¨This is a nasty, rotten business.¨
Robert L. Crandall, CEO & President of American Airlines.
Following the deregulation of the US airline industry in the 1970s, many new carriers were formed to challenge the dominance of the so-called legacy carriers (United, American, etc.).
Most of these challengers attempted to undercut the legacy carriers’ prices. (Before deregulation, the government decided what routes the airlines would fly and determined the pricing system. Most tickets, by the way, were priced based on the number of miles traveled.)
In the first decade or two after deregulation, dozens of these challengers appeared and disappeared seemingly overnight. If a consumer was able to buy a ticket on these airlines before the company went bankrupt, they could get a good deal. However, as a whole, these challengers entered and left the scene so quickly. They made only a small impact on the cost of the fares that most consumers paid.
In the 1990s, Southwest Airlines began to challenge these legacy carriers very effectively by developing an entirely different business structure. It:
- Simplified its pricing structure. Southwest usually has only three to five prices for each flight based on reasonably simple criteria such as:
- how many days in advance you buy a ticket and
- whether you buy a ticket online
- Hired nonunion labor and gave employees the ability to make decisions on the spot)
- Allowed passengers to pick their seats. They assign passengers a boarding group only. When they call your boarding group, you can choose any available place you want.
- Radically altered the industries’ traditional routing structure by:
- using less-popular airports (such as Burbank in Los Angeles, Oakland in the San Francisco Bay Area, Islip in New York City, and Midway in Chicago)
- specializing in short hops rather than long haul flights. (If you flew across the country, you made at least one, often two or three, stops on Southwest).
Southwest proved profitable. The legacy carriers, until the last seven or eight years, floundered.
As a result, the legacy carriers and Southwest became more alike. The legacy carriers adopted Southwest Airline’s pricing strategies in the late 1990s and 2000s. In the meantime, Southwest started to look more like legacy carriers did in the past. They implemented a frequent flyer program and became the only major airline in the US that does not charge baggage fees.
Southwest also in the last few years has:
- expanded its flight schedules to include destinations outside of the US,
- began to fly longer-haul domestic flights, and
- provided more service between large US airports.