How low- cost airlines alter the economics of flying
For more than three years, the average one-way fare between Detroit and Philadelphia never dipped below $308, and sometimes moved higher, topping $385 at one point.
But then, early in 2016, fares suddenly started to fall, according to data from the Bureau of Transportation Statistics. By the end of the year, the average oneway ticket between the two cities stood at just $183.
What changed? The primary factor was Spirit Airlines.
The low-cost carrier began operating flights from Philadelphia International Airport to Detroit in April 2016, offering one-way fares for less than $100, in some cases. Spirit’s move into the route pushed down average ticket costs at all carriers on it, including Delta Air Lines and American Airlines.
“Without the low-cost carriers, we would have been looking at a pretty significant downturn in activity,” said James Tyrrell, chief revenue officer at Philadelphia International Airport.
Frontier Airlines, another lowcost carrier, had also added flights from Philadelphia, Tyrrell said. Without such airlines, he added, “you would have absolutely seen a different pricing structure.”
Even as a wave of mergers has cut the number of major carriers to four and significantly reduced competition, lower-cost airlines continue to play a role in moderating ticket costs.
While such airlines offer a nofrills passenger experience and charge plenty of fees for such luxuries as additional bags or extra legroom, they are able to stimulate new demand from occasional fliers with relatively cheap prices and even take passengers from the major carriers.
This dynamic is not new: In 1993, researchers at the Department of Transportation called the same trend the “Southwest effect,” named for Southwest Airlines, which grew rapidly thanks to basic, low-cost flights. A recent study by a University of Virginia professor and a consultant at the Campbell-Hill Aviation Group calculated that average one-way fares are $45 lower when Southwest serves a market with nonstop flights. Researchers have shown other low-cost carriers also push down fares.
“It’s impossible to underestimate just how important the effect of low-cost carriers are on a given route,” said William McGee, the aviation advisor for Consumers Union.
Carriers like United and American do not compete with carriers like Frontier and Spirit on every type of passenger. Lucrative corporate accounts are owned by the big carriers, and business travellers avoid the cheaper airlines, often choosing to pay premium prices at the last moment to get seats on the flights that best fit their schedules.
But the low-cost carriers nonetheless force the big airlines to figure out a way to draw the most price-sensitive fliers in any given market - those who scour the internet for the cheapest tickets possible. Those customers make up a significant portion of travellers, meaning the major carrier cannot just ignore them.
“Those passengers certainly are important,” said David Weingart, an economist at the aviation consultant GRA. “The larger airlines have proven that in how they’ve reacted, in how they’ve tried to capture or recapture those passengers.”
Delta, American and United Airlines have all rolled out “basic economy” fares. Such tickets are priced competitively against Spirit and Frontier, but do not offer the amenities that most consumers have come to expect on a flight, like receiving a seat assignment ahead of a flight or obtaining a refund for a ticket.
Of all the major carriers, United is fighting on price the most aggressively.
Scott Kirby, who was appointed as United’s president a year ago, has shifted the carrier’s strategy toward the low-cost airlines, mirroring one he helped to drive when he served as a top executive at American.
Pushing back against Wall Street’s wishes to limit capacity growth, United is adding seats in a number of its major markets across the country. It has, for example, swapped out smaller jets for larger planes to increase the number of seats it has available to sell, and matched fares offered by low-cost carriers.
By expanding capacity, United aims to get back to what Kirby calls its “natural” share of passengers in some of its hubs. The carrier now expects to increase its seat capacity in the domestic market by as much as 4.5 per cent this year over last year, double the 2 per cent growth Delta has forecast. American does not expect its capacity to change.
“We’re just returning to where United’s natural market share is,” Kirby told stock analysts in April. “We’re going to be very careful to calibrate how it’s working and how we’re doing.”
United’s new approach has put it into direct competition with Spirit in Newark, Houston and Chicago, according to analysts and executives. Spirit has certainly noticed.