Dresner, Lin, and Windle [19] show th at the impact of a low-fare-low-cost airline
entry is not only on the airlines at the same route, but also on the airlines th at operate
at the competitive routes going to nearby airports, (e.g., Cleveland to Washington
National and Cleveland to Baltimore-BWT). They also showed th at in some cases
an entry to a particular airport will lower the prices of flights originated from this
airport. This might indicate th at the incumbent airlines established a preventive
competitive measure before the low-fare-low-cost airlines decided to expand to other
routes originated from the same airport.
The idea of creating low-fare-low-cost airlines started in 1970s. It began with
Southwest Airlines which commenced its operation as an intra-state airline connecting
Dallas, Houston, and San Antonio in 1971. Midway and Air Florida started later to
serve the Midwest and Florida areas. The concept of these regional airlines at the beginning was to serve only short-haul city pairs in a lim ited region, charge low fares,
provide no meals on board, and utilize alternative airports where no m ajor airline
was dominant. By utilizing these airports, such as Dallas Love Field for Southwest
Airlines and Chicago Midway for Midway Airlines, they tried to avoid head-to-head
competition with m ajor airlines.
In order to be able to quote relatively lew fares, these airlines need to have
relatively low costs. As start-up airlines, they have the advantage of lower labor costs
and lean management structures. Also, by offering only one-class fares, no hills, and
point-to-point services and by operating only one type of aircraft, they simplify airline
operations and reduce their costs significantly.
The competition between low-fare-low-cost airlines and m ajor airlines sprang up
when People’s Express started its service in 1981.5 Although People’s Express chose
its hub in Newark, which was not a major airport at that time, its new management
concept and later expansion was considered a threat by some m ajor airlines. People’s
Express had relatively low costs compared with m ajor airlines. The unique characteristic
of the management style was th at employees were trained to function in several
tasks to save costs. There was no fixed job description for anybody. The hierarchy
of the management was very lean too. People’s Express sold their tickets directly
to the consumers to cut travel agency commissions. The target m arket consisted of
people who were not concerned about service quality. The company started offering
services to Buffalo, NY, and later expanded to Washington D.C., Chicago, and other
m ajor cities, th at had been lucrative markets for m ajor airlines. The People’s Express
operation was quite successful for a few years until m ajor airlines applied yield
management in pricing their fares.
Yield management was initially developed by American Airlines. Basically, yield
management practice in the airline business is a tool to manage revenue by controlling its reservations inventory.6 Its function is to maximize revenue by selling the right
seats to the right customers at the right fares. The innovation was possible under
the utilization of computer reservation system (CRS). Yield management allowed
American Airlines, and other m ajor airlines who had developed their CRS, to match
People’s Express fares for a certain number of allocated seats. Yield management
made it possible for airlines with high cost to compete with those with lower cost
structures. The price-differentiation strategy of m ajor airlines successfully increased
their market share in the routes where they competed with People’s Express. People’s
Express did not own any CRS a t that tim e and could not apply yield management
in pricing their available seats. Further expansion of People’s Express by acquiring
Frontier Airlines made its financial situation worse and it went out of business in
1987.
Another example of a successful low-far e-low-cost airline th at has gained a lot
of exposure is Southwest Airlines.7 Started as an intra-state airline in Texas, it has
expanded its service to 41 airports, primarily in the midwestem, southwestern, and
western region of the United States. Low cost is achieved by offering high-frequency,
one-class, no-meal and short-haul flights. A point-to-point instead of hub-and-spoke
system applied at Southwest Airlines reduces the ground tim e of the airplanes which
increases its operational efficiency.
In some cases, direct competition between low-fare-low-cost and m ajor airlines
is difficult to avoid. In the beginning of its operation Southwest Airlines tried to avoid
any direct competition with m ajor airlines, such as United or American Airlines. It
did so by offering flights only from and to airports where no m ajor airline was dominant.
However, Southwest’s expansion is still disadvantagous to the major airlines’
operations. Some customers do not mind flying from or to non-major airports, and in some cases they even prefer it. For example, some people prefer to fly from or
to San Jose or Oakland Airport than San Francisco International Airport or, prefer
Midway to O’Hare Chicago to avoid ground-traffic congestion from those airports to
the city centers. In fact, Southwest’s expansion in the West Coast made American
Airlines discontinue its hub operations at San Jose, California, as reported in the
AMR Annual Report in 1993 [8].
La the southeastern region of United States a direct competition between major
and low-cost-low-fare airline was demonstrated by Delta and ValuJet Airlines.
ValuJet Airlines commenced its flight operations in October 1993 with two DC-9-32
aircraft providing service between Atlanta and three cities in Florida. Its operation
expanded rapidly, as it increased its fleet to 27 aircraft and service to 23 destinations
by the end of the first quarter of 1995. The concept of its operation was similar to
other low-fare-low-cost airlines, but unlike Southwest it did not offer high-frequency
service. ValuJet introduced the innovative ‘ticketless’ m ethod to handle its passenger
booking efficiently.8 Instead of issuing a ticket, ValuJet gave a confirmation number
when a passenger booked a flight. The passenger received a reusable numbered
boarding p u s and the seats were assigned based on first-come-first-served.
ValuJet’s marketing concept was to quote such low fares as to create demand
for air travel by people who would otherwise use ground transportation or by those
who would not travel at all at regular fares.9 Initially its market was only leisure
customers, to avoid direct competition with Delta Airlines, the dominant airline in
Hartsfield Atlanta Airport. However, the low fares offered by ValuJet reduced the
market share of Delta Airlines on the routes where both airlines served. In order to
maintain its market share, Delta initially matched the lowest fare offered by ValuJet.
In some cases Delta did not match the lowest fare for certain routes and instead tried to fill out the seats with connecting flyers.10
The fatal accident of ValuJet in Florida in 1996 was the beginning of the fall
of this airline. Consumer’s perceived quality of ValuJet dropped significantly as the
safety of the service was considered unsatisfactory by some travelers. Federal violations
of safety standards grounded V aluJet’s airplanes for a few months. Returning
to the market, the airline could not regain its position as it could not gain the level
of demand it used to have. After unsatisfactory financial performances for a certain
number of periods, ValuJet decided to merge with Air Tran, another upstart airline
based in Orlando, Florida.