By Kyle Peterson - Analysis
CHICAGO (Reuters) - The launch of low-cost airline Virgin America Inc this year has triggered a fare war that has nearly halved ticket prices on some routes and could erode earnings at rival airlines.
The competition has been especially fierce between Virgin, which is partly backed and fully branded by British entrepreneur Richard Branson, and UAL Corp’s UAUA.O United Airlines on the transcontinental route between San Francisco and Washington, D.C.
“It’s pretty apparent that the airlines are worried,” said Rick Seaney, chief executive of fare tracker FareCompare.com.
Virgin launched service in the United States on August 8, diving into a U.S. airline industry that is recovering from a years-long downturn.
Through deep cost cuts and fare hikes, U.S. airlines have managed a recovery in the last two years after grappling with low-cost competition and excess capacity. But the Virgin invasion adds fresh fuel to those troubles for some competitors.
According to FareCompare data, United has cut its lowest advance purchase fares on round-trip flights between San Francisco and Washington by 20 percent since mid-July, when Virgin started selling tickets.
Lowest advance purchase fares do not necessarily reflect average fares, which see some seasonal reductions as the peak summer travel season winds down.
Other carriers have attempted to fend off Virgin by adding more flights to routes where Virgin flies, Seaney said.
For example, when Virgin added 447 seats, or three daily weekday flights, to its San Francisco-to-Las Vegas route, Southwest responded by adding 959 seats, or seven flights, on that route.
When Virgin put 745 seats, or 5 daily flights, on the route between San Francisco and Los Angeles, JetBlue added 600 seats, or four flights, on the route.
Such capacity additions can attract more travelers, but they also create a glut of seats and pressure fares.
“They don’t want to lose market share, so the airlines that run right against (Virgin) start adding aircraft,” Seaney said.
It is a trend that is unlikely to reverse any time soon, said Terry Trippler, an airline expert at myvacationpassport.com.
He said Virgin’s fares and focus on in-flight services, such as entertainment, make it a formidable competitor for the cross-country business travelers that United and others have courted aggressively in recent years.
“More than bringing fares down, they’ve assured that fares will stay down,” Trippler said.
A UAL spokesman declined to comment on competition with Virgin, except to say that United welcomes it.
But it is only a matter of time before the fare reductions on transcontinental routes begin to depress industry revenue, said Joe Schwieterman, transportation expert at DePaul University.
He said UAL will be the first to feel the Virgin’s squeeze but other airlines will be in a similar situation as Virgin expands.
“I think the fourth quarter is when you could see a modest bottom line impact,” Schwieterman said. “Virgin America will likely emerge as a West Coast powerhouse.”
Reporting by Kyle Peterson, editing by Tim Dobbyn