Impact and Model of Low-Cost Carriers What is low-cost carrier? Why can they attain lower cost? What impact does low-cost carrier have on route fares and traffic?

Southwest Airlines Southwest is unique in that: 1. Focus on dense, short-haul markets 2. Point-to-point service using high frequency 3. Single class, no prior seat assignment 4. Simple Frequent Flyer Program 5. Single type of aircraft (Boeing 737) 6. Avoids congested airports 7. Attain low cost, low fare

Impact of Low-cost Carriers Price effect Demand effect “Spill over” effects Consumer surplus

A Study in 1996 Case study: SW entry into BWI Entry in Sep. 1993 Substantial fare and demand effects at entry airports and routes (Figures 1-4) Noticeable “spill over” fare and demand effect (Figures 5-7)

Study in 1996 (cont.) Control for other effects such as, season, trend, other low-cost carriers, etc. Sample = top 200 US routes for 3 years Low cost carriers include non-Southwest

Study in 1996 (cont.) Sample = top 200 US routes for 3 years Presence of SW lowers yield by 53% Presence of low-cost carriers reduce yield by 38% Effect of SW presence is greatest when it is in the route of question, but still has significant impact on other routes Effect of route traffic is significant too.

Study in 2008 Analyzed “Price Premiums” Major carries known to charge premiums on flights originating from hub airports Tested how price premiums affected by the presence of low cost carriers Large data on top 1000 US routes for 12 quarters

Results Fares highest when only high-cost carriers are present Premiums decrease with the presence of low-cost carriers Low-cost carriers charge no premiums based on concentration/domination. In fact they charge negative premiums for concentrated and dominated routes.

Discussion questions 1. How is Southwest’s strategy different from other major airlines? Why can they attain lower costs? 2. Other than low fares, what other factors attract passengers to Southwest? 3. What is the impact of Access Air on DSM traffic and prices? 4. Why do passengers keep using “high-cost” carries even though they charge premiums? 5. From the airline perspective, is the presence of low-cost carriers desirable? Why?