Impact and Model of Low-Cost Carriers

1
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?

2

• 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

3

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

4

• 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)

5

• 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

6

• 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.

7

• 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

8

• 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.

9

• Discussion questions
• 1. How is Southwests 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?