoid a baggage fee; they are annoyed when they have to wait in line behind someone who is being humiliated in this manner. More than once, I have seen adults break down in tears while simply trying to reach their destination.

The only forces that seem to keep the worst instincts of banks and airlines in check are competition and regulators. Bankers have a brand-new federal consumer protection agency to deal with precisely because they had neither decency nor the competitive pressure to rein in their behavior when it came to dealing with customers. (If there is a major bank whose customer-friendly policies are analogous to Southwest’s, I don’t know what it is.)

Regulators stepped in to end unreasonable delays on airport tarmacs – and, lo and behold, the unreasonable delays ended. Now, Southwest is riding into Atlanta and other AirTran venues, which ought to make the cost of flying a little more reasonable, too.

Oh, and if any Delta executives out there need a fresh cup of coffee, it’s still free in coach on Delta flights. Having Southwest around will probably keep it that way.

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About Larry M. Elkin 564 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

Visit: Palisades Hudson

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