NEW YORK – U.S. airlines are cutting fall prices earlier than usual this year, launching a fare war that some Wall Street analysts say will squeeze profits more tightly at low-cost carriers than at their larger rivals.
JetBlue Airways Corp. (JBLU) on Tuesday said it will cut prices by as much as half on 1 million seats this fall, becoming the latest low-cost carrier to slash fares in recent days.
U.S. airline fare sales are common in the traditionally weak period between Labor Day and Thanksgiving. But the annual fare war generally starts later in the year, with the first shots fired by the major carriers.
"It's perfectly normal from a seasonal perspective to see discounted fares for fall travel offered in mid-summer," Sam Buttrick, analyst at UBS, said. "However, the levels are particularly low in markets where there have been significant capacity additions," he said, citing transcontinental markets and routes such as the Northeast to Florida and Dallas to the West coast.
Southwest Airlines (LUV), AirTran Airways (AAI) and ATA Holdings (ATAH) recently announced heavily discounted fares for fall flights, starting the early round of price cuts in an industry that has been struggling to keep profits alive.
Larger carriers, most of which are expected to post losses in the second quarter, have been forced to match the discounts to stay competitive.
But according to some analysts, the lower fares will hurt low-cost carriers more than the larger ones.
"The domestic revenue environment is going to be challenging this summer and into the fall, particularly for discount carriers," Buttrick said. "It will be a tough summer from unit revenue perspective for carriers such as America West, AirTran and perhaps JetBlue."
Low-cost carriers benefited from capacity cutbacks by larger airlines after the Sept. 11, 2001 attacks on the World Trade Center and through the war on Iraq (news - web sites). But as the travel industry began to recover late last year, major airlines began restoring capacity.
"Capacity is back at the larger network airlines. There will be no revenue spill-over to the smaller airlines this year," Buttrick said. "There is too much capacity, much more than the demand."
Dallas-based Southwest last week slashed prices by as much as 65 percent, offering $39 to $99 fares on late summer and early fall flights. AirTran also announced a 30 percent price cut on all its fares.
Analysts said the discounted fares will have little effect on the major airlines, even though many are struggling, with United Airlines trying to emerge from bankruptcy and Delta trying to avoid it.
"The network airlines are desperately in need of more revenue. But it's not always clear that a fare hike produces that outcome," Buttrick said. Larger carriers also have the benefit of garnering a large chunk of their revenue from international operations, he said.
Airline stocks were off across the board in mid-day trading. JetBlue shares were down 3.4 percent at $25.79, AirTran shares were off 3.5 percent at $13, Delta shares were off 7.2 percent at $6.26, AMR Corp. shares were down 5.9 percent at $9.74 and Continental shares were off 2.6 percent, at $$9.78.
"We expect losses throughout the network carriers business, albeit with margins better than a year ago," Buttrick said. "And we expect profit in the discount carrier business, but with lower margins."