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RIP to the 'Southwest effect'?

DieselDragRacer

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There were times in the recent past when industry analysts and journalists automatically added the words "America's low-fare leader" after the Southwest Airlines' name. Now it's safe to say those days are over -- perhaps permanently.


Recently there has been coast-to-coast grumbling that Southwest's pricing isn't as low as it once was. So we conducted an apples-to-apples fare comparison on a variety of domestic routes, and what we found was rather shocking.


The vaunted "Southwest effect" no longer seems to be valid.
In 1993 the U.S. Department of Transportation studied how the entry of a low-cost carrier into a market can lower overall fares and spur demand for air travel, dubbing this the "Southwest effect." But for years now, aviation analysts have questioned if the airline that enplaned 115 billion passengers in 2013 is still the low-fare leader.


TODAY IN THE SKY: Southwest grows in D.C., reveals new Dallas schedule and international destinations


In August 2013 the Massachusetts Institute of Technology issued a lengthy analysis of this issue that stated: "Recent work has suggested that the Southwest effect has started to weaken, and no longer provides the same degree of downward pressure on fares in city-pair markets in which mergers of other carriers have occurred." That study prompted USA TODAY reporter Charisse Jones to suggest that the phenomenon should now be called the "JetBlue effect" instead.


In 2011 I interviewed Southwest CEO Gary Kelly and quoted the many analysts who asserted his carrier was not as low fare as it once was; he didn't deny it and acknowledged, "Our cost advantage has narrowed."


The reasons include the end of Southwest's fuel hedging strategy, an increasingly complex merger with AirTran and the rapid consolidation of the domestic airline industry. This seems to be yet another reason why the spate of recent mergers has harmed consumers.


Analysis is one thing but empirical evidence is another, and the DOT's quarterly Domestic Airline Consumer Airfare Report is a good source.


Southwest legend holds the airline was launched on a cocktail napkin with a three-city route map that focused on Dallas-Houston and Dallas-San Antonio. So here's how the most recent average one-way fares for those two routes ? reflecting the third quarter of 2013 ? stack up against five years ago:


Dallas-Houston/Southwest average fare:
3Q 2008: $123
3Q 2013: $170


Dallas-San Antonio/Southwest average fare:
3Q 2008: $118
3Q 2013: $159


Now before critics start yelling "fuel prices!" and "inflation!" let's compare these fares in an apples-to-apples fashion. The average domestic fare for the exact same periods rose from $362 in 2008 to $390 in 2013, so the percentage of increase on both these routes on Southwest is more than four times higher:


Fare increase:
Domestic average: +8%
Dallas-Houston/Southwest: +38%
Dallas-San Antonio/Southwest: +35%


Putting it to the test
We decided to compare Southwest's fares ourselves, so we examined the Dallas-Houston route and seven others and searched for the lowest prices on 10 identical itineraries in real time. We included a mix of both leisure and business trips and our sample included city-pairs dominated by both low-cost and legacy carriers.



The results were quite surprising.


As the chart below shows, Southwest was not the sole provider of the lowest fare on any of these 10 routes. Instead it shared the lowest fare 40% of the time, and was beaten 60% of the time. Overall, Southwest's fares ranged from 17% to 145% higher than its competitors.

Southwest's performance was not helped by varying the length of the booking windows. On the short-notice bookings of just one to three days in advance ? traditionally bread-and-butter opportunities for the airline synonymous with discretionary travel ? we repeatedly found Southwest's lowest "Wanna Get Away" fares were completely sold out and unavailable. In fact, we even saw this as far as seven days prior to departure.


What's staggering is that Southwest was beat in so many ways. In the East, West, North, and South. On short-haul routes and long-haul routes. Against low-fare carriers and against legacy network carriers.


We found that Southwest's fares were regularly beaten ? often by a wide margin ? by low-cost carriers such as Frontier, JetBlue and Spirit. But we didn't expect to see Southwest routinely matched or even bested by the likes of American, Delta, United and US Airways. Implicit in the Southwest marketing paradigm for decades has always been the acknowledgement that no-frills service ? a lack of meals, inflight entertainment, airport lounges, even assigned seats ? is offset by airfare savings. It seems consumers will need to revisit this.


Some key facts

The art of finding the lowest airfare is complex. So it's important to consider the following:


? Southwest remains the only U.S. airline that doesn't charge for the first two checked bags (JetBlue doesn't charge for the first checked bag). In fact, rival carriers impose fees for many services Southwest allows for free, including change fees. So this must be considered when comparing bottom-line prices, since baggage fees alone can make the difference on many routes.


? Southwest has always resisted participating in major travel distribution networks, including the leading online travel agency sites; the carrier is all about driving customers to its own website. The airline states on its site: "Our legendary low fares can only be found at southwest.com. You'll never find Southwest flights for sale on other travel sites. This allows us to keep our fares as low as possible by cutting out online travel agency fees." There was a time when visiting Southwest's branded site was a must when searching for the lowest price; now that seems to be in flux.


? Southwest routinely offers deep discounts via targeted or nationwide sales; one such sale expired just prior to our testing. Booking during these periods can yield real savings, so it can pay to check on their availability.

http://www.usatoday.com/story/travel/columnist/mcgee/2014/05/19/southwest-effect/9273899/
 

redflyer65

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Now before critics start yelling "fuel prices!" and "inflation!" let's compare these fares in an apples-to-apples fashion. The average domestic fare for the exact same periods rose from $362 in 2008 to $390 in 2013,



http://www.usatoday.com/story/travel/columnist/mcgee/2014/05/19/southwest-effect/9273899/


I absolutely LUV this one line.

You want's to silence any talk about fuel prices, then conveniently decides to pick two short haul cities?

So the average domestic fare goes from $362 (2008), to $390 (2013). An increase of a HUGE 7%.

What was the difference of Brent Crude during those periods?

Here you go......

Nov. 7th, 2008 - $56.84
Sept 4ht, 2013 - $115.65

An increase of only 105%. So if the airlines (in general) had raised their prices by that number, the average domestic fare would have gone from $362, to around $750 and he's bitching about a 30% increase for short haul flying? Then people will drive..and that's why SW has been switching to a long haul carrier. There's more yield and margin. Just pure economics, but the writer apparently either doesn't understand that, or choses not to bring it up.

Did this guy do any research at ALL?
 

humveedriver

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I completely agree with the article. Southwest no longer offers the lowest fares anymore and every airline benefited from the 6 major increases they instituted after purchasing AirTran. What it doesn't address though is that ridership is high. They aren't struggling to fill the seats. So if that number changes I would expect to see one or more changes including assigned seats, business class, snacks for purchase, charge bags/de bundle the purchase and any other convenience our competitors offer (don't see TVs happening). But people know what they are getting with SWA and they seem to enjoy it for the same or even slightly higher price.
 

vixin

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The slamming of SWA with half truths from an idiot is more fun.

every major airline benefited from declaring bankruptcy and not paying their bills and obligations.
Fixed it.
 

humveedriver

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The slamming of SWA with half truths from an idiot is more fun.

Fixed it.

It could happen to SWA too. I haven't flown with anyone who thinks the airline is immune dispute it's track record. Slamming the Kernals who make this easy job hard is where I'm at.
 

livin'thesim

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I absolutely LUV this one line.

You want's to silence any talk about fuel prices, then conveniently decides to pick two short haul cities?

So the average domestic fare goes from $362 (2008), to $390 (2013). An increase of a HUGE 7%.

What was the difference of Brent Crude during those periods?

Here you go......

Nov. 7th, 2008 - $56.84
Sept 4ht, 2013 - $115.65

An increase of only 105%. So if the airlines (in general) had raised their prices by that number, the average domestic fare would have gone from $362, to around $750 and he's bitching about a 30% increase for short haul flying? Then people will drive..and that's why SW has been switching to a long haul carrier. There's more yield and margin. Just pure economics, but the writer apparently either doesn't understand that, or choses not to bring it up.

Did this guy do any research at ALL?


Why would a doubling of crude price equal a doubling of ticket price? Why wouldn't it be just a doubling of the portion of the fare that fuel represents?
 

daviator

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I don't fly for SW but even if the market has changed they still put out a very good product and I'm always grateful for the free ride and the friendly people. I may fly for a competitor but I'm no hater.
 

redflyer65

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Why would a doubling of crude price equal a doubling of ticket price? Why wouldn't it be just a doubling of the portion of the fare that fuel represents?

The point being, he completely glossed over the price airlines are now paying for crude vs 2008 (see my numbers above). The price difference is substantial. It's close to 50% of the overall cost at every airline. He really doesn't even mention that.
 

j41driver

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In the third paragraph, the author says that SWA flew 115 billion people in 2013. Obviously that's just a little off. I'm not gonna check but how accurate are the rest of the numbers?
 

HowardBorden

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In the third paragraph, the author says that SWA flew 115 billion people in 2013. Obviously that's just a little off. I'm not gonna check but how accurate are the rest of the numbers?
Nope, that's correct. We gave every person on the earth 16 rides in 2013.
 

humveedriver

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In the third paragraph, the author says that SWA flew 115 billion people in 2013. Obviously that's just a little off. I'm not gonna check but how accurate are the rest of the numbers?

If you click on that 115 billion (which is a link) figure it takes you the DOT statistics. 115 million is listed. Not billion.
 

SpauldingSmails

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krewmeel

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If you click on that 115 billion (which is a link) figure it takes you the DOT statistics. 115 million is listed. Not billion.

This is why no one actually buys a USA Today. If the hotels didn't give them for free I would never look at it.....Truly the McDonalds of newspapers, tastes good going down but contains no nutritional value.
 

waveflyer

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I thought the long standing critique of SWA by pilots was the undercutting of fares in markets.
Now that SWA's been carrying the water on pilot contracts for a decade and have had to raise prices, that's a bad thing ?
Consolidation has led to a healthier more profitable industry. We seem to be breaking load factor records every quarter
That's a good thing for us

These ticket prices don't exist in a void.
I know economics isn't a pilot strong point, but we ought to try and see the big picture
 

BILL LUMBERG

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I thought the long standing critique of SWA by pilots was the undercutting of fares in markets.
Now that SWA's been carrying the water on pilot contracts for a decade and have had to raise prices, that's a bad thing ?
Consolidation has led to a healthier more profitable industry. We seem to be breaking load factor records every quarter
That's a good thing for us

These ticket prices don't exist in a void.
I know economics isn't a pilot strong point, but we ought to try and see the big picture

Wavey,

Congrats btw for being pulled off my ignore list.... =)

Question, if a 9/11 type of crisis hit today, would SWA be nimble enough to cancel deliveries, not furlough anybody, not be devastated in current section 6 and stay profitable?

Serious question...not for sniping. You are a mature airline now who skipped our pain by very smart hedging.....could you stay on top?
 

HowardBorden

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Wavey,

Congrats btw for being pulled off my ignore list.... =)

Question, if a 9/11 type of crisis hit today, would SWA be nimble enough to cancel deliveries, not furlough anybody, not be devastated in current section 6 and stay profitable?

Serious question...not for sniping. You are a mature airline now who skipped our pain by very smart hedging.....could you stay on top?
No one could know the answer to those questions. Also, these things don't happen in a vacuum, they would effect all airlines not just SWA.

SWA does have a big ace up its sleeve though. SWA could choose to charge for bags and charge various other ancillary fees that all the other airlines are already collecting. My guess is they could remain profitable. No furlough is anyone's guess. We did eek out small contractual gains post 9/11 but considering our current negotiating climate I would speculate the chances of a substancial contractual gain would be slim to nill.
 

waveflyer

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Bill, it's a fair question, and the devil's in the details. Do we lose a hull or two in this crisis? Did we make mistakes within that crisis that could've helped prevent it? Do we have a govt that wants to make an example out of like Bush did with united? I've always thought that was more than just a little critique worthy.
I don't think anyone at SWA is walking around thinking we're invincible. If you do, please slap them for me, then tell me who they are so I can slap them. We will need to compete

There's no getting around that

That said, we had a major economic meltdown in 2008, and we didn't furlough. So for all the critiques of GK and MvdV, they are good men who will fight like hell not to be the first execs to furlough. Those who claim otherwise haven't spoken with them much. They are simply faced with a much different environment and reaching our limit with our current structure. So we'll see.

I'm very well aware that delta was known for half a century as 'never having furloughed'
Until they did.
So, I recommend humility, and to not rest on our laurels with a good contract and get into that insidious mindset where 'we've made it'

Want no part of that
 

BILL LUMBERG

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Ok...

Fair enough Howard and Wave.

We would all be hurt but you are right about charging for bags, it's a way out.

I honestly believe another trip through BK wouldn't be in our future if that went down. We have flexibility now.
 
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