11-Reality Strikes Discount Air Carriers

Posted 4/10/08

After thirty years of unmitigated success in the airline industry, the smaller discount airlines are starting to fall by the wayside. Aloha, ATA and Skybus recently shut down. Others are likely to follow. Even Southwest is feeling the pressure. None of these discounters is able to fully recover the burgeoning cost of fuel.

What does this really mean? It means that the legacy carriers have finally reached the point where their cost structure is low enough that the prices they charge are very difficult for the discounters to get a substantial discount against. Typically, a discounter needs to offer a price 25% or so below that of the standard leaders in an industry. That level of discount is getting increasingly difficult for low-end airlines to achieve in today’s airline industry. The balance of power is beginning to shift back to the legacy carriers.

There is more about industry leaders confronting low-end competition in our Perspective, “Turmoil Below: Confronting Low-End Competition” on our StrategyStreet web site in the Tools section, or from MIT’s Sloan Management Review.

 

UPDATE 071225

Until the early 2020s the low-cost competitors in the US market (primarily Southwest, JetBlue, Frontier and Spirit Airways) continued their market penetration while the three legacy airlines suffered under a Leader’s Trap. That condition ended largely as the three legacy airlines copied many of the product and pricing approaches of the low-cost airlines. In 2025 SWA is likely to compete with the three legacy airlines with similar products and pricing. It will then rely on its superb reputation and low cost structure to resume profitable growth.

The US low-cost carriers had a profound effect on the three legacy airlines until the early 2020s. They offered lower pricing, geared specifically to local markets. Their pricing model started with low initial prices that gradually increased as a flight filled up. Most of the low-cost carriers relied on ancillary fees to improve their effective revenue per passenger mile. Over time this pricing approach eroded much of the legacies’ “hub premium” price advantages. The low-cost carriers supported these low prices with a cost structure tailored to low operating costs through better Effectiveness and Efficiency. This structure included point-to-point operations, the use of smaller, less expensive airports, a uniform fleet and fast airplane turnarounds. Their point-to-point product enabled them to pivot quickly to bring product to high demand markets, a Function innovation. They were also attracted to the premium markets and began offering benefits tailored for business travelers. These strategic approaches focused mostly on Small and Medium customers where the low-cost carriers continued to gain share until the early 2020s.

By 2020, SWA had become a clear leader in the industry. Over the years from 2008, even until 2025, SWA continued to offer a Predator product. The company offered low prices on its standard routes. As the legacy airlines began to close price gaps on base prices, SWA maintained a lead on pricing by offering ancillary products and services for free while the legacy airlines charged for such services as checking bags and changing flight arrangements. The three legacy airlines were in a collective Leaders Trap.

Over the last several years, the three legacy airlines have learned to compete much more effectively with low-cost carriers. Two major changes by the legacy airlines eliminated significant advantages enjoyed by the low-cost carriers: new lower price points and real-time pricing. In the first change, the three legacy airlines unbundled their product pricing to create new Stripper Price Leader products at lower prices. These lower price points removed previously free benefits in the base product in return for customer price savings. These removed benefits often remained available through optional pricing. With the creation of these new price points, the legacy airlines significantly reduced the pricing gap they had with SWA. These lower Price Points enabled the three legacy airlines to appeal more effectively to Small and Medium leisure customers. In the second change, the three legacy airlines freed themselves from rigid rules and technological impediments to institute dynamic pricing. In 2025, the three legacy airlines could change their pricing in real time, even down to the level of the individual passenger.

These two major changes have gradually improved the market share of the three legacy airlines and put new and uncharacteristic pressure on SWA. Southwest suffered losses in 2024 and 2025, while its legacy competitors were profitable. Southwest is adapting to these strengthening competitors by becoming more like them in base pricing, fees and operating policies. Every day, SWA’s offering looks more like the other three legacy airlines. SWA still maintains their customer service focus and culture, which have granted them an unparalleled reputation for Reliability. So, they have reasonable expectations of maintaining their strong market share status.  The future for the other low-cost carriers is much cloudier.

To learn more about competition with low end, Price Leader, competitors go HERE and HERE>

 

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THE SOURCES OF STRATEGYSTREET.COM: For over 30 years we observed the evolution of more than 100 industries, many hostile.  We put their facts into frameworks applicable to all industries and found patterns.  Strategystreet.com describes the inductive results of these thousands of observations and their patterns.