Airfare war brewing as Southwest drops prices again

Just as consumers are hunting for cheap airfares for summer vacations, U.S. airlines may be entering into a fare war.

This week, Southwest Airlines lowered domestic one-way fares by $5 for tickets purchased within seven days of departure.

American Airlines and United Airlines appear to have matched Southwest’s fare reductions. But Delta Air Lines, which just raised almost all of its domestic fares by $5 one-way, has not.

It remains to be seen if the fare cuts will stick.

“Pricing spats occur from time to time, though usually limited in scope and well outside the market’s purview,” wrote J.P. Morgan analyst Jamie Baker in a note to investors Wednesday. “But this effort feels larger to us.”

The moves come as consumers are enjoying some of the lowest airfares in years, spurred by low oil prices. According to data released by the U.S. Department of Transportation this week, the average fare in the U.S. declined 3.8 percent in 2015, when adjusted for inflation, to $377, the lowest level since 2010.

Fares continued to drop in the fourth quarter, declining 8.3 percent to $363, also the lowest level since 2010, the report said.

Baker thinks the move by Southwest signals that downward pressure on fares — a concern for Wall Street — is not over.

“For starters, we can’t recall any prior, plain vanilla fare decrease by a large airline, nor could any of the industry executives we spoke with last night. Second, yesterday’s effort essentially reverses the Southwest-initiated February fare increase, at the time its second broad-based increase in 2016. Lastly, we suspect, but can only offer our opinion, that Southwest’s effort may be in response to other competitive fare gyrations, potentially signaling a more hostile pricing stance,” Baker wrote in his note.

Baker surmises that Southwest’s fare decrease could be in response to American and Delta placing Advantage Fares back into the market after halting them during the first quarter. When the fares weren’t there, Southwest picked up market share on some routes.

Advantage Fares were originally launched by US Airways several years ago, with the carrier offering deeply discounted fares on connecting routes compared with a competitor’s nonstop price. Eventually other airlines adopted the practice. But by the beginning of this year, the fares had largely disappeared, as noted by American Airlines executives on their first-quarter earnings conference call.

“We went for about three months with no Advantage Fares in the market. That three-month period actually coincided with the relative decline in revenue expectations across mostly all airlines. So we were starting to wonder if our decision to cancel Advantage Fares was really the correct revenue decision,” said American President Scott Kirby.

This story was originally published April 27, 2016 at 5:19 PM with the headline "Airfare war brewing as Southwest drops prices again."