(FORTUNE Magazine) – American Airlines sure picked a strange time to start flying shuttles. In late September the company launched ten daily shuttle flights between Boston's Logan and New York City's LaGuardia airports. Soon after came hourly flights between LaGuardia and Reagan National in Washington, D.C.

An odd time to expand? That's putting it mildly: American had just announced layoffs and flight reductions, and the company has lost $2.3 billion over the past four reported quarters. While U.S. air traffic plummeted 10% in the first half of this year, the New York-Washington route suffered a 21% decline, according to government statistics.

But American's move may not be as crazy as it looks. Adam Pilarski, senior vice president at aviation consulting firm Avitas, estimates that the premium-priced, short-hop shuttle flights bring in five times the revenue of other routes. And American is using smaller and more cost-efficient jets than rivals US Airways and Delta.

While Delta, which boasts an enviable private shuttle terminal in New York and is one of the few cash-flow-positive airlines out there, will be a tough competitor, US Airways' August Chapter 11 filing makes it an easy target. Ditto for ground-bound rival Amtrak, which lost 76,000 Acela passengers in August because of engineering problems. Says Pilarski: "This is the time for American to step up and see if it can muscle itself into this highly profitable market."

The real winners are the passengers: American's entry into the Northeast shuttle service is expected to instigate a price war, and already the airlines are offering perks like double and triple frequent-flier miles. For travelers, American's timing couldn't be better.