11-Reality Strikes Discount Air Carriers
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.
The superior economies of scale of the Standard Leaders, along with their willingness to offer Price Leader products, gradually squeezes out weaker Price Leader competitors. Business Insider identified several low cost carriers that went out of business in 2020, including Compass, ExpressJet, Ernest and TransStates. A low price for a product, by itself, does not produce a loyal customer. To continue to attract the volatile, price sensitive customer, a Price Leader must maintain a cost structure significantly below that of the Industry Standard Leaders to keep its pricing very low… A tough assignment in an industry with overcapacity.
By 2019, the top four domestic air carriers (American Airlines, Southwest Airlines, Delta and United Airlines) controlled 65% of the total domestic market. Their market power was greater than this percentage because these carriers held even higher shares of their key hubs and spokes. In recent years, these four major airlines removed unprofitable flights, filled a higher percentage of seats on planes, and slowed capacity growth to command higher airfares. Airline capacity has grown at a slower pace than ticket prices. In addition, since 2008, the airlines have charged ancillary fees for services that were formerly free. These four major carriers finally achieved significant pricing power in their markets.
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.