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Delta Price Cut May Heat Up Fare War

News that Delta Air Lines Inc. cut its fares by 50 percent on some flights may fuel a low-fare revolution that could cripple or kill costlier carriers, analysts said on Wednesday.

The Atlanta-based, No. 3 U.S. airline slashed fares by up to 50 percent for travel in the continental United States. The carrier, which is struggling to avoid bankruptcy, said it lowered its fares to better compete with low-cost rivals such as JetBlue Airways and Southwest Airlines.

Competition from these and other low-cost carriers has pressured the airline industry in general, helping push UAL Corp. and US Airways into bankruptcy.

Delta's price cutting was the latest shot across the bow for these airlines and may signal a quickened pace of restructuring by the legacy carriers into leaner operations, analysts said.

"We feel that the low-cost revolution is not over. It's evolving," said Bob Harrell, president of Harrell Associates, an airline consulting company. "What will happen is they'll meet in the middle somewhere."

Some airlines were already lowering their fares on Wednesday to compete with Delta's rates. Internet travel web site Bestfares.com said US Airways and Northwest Airlines matched Delta's reduced fares in some markets.

US Airways spokesman Dave Castelveter said the carrier matched some of Delta's new fares, extending the airline's GoFares program introduced in April 2004.

A spokesman for Northwest declined to confirm reduced fares on that airline, citing concerns about competition.

Harrell said it is possible that one or more of the so-called legacy carriers could disappear, but he declined to speculate on the fate of any particular airline.

Delta was quick to acknowledge that lower fares would hurt its earnings in the short term, but the end result may be a stronger competitive stance for the airline. Delta said it would cap one-way domestic fares at $499 and one-way first-class fares at $599.

The reduced fares were sure to have repercussions throughout the industry, experts said.

"Depending upon the airline, it's either positive out of the box or it's somewhere between neutral to negative short-term and positive over the longer term," said Robert Mann, an airline industry consultant.

He said the hardest hit airlines will be those that currently face little competition from low-cost carriers, including Northwest, the No. 4 U.S. carrier that has been largely insulated from the fare wars.

For other carriers, Delta's low fares will pose a bigger problem that could play a role in long-term survival.

United Airlines, a unit of UAL Corp., and US Airways, both under Chapter 11 protection, now face the added burden of restructuring in an environment of falling fares.

Mann said that lower fares may disrupt the willingness in capital markets to finance United's reorganization. For US Airways, lower fares pose a liquidation risk, he said.

Even though low-cost carriers have been influencing ticket prices for several years, the gap between low- and higher-cost fares remains wide.

A weekly business fare survey from Harrell Associates shows that travelers on medium length routes with a low-cost presence can fly for as little as 13 cents a mile. Medium length flights are 651 miles to 1,000 miles and include New York-Chicago and Chicago-Dallas routes.

On routes that have no low-cost carriers, business travelers may pay as much as 95 cents a mile, the data shows.

"We are at a point where the low fare carriers exert enough power over pricing that it has forced the restructuring of costs," Mann said. "It's forced Delta into a position where it's had to restructure its pricing."


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