9-Postponing the Real Clash

A Standard Leader cannot raise prices by withdrawing capacity unless it controls new entrants and the expansion of its current rivals. It usually controls neither. In 2008, Delta and United cut domestic capacity to protect their margins, and low-cost airlines moved into the space. In most industries, low-cost followers expand at least enough to replace what the leader withdraws, and usually faster. Prices fell and returns were dismal. Capacity a leader withdraws does not disappear. Someone else adds it, and that someone is often stronger the next time around.

Posted 4/3/08

Delta recently announced that it was trimming its domestic capacity and shifting that capacity to international flights. It will cut its domestic capacity by about 5%, which will bring its capacity in August of 2008 to a level 10% below that of one year earlier. United Airlines did something similar earlier in the year.

In the short term, this will help these two legacy airlines’ margins because international passengers pay more per available seat mile than do domestic passengers. In the long term, the benefits are considerably less clear because of the encouragement these moves offer to the low-cost airlines.

By withdrawing capacity from the domestic market, Delta and United create more opportunities for the expansion of low-cost and low-priced airlines, such as Southwest and Jet Blue, among others. In most industries where the industry leaders withdraw capacity in order to shore up margins, other industry followers, especially low-cost followers, expand at least by enough to make up for the withdrawal of the leader’s capacity. Usually they expand even faster than the leaders withdraw capacity.

Then what happens? The low-cost carriers become even stronger because they expand where they can produce a cash return on their marginal investments. They then become more formidable competitors for the higher margin business as well. These low-cost people are not going away.

Further down the road, there will be an inevitable clash for higher-margin passengers, such as business travelers, between the legacy airlines like United and Delta and the low-cost airlines. When that clash comes, those low-cost airlines will be stronger. It is difficult to predict a winner in that clash.

For an example of how these things happen, consider this: Toyota and Honda began as low-cost, low-priced players in the domestic automobile industry. Early in the history of the entrance of the Japanese manufacturers into the US market, the large US auto manufacturers considered them inferior competitors and refused to introduce automobiles that would compete with them directly. The leading Japanese companies then used their profits and cash flows from their small automobile offerings to expand into the heart of the US automobile market. Today, none of the domestic automobile manufacturers can take on these companies and expect to prevail. Leaders need to stop low-cost competitors earlier, rather than later, in their evolution.

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Update 10/1/26

A leader in an industry cannot successfully remove capacity to raise prices unless it can control any potential new entrant. The airline industry could not control these new entrants and low prices continued pressuring the industry. The removal of capacity did little to help the large airlines. Fuel costs pushed fares up in 2008, but industry prices then fell sharply in 2009. Industry returns were dismal.

The two best consultants in the world, your customers and competitors, have spoken. Southwest became a preferred competitor offering many flights at prices competitors apparently could not, or would not, meet. By 2018, Southwest was far-and-away leader in domestic passengers, 20%, to Delta’s 16%. By 2024, however, Delta led in revenue passenger miles (17.8%), followed by American (17.5%) and Southwest (17.3%). SWA maintained for years a cost and all-in pricing advantage over its legacy rivals.

But then things began to change. While withdrawal of some of their capacity did not help the legacy airlines, two major changes by those airlines did: new lower price points and real-time pricing. In the first change, the three legacy airlines unbundled their product pricing to create new Low-Extender Products at lower prices. These lower price points removed previously free benefits in the base product in return for 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. In the second change, the three legacy airlines freed themselves from rigid rules and technological impediments to institute dynamic pricing. By 2025, the three legacy airlines could change their pricing in real time using AI-assisted dynamic pricing.

These two major changes have gradually improved the market shares of the three legacy airlines and put new and uncharacteristic pressure on SWA. Southwest’s profits were thin in 2024 and 2025 ($465 million and $441 million, a 2025 operating margin of about 2%), while Delta earned $5.0 billion in 2025 and United $3.4 billion. American, at $111 million, was the weak legacy carrier. Southwest adapted to these strengthening competitors by becoming more like them in base pricing, fees and operating policies. It began charging for checked bags on May 28, 2025. In January 2026 it ended 54 years of open seating, adding assigned seats, extra-legroom seats and basic economy fares. In effect, Southwest adopted a Low-Extender Product of its own, closing the Price Point gap from its side. It now expects 2026 profits to at least quadruple. By April 2026 its bag fees, $45 for the first bag and $55 for the second, matched the legacy airlines almost to the dollar. With these changes, SWA has migrated from Price Leader to Standard Leader, probably as a Price Shaver: its discount for a comparable product now appears to be less than 10%. In the second quarter of 2026, SWA’s unit cost excluding fuel was about 12.5 cents per available seat mile, against 13.1 for United, 13.9 for American and 14.1 for Delta, a cost gap of roughly 5 to 12%. But SWA’s unit costs are rising, up 3.4% year over year, and its operating margin was 3.4% against Delta’s 9.4%. Time will tell whether it can sustain Price Shaver discounts against the three legacy airlines. Every day, SWA looks more like the other three legacy airlines. They still maintain their customer service focus and culture, which have granted them an unparalleled reputation for Reliability (the Wall Street Journal ranked Southwest the best U.S. airline of 2025). So, they have reasonable expectations of maintaining a strong market share.

We have found that there are four basic Price Points in a market. You can find an explanation of each Price Point and its impact on a market HERE. HERE is how to meet low-end competition.

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Quick Hits

Six patterns from the StrategyStreet system this story confirms.

1. A Standard Leader cannot raise prices by withdrawing capacity unless it controls new entrants and the expansion of current entrants. Delta and United cut domestic capacity in 2008 to protect margins. Low-cost carriers expanded to fill the space, industry prices fell sharply in 2009, and returns were dismal. The airline industry could not control the entrants, so the cuts did little for the large airlines.
2. A successful Price Leader tends to migrate toward the Standard Leader’s position, and the Standard Leader helps by closing the price gap. Toyota and Honda began as small, low-priced players and moved into the heart of the US auto market. Southwest followed the same road. By 2024 its share of revenue passenger miles (17.3%) trailed Delta’s (17.8%) and American’s (17.5%) by less than a point, and its fees and policies now look like theirs.
3. A Standard Leader parries a Price Leader product with a Low-Extender Product, not a cut to its standard price. The three legacy airlines unbundled their fares, removing benefits that had been free in the base product and selling them back as options. That narrowed the pricing gap with Southwest without cutting the price of the full product. Southwest has since added a basic fare of its own.
4. A discount is sustainable only if the discounting company has a low cost structure to support it. Otherwise, it will be temporary. In the second quarter of 2026, Southwest’s unit cost excluding fuel ran roughly 5% below United’s and 11 to 12% below American’s and Delta’s. A gap that size can support a Price Shaver discount, not a Price Leader discount. Southwest’s unit costs are rising, up 3.4% year over year, so whether the gap holds is an open question.
5. A competitor within 10% of the standard price is a Price Shaver, not a Price Leader. Southwest’s bag fees of $45 and $55 now match the legacy airlines’ almost to the dollar, and its all-in pricing advantage appears to have narrowed to a small discount at most. Whether even that small discount survives is an open question.
6. A strong Reliability reputation lets a competitor give up some price advantage without giving up customers. Customers use the Customer Buying Hierarchy, and Reliability ranks ahead of Price. The Wall Street Journal ranked Southwest the best U.S. airline of 2025, which is the best reason to expect it to hold its share as its prices converge with the legacy carriers’.

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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.