Skies Get Friendly for In-State Travel : Airlines: Fight for market share drives down intra-California fares. But cuts could hurt earnings and trigger other fare wars.

Fare wars over California skies intensified Friday as Southwest Airlines launched a new round of price cuts that slashed fares between the state’s major cities to less than $40 each way.

Southwest, responding to unrelenting competition from United Airlines’ Shuttle, cut its intra-California fares by 20%, to $39 one way, for tickets bought at least seven days in advance. There are no deadlines for travel.

United promptly matched the fares on California routes where it competes with the Dallas-based carrier.

But although the cuts are a clear bonus for consumers, they could cut into the swelling profits that the airlines have enjoyed lately after years of huge losses. The higher earnings in large part reflect the carriers’ ability this year to either hold or raise fares in many parts of the nation.

In California, though, the battle between Southwest and United has continued to build since United’s Shuttle began operations last October and promptly took a bite out of Southwest’s dominant position in the state.

Southwest’s share of the intra-California market has dropped from nearly 60% to about 55% during the past year, though it has now stabilized, estimated Philip D. Roberts, chairman of the research firm Roberts Roach & Associates in Hayward, Calif.

Michael Boyd, president of Aviation Systems Research Corp., a consulting firm in Golden, Colo., said Southwest’s latest fare cuts show “it’s not nice to offend Mother Nature or [Southwest Chairman] Herb Kelleher. There’s a message here being sent to the United Shuttle,” namely that Southwest will fight any further loss of market share, he said.

The absence of fare wars in much of the country has enabled the industry’s financial health to improve dramatically in 1995.

Thanks to robust passenger traffic and the airlines’ cost-cutting, fares on average are up 5% this year. That’s expected to help the industry post a record operating profit of more than $1.5 billion for 1995, which in turn has sent airline stocks soaring this year.

But the fare cuts in California could dent those earnings gains for Western carriers, and some analysts have warned that price wars could erupt elsewhere in the nation if passenger traffic tails off.

Besides cutting fares within California, Southwest also slashed prices of its unrestricted “walk-up” fares from California cities to Portland and Seattle by up to 46%. The new fare between Los Angeles and Seattle, for instance, was cut to $89 each way from $164. However, all of Southwest’s flights between Southern California and the two Pacific Northwest cities require one stop along the way.

Alaska Airlines said it would not match the new unrestricted fares because it flies nonstop between Southern California and the Pacific Northwest. But Alaska Airlines did add a $79 one-way fare between Southern California and Seattle for tickets purchased a week in advance.