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Southwest Plants in Denver - But Can It Grow?

Southwest Airlines has announced plans to come to Denver, after a twenty-year absence. Since fares historically begin dropping on the announcement that Southwest plans to enter a market, I can't begin to tell you how happy this makes me.

In the conference call, CEO Gary Kelly noted a number things contributing to LUV's decision: 1) Denver's a large a growing market, with the 9th-largest origin-destination traffic in the country, 2) the airport's per-passenger costs have declined dramatically, from over $20 to around $9, where Southwest wants to be, 3) weather. OK, he didn't actually say, "weather;" what he said was that the taxi and turnaround times were more reliable, blah blah blah. But Stapleton, like the Fairfax County School System, was about 20 miles closer to the mountains and used to close on the prediction of snow. (One of the concourse shops was actually called, "Bread, Milk, and Toilet Paper," and only opened on snow days.) Since the airline's Statement of Values says "Thou Shalt Not Idle Your Engines," that alone probably contributed mightily to their 1986 on-time departure from Denver.

One might argue Southwest will have a hard time dealing with a competitor who doesn't have to pay its bills on time. However, United is under pressure to emerge from bankruptcy, which requires a business model that's actually profitable. That just got less likely, so for the moment, Platte River communities downriver from Denver are going to have to keep filtiering red ink out of their drinking water.

Naturally, the company wants to grow, and here's where there could be some trouble. Note that Frontier has been trying to pry United's hands off its under-used gates for years, but neither the city's half-hearted efforts nor the company's threatening to find a new hub has been able to loosen United's death-grip on Concourse B. Those gates represent vitrually all of United's competitive advantage, and it's worth noting that it's a completely contrived advantage, the result of poor negotiating by the city.

Kelly was asked several times about growth, and while he continued to repeat that those were the plans, comparing Denver's size to that of Boston and LaGuardia. But when USA Today asked about a rapid buildup, a la Philadelphia, he sounded very unsure: "I believe we will have the facilities we will need, although that's not definitive. (emphasis added - ed.)"

I sincerely hope that Southwest has more than a wing and a prayer when it comes to those gates. It's not clear where they're going to come from, and if I were Frontier, I'd be hopping mad about seeing a long-term rival expand, so there may be legal action coming from that quarter. On the other hand, there's no question that United's near-monopoly status has enabled their Baby Doe Tabor impersonation ("Hold on to will pay millions again"). So maybe Frontier will welcome the entrant.

A couple of side-points. First, Southwest apparently had been planning to enter the Denver market in late 2006, but pushed up the date when lots of planes became available from New Orleans. Since their model relies on being the low-cost provider, they don't want those planes sitting idle, and moved up their Denver entry,possibly before they actually had those long-term facilities nailed down. (Kelly was extremely careful to make all the right noises about the expansion not coming at New Orleans's expense, about rebuilding their New Orleans service, but "according to needs," so my guess is that a lot of those planes are permanently available now.)

Secondly, when asked about other major markets the airline didn't serve (the reporter in question was probably looking for Limits to Growth), the first city he mentioned was Minneapolis-St. Paul. Ahem.


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