256-The Long and Arduous Journey of the Airline Industry May be Reaching an End

The government deregulated the airline industry in 1978. Since that time, the basic pricing in the industry, as well as airline fortunes, have been more or less continuously on the downward slope. It has been a very long trip down.

The industry may be heading up again, though. In the third quarter of 2010, the average domestic airfare was 11% higher than a year earlier. Profits returned to the industry in 2010 behind higher prices. In some part, these higher prices were the result of the additional fees that most of the domestic carriers charged passengers for checked baggage, better seating, rerouting and so forth. Still, the industry was able to hold its higher prices.

These prices are holding because the major industry players are less enamored of discounted flying. All of the big airlines are finding ways to extract prices from industry customers. Now that airline capacity utilization is high, the industry is more careful about capacity additions. Higher prices are here to stay.

The consumer still is far ahead. Even at these higher prices, ticket prices are a bargain. In fact, ticket prices, adjusted for inflation, are 20% below the levels of 1995. The industry has continuously stripped benefits from the base product in order to save costs. In 2010, the industry added back a few of those benefits (for example, economy plus seating) for an additional charge. We may see more of that over the next few years.

We have studied several thousand examples of companies both reducing and raising prices. In 2010, the airline industry raised its prices by adding fees. For many innovation ideas and real world examples of how to raise prices, visit Improve/Pricing/Raise Price Directions on StrategyStreet.com.

Posted 3/10/11

Update:

The consolidation of the airline industry has taken the industry out of hostility. There is little competition between the four largest airlines on point-to-point flights. There is price competition though, led by Southwest Airlines, who continues its slow march to a strong lead in the industry.  It continues to use selective low prices against its legacy competitors and these competitors allow it.

The legacy airlines have preempted much of the growth of the smaller Price Leader competitors by offering some seats on most flights at very low prices. In other words, they have covered the price points low-end competitors offer. This did not take away all the revenues of low-end competitors, but it did impact their revenues and profitability. See HERE for more on industry price points.

By early 2020 the US domestic airline industry had become an oligopoly. The top 4 legacy airlines (Delta, American, Southwest and United) controlled nearly 2/3 of the total market and had good control on pricing. Low-cost carriers were having little effect on corporate pricing. The average corporate price from 2015 to 2020 hovered around $500 per ticket. The legacy airlines control the market with their business structure of hub and spoke flights, high service, multiple price points on each flight and significant ownership of airline infrastructure. The low-cost carriers have a different business model, offering point-to-point flights with limited services and usually single aisle small jets from one manufacturer.

For the last few years, it has been difficult for the low-cost carriers to thrive in competition with the legacy airlines. The low-cost carriers offer about 10% of their capacity at very low prices and then gradually raise the price as flight occupancy rises until their prices are comparable to those of the competing legacy airline. Aside from losing some of its price advantage, a low-cost carrier has difficulty entering or expanding in an airport dominated by the legacy carriers because of limited gates and take off slots.

By 2020, Southwest was the far-and-away leader in domestic passengers, 20% to Delta’s 16%.  In revenue passenger miles American, held a slight lead over Southwest.  SWA continued to maintain a cost and all – in pricing advantage over its legacy rivals.  For the major fee generating services, Southwest is always less expensive than the 3 other legacy airlines.  The legacy carriers seem to lack the will to sacrifice any profits to match Southwest’s prices. See HERE and HERE for more explanation.

12/22

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