9-Postponing the Real Clash

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.

 

Update 7/9/25

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. Industry prices continued to fall throughout 2008 and 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 2020, Southwest was the far-and-away leader in domestic passengers, 20%, to Delta’s 16%.  In revenue passenger miles American, held a slight lead over Southwest.  SWA continued to maintain 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. But two major changes by the 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 Stripper Price Leader 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. 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 shares of the three legacy airlines and put new and uncharacteristic pressure on SWA. Southwest suffered losses in 2024 and 2025, while its 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 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. So, they have reasonable expectations of maintaining their strong market share status.

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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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.