Southwest was not only the perennial discount airline, but their mere presence in a new city could lower flight prices across the departure board from all airlines. It seems, however, that their position has been replaced by Spirit and other carriers. Is it no longer the “Southwest Effect” but perhaps the “Spirt Effect”?
History of the Southwest Effect
Long before every city in America had Southwest service (or almost every city anyway), Southwest was welcomed to many cities with wide-open arms. Why? Because fares in those cities typically dropped significantly on routes served by Southwest where competition was present.
I lived in Omaha, NE for many years and when Southwest began service to cities like St. Louis, Chicago, and Denver, fares on TWA (at the time), American and United dropped to meet the Southwest prices and hold their market share on O&D customers (origin and destination – customers not connecting onward). Cities like Omaha, Kansas City, and now St. Louis, and San Antonio had very high fares and limited options. Many still do.
While it’s outlined in the book, Nuts, by founder and longtime president Herb Kelleher – a great book if you get the chance to pick it up – it’s not really that way anymore.
It’s Not The Southwest Effect Anymore
Southwest no longer has this effect for a few reasons. First, they are no longer the cheapest. According to market research, Southwest was more expensive than the competition 60% of the time and the same price as the competition 5% of the time. While they were once the home of low fares, the reality of today’s Southwest is a carrier that is at least as expensive if not more expensive than other carriers on the same route 65% of the time.
Secondly, Southwest has saturated most of the markets they serve and already reach most cities in the US. While they don’t fly to Essential Air Service cities like Sioux City, IA (airport code: SUX), they are pretty much everywhere else including primary airports like Atlanta, Boston, and New York LaGuardia. It’s hard to have the same effect on prices when you already serve the airport.
Even new city services don’t offer the benefit of the Southwest Effect any more. Southwest’s costs are just higher. They now offer more of a hub and spoke operation rather than point-to-point service which costs more. They fly planes longer distances (offering cross-country flights) and fly into expensive airports.
Is It The Spirit Effect? Kind of
Southwest was an LCC (low cost carrier) – not because their prices are low but because their operating expenses are. Those low costs were linked to great fuel hedging, as well as flying into secondary airports like the formerly all-but-abandoned Houston Hobby or Chicago Midway.
But LCC is not good enough anymore. RyanAir took the Southwest model to the extreme and started charging for every little thing creating a new category, ULCC (ultra low-cost carrier). Enter: Spirit Air. Spirit and Allegiant followed the same secondary airport market in the US using RyanAir’s model which was not only to charge for everything other than the seat, but also picking destinations. Michael O’Leary, RyanAir’s long time CEO, stated that people with fly from nowhere to somewhere but not from nowhere to nowhere. Meaning, passengers will fly from Grand Island, NE to Las Vegas, but won’t fly from Grand Island to Reno.
Spirit has amended that model by flying into the large airports and taking huge airlines head on. Spirit even flies hub-to-hub routes like Chicago to Dallas, Minneapolis to Atlanta, Los Angeles to Houston. The good news for some travelers is that it is working to lower fares in the same way that Southwest used to.
Spirit recently moved from LaTrobe, PA to nearby Pittsburgh International Airport. Some of their routes were the same as before, others challenged large-scale business markets. Pittsburgh to Los Angeles was flown solely by United until Spirit and Southwest recently challenged, but that’s still flying from nowhere to somewhere, at least in relative terms. What about a business-only example with no tourism or leisure element to offset the shortfalls in business traffic? Pittsburgh to Houston, newly opened, is just such a route.
I fly this route often, sometimes on American with a connection, and sometimes utilizing direct flights on Southwest or United. However, prices have been high, really, really high. On weekdays prices between the two cities routinely runs between $450-700 roundtrip for the two-hour flight. That’s more expensive than Cancun, Los Angeles, even Barcelona out of Pittsburgh. But Spirit has had their effect. Look at prices between Pittsburgh and Houston even as short as the next day.
Those flight prices are clearly all on Spirit, but for the, now, Spirit Effect to take hold the price of other airlines have to come down. As you can see below, the prices for even mainline carriers have come down too! Not just on connection flights like American was offering, but nearly every United direct flight come in hundreds less than before.
Of course for the United flights those are Basic Economy. Those flights are matching the service offering of Spirit at a $100 premium without any of the benefits. Maybe Mr. Kirby can explain why he thinks anyone would anyone choose United Basic Economy when they can get the same limited, charge-me-for-everything service but at a premium of almost double the price. Until he does, this perplexing service is offered, and his old friends at American come in cheaper with a connection and without the Basic Economy restrictions.
Despite United’s Basic Economy offering, for a little more money you get an economy fare without the hassles and with all of the benefits for 33% less than they offered before. Truly, however, United was nearly always in the $550-750 price category for their directs between these two industrial cities, so the Spirit Effect is almost certainly in effect.
What About Wow/Norwegian/Hainan
In the same vein of domestic markets with Spirit and Allegiant, WOW Air, Norwegian Air Shuttle and Hainan have more or less done the same for international markets. I mentioned earlier that flights to Barcelona from Pittsburgh would run $1300-1500 roundtrip. Now, on Delta direct to Paris and then connecting on to Barcelona roundtrips can be had for less than $700.
Other markets have seen this too. Boston, Los Angeles, and DC have been pressured by Norwegian and offered cheap flights to Oslo and Copenhagen matched by the biggest carriers in the world.
Norwegian has been pushing around traditional heavies like British Airways, Delta, United and Lufthansa for the last few years – and winning.
WOW Air is doing the same but in different markets and with more of an Emirates model of using their hub as a connection point conveniently on the way to somewhere else. Most flights from the US to Europe fly over Iceland anyway so connecting in Reykjavik en route doesn’t cost travelers much time but opens up smaller markets to Europe.
Hainan is smaller Chinese carrier that flies mostly from secondary Chinese cities to secondary US cities like Las Vegas for example. This lowers fares between the US and China in a broad sense as well.
Is This Good For Travelers?
For most travelers this is excellent news. Fares are lowered between traditionally expensive markets, making it cheaper for everyone to get moving. For those like myself who simply could not stomach to pay more for a short weekday flight than they could to Europe for the weekend, there is a resoundingly welcome cheer for this new competition.
Some travelers though will unwittingly book fares that do not match their expectations. Those who book away from Spirit because they know that everything will incur a charge may run into United’s waiting arms only to find a higher price for the same issues.
For most, however, this makes travel possible for some, reasonable for others. Europe is simply out of reach for those who are not in the know. While most of our readers here at Live And Let’s Fly will know about cheap fares into competitive markets, we all have friends that thought Europe was a trip they would take… someday. Now that someday can be today, tomorrow, during spring break. The same could be said for domestic trips to Disneyland, flights to the beach for the same cost as gas to an upstate lodge.
Where to Go From Here
The only reason why the major carriers continue to get away with charging high rates for short flights is because ULCCs have not yet had a chance to truly expand in the US market. RyanAir has saturated Europe and like Southwest has turned their focus to business travelers and expanded into larger markets like Barcelona instead of Girona (45 minutes away).
WOW Air and Norwegian Air Shuttle are growing slowly and carefully, testing new markets and possibilities all the time, but to truly impact the trans-Atlantic market they will simply need more flights and more coverage. They will need to fend off the Bigs aggressively like the ULCC spin-off Level from IAG (owner of British Airways, Aer Lingus, Vueling and Iberia). They will need to continue to expand their markets like Norwegian’s new services from Rome to the US as well as London to Austin and Chicago. WOW Air should focus on the markets where they can grow with A321s like Buffalo, Detroit, Milwaukee, and Cleveland.
Spirit has plenty of room to grow by focusing on mid-major markets and competing against heavy business markets that lack competition. While we are on the subject of Pittsburgh, Philadelphia is a $600 roundtrip and so is Charlotte – those are places to start shaking things up. Later, like Southwest, the carrier can bring markets in their extensive Latin America to cities without service.
In the end, I welcome the Spirit effect in all of its forms. Whether the livery is purple (WOW), red (Norwegian), black and neon yellow (Spirit) or blue (Allegiant), bring on the lower fares and liberate price-dependent customers and captive business travelers from obscene pricing.
Have you seen a similar effect in your market?