Regional Airlines Profit from Rivals' Fare Hikes

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CHICAGO (Bloomberg) -- Southwest Airlines, the biggest low-fare airline, and smaller carriers such as Frontier Airlines gained business last month after some passengers balked at fare increases by larger rivals.

Passenger traffic rose 15 percent in May at Southwest, the seventh-largest U.S. airline, while several smaller discount carriers even greater increases. That compares with declines at the three biggest carriers -- UAL's United Airlines, AMR's American Airlines and Delta Air Lines -- and a 1.4 percent increase industrywide. May's lower traffic led to profit warnings at UAL and US Airways Group.

Major airlines raised prices three times this year, pushing leisure fares up 11 percent and business fares up 3 percent. Low-fare carriers gained because the Internet is making it easier to comparison shop and even some stalwart business travelers are switching carriers to find cheaper flights, analysts said. "Low-fare carriers are gaining market share, definitely," said Morten Beyer, chief executive of Morten Beyer & Agnew, an airline consulting firm. "They're all showing quite good growth rates, with Southwest being king. The big guys are hurting." Small carriers are benefiting from other changes as well. Most are upgrading their fleets with regional jetliners, letting them offer more comfortable and faster service than the traditional propeller planes. They're also targeting small and midsize cities where major carriers have cut back service. Investors are taking note. Southwest's stock has risen about 39 percent so far this year, compared with a 7.3 percent increase for the American Stock Exchange airlines index. Frontier's shares have tripled, while AirTran Holdings, parent of AirTran Airlines, has seen its shares rise 85 percent. Spurred by higher fares and easier access to rate information on the Internet, consumers are becoming better shoppers, analysts said. That helps Southwest, the seventh-biggest U.S. carrier, and its competitors in the low-fare market. "The key is whether low-fare airlines can retain those customers," Warburg Dillon Read analyst Michael Stellwag said. "People are more willing to try them now that they are better educated consumers." May traffic at Southwest rose to 3.16 billion revenue passenger miles -- a measure of the miles flown by paying passengers -- from 2.74 billion a year earlier. Frontier Airlines, which competes with United at its Denver hub, reported May traffic surged 49 percent to 162 million revenue passenger miles. …