Effect of low-cost airlines on communities explained

The effect, often referred to as "the Southwest effect", is the increase in airline travel originating from a community after service to and from that community is inaugurated by Southwest Airlines, or any similar airline that improves service or lowers cost.

Original description

The U.S. Department of Transportation coined the term in 1993, to describe the considerable boost in air travel that invariably resulted from Southwest's entry into new markets,^[1] or by another airline's similar activity.

The Southwest Effect was said to have three elements:

• The new-entrant airline increased supply and offered lower prices. Southwest offered dramatically lower air fares than established airlines that usually enjoyed a near-monopoly in the communities.
• Incumbent airlines lowered their own fares. Established airlines competing with Southwest Airlines sought to avoid Southwest's entering their markets, and feared losing passengers and having to offer lower prices. Upon Southwest's entry, incumbent carriers lowered their own fares in that market (and thereby reduced their profitability), to remain competitive.
• Sales rise for all airlines in the market. For the communities affected, Southwest's entry and the corresponding drop in air fares stimulated business and increased demand for air transportation. This, in turn, increased the revenues of all airlines offering transportation to the community, and sometimes resulted in a net profit increase.

Other carriers with similar effects

In recent years, some new airlines have had a greater "Southwest Effect" than Southwest itself. An MIT study released in August 2013 found newer, smaller airlines were having a greater impact on lowering the average price of a ticket where they fly. According to an MIT International Center for Air Transportation analysis of ticket statistics, between 2007 and 2012, Southwest's ability to lower fares had weakened from $36 per one-way fare to only $17 per one-way fare. At the same time, JetBlue, Allegiant, and Spirit Airlines were associated with dips of $32, $29, and $22, respectively, in markets that they entered. However, other airlines' lower fares don't account for the ancillary products that are a significant component of their business.^[2]

In August 2013, USA Today, in noting the competitive effect on prices continued to be seen, but JetBlue's impact on prices was now largest, suggested, "You might want to start calling it the JetBlue effect." The article also draws attention to JetBlue's much smaller footprint in overall domestic passenger traffic, making any claims about a widespread effect much more tenuous.^[3]

Further reading

• Book: Freiberg, Kevin . Freiberg, Jackie . Nuts! Southwest Airlines' Crazy Recipe for Business and Personal Success. Austin, Texas. Bard Books. 1996.
• Book: Rickenbacker, Edward V. . Rickenbacker: An Autobiography. Prentice-Hall. 1967.
• News: Ritter, Justin. Chapter 8: The "Southwest Effect. https://web.archive.org/web/20080610004921/http://www.erau.edu/research/BA590/chapters/ch8.htm . June 10, 2008 . Southwest Airlines: An In-Depth Review BA-590. Embry–Riddle Aeronautical University.
• News: Skertic, Mark. Price of flying takes skyward turn again. Chicago Tribune. July 6, 2006.
• News: Strickland, Amanda. Fares dive at RDU: 'Southwest effect' also boosts traffic. Triangle Business Journal. August 4, 2000.
• Book: Yeh, Raymond T. . The Art of Business: In the Footsteps of Giants . 2004 . Zero Time Publishing Co . 0-9754277-0-9 .

Notes and References

1. Book: The Airline Degregulation Evolution Continues: The Southwest Effect. Bennett, Randall D.. Craun, James M. . Office of Aviation Analysis, U.S. Department of Transportation. May 1993.
2. Book: Wittman, Michael D.. Evolving Trends of U.S. Domestic Airfares: The Impacts of Competition, Consolidation, and Low-Cost Carriers. MIT Small Community Air Service White Paper No. 3. MIT International Center for Air Transportation. 9 April 2014. Swelbar, William S. . 34. August 2013. The effects of other low-cost and ultra-low-cost carriers on average airfares at U.S. airports now exceed the Southwest effect. In 2012, the presence of JetBlue Airways, another low-cost carrier, was associated with a decrease of about $32 in average one-way fare, controlling for average itinerary distance and other low-cost carrier competition. In the same year, Allegiant Air service was associated with an average one-way fare decrease of about $29, and Spirit Airlines service was associated with a decrease of about $22. However, it is important to note that these latter carriers often charge ancillary fees in addition to the base airfare, so a comparison of changes in base airfares alone does not fully capture differences in total travel price..
3. News: Jones. Charisse. Southwest's influence on lowering airfares waning. 9 April 2014. USA Today. 16 August 2013. You might want to start calling it the "JetBlue effect."...Southwest's fabled ability to lower fares by its mere presence in a market has diminished..JetBlue, meanwhile, and ultra-low-cost carriers such as Allegiant and Spirit have shown a greater impact on lowering the average price of a ticket where they fly..