Fare cuts to hit budget carriers

Delta Air Lines's move to slash unrestricted fares by half has been matched by most legacy carriers in the past week. JP Morgan analyst Jamie Baker said AirTran, ATA Airlines and America West Airlines will be the ones most negatively impacted by the fare cuts.
"When faced with price ubiquity, passengers will make their decision primarily based on schedule, network breadth and frequent flyer benefits," Baker wrote in a research note, adding that as nonstop fares decline, passengers will have no incentive to change planes at low-cost carrier hubs such as Midway, Atlanta or Phoenix.
JetBlue Airways will be the "least" affected by the fare cuts as connections are not a large part of the carrier's business strategy, Baker said.
Baker, who has an "underweight" rating on JetBlue Airways, Southwest Airlines, AirTran Airways and Frontier Airlines, on Tuesday cut his ratings on America West to "underweight" from "overweight."
Low-cost carriers, which largely served "overpriced and underserved" markets will now be serving just "underserved" markets, Baker said, and will see lower profit margins than what they had expected.
"As these returns fail to live up to expectations, we expect longer-term low-cost carrier growth rates to moderate, potentially coming in the form of aircraft deferrals or cancellations," Baker said.
Baker also said that while he thinks the reduced fares will erode industry revenue in 2005, shares of larger airlines -- such as American Airlines, Northwest Airlines and Continental Airlines -- will end the year higher because of potentially slower growth rates at low-cost carriers and a more stable and healthy revenue environment in the industry.