Conventional Wisdom Explained

It may be obvious, but low cost carriers are now driving the airline industry.

    In a business in which everyone sells the same thing, the low-cost producer usually comes out on top. It took 25 years, but that is exactly what has happened in the airline business.

    Give the major airlines credit: They managed to hold off the challengers for an awfully long time. They used their muscle at big airports to deny gates to the upstarts.

    They employed frequent-flier programs to build brand loyalty. And they kept a stranglehold on the business traveler, the guy who would pay $2,300 to fly round-trip from Boston to Los Angeles.

    The discounters kept getting bigger. In 1993 they flew 8.4 percent of the nation’s passengers. By 2003 their market share was up to 21.7 percent. More important, they expanded the number of cities they served.

    United’s experience is instructive. In 1990, 13 percent of United’s passengers could choose a low-cost competitor, according to a report prepared by Daniel Kasper, a Cambridge, Mass., consultant. Last year more than 72 percent of United passengers had a low-cost option, even if they sometimes had to travel to smaller airports in Manchester, N.H., or Long Beach, Calif., to get bargain fares.

    At some point – it is hard to say exactly when – the industry reached a tipping point. Business travelers found they, too, could use the discounters, which meant the majors could no longer charge outrageous prices. The loss of pricing power dealt a huge blow to the established carriers. Their higher costs, always a burden, became a weight that threatened to sink them.

    Part of the cost gap is a function of productivity. Southwest’s pilots fly about 75 hours a month, compared with about 50 hours for pilots at the old-line carriers. Because it doesn’t operate a complicated hub-and-spoke system, Southwest can keep its planes in the air for more hours and operate with fewer employees than its establishment rivals.

    Paychecks explain the rest of the gap.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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