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Impact and Model of Low-Cost Carriers

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

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Impact and Model of Low-Cost Carriers

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  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 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?

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