The “Southwest Effect” is a rather entertaining part of air traffic lore. The name was coined long ago as Southwest Airlines would show up to provide service at an airport that generally had limited legacy carrier service. Prior to Southwest showing up the fares in that market would be high and then Southwest would bring lower fares in. The legacy carriers would similarly reduce their fares and the consumers won. It has happened many, many times over the years and the effect is pretty well documented.
Southwest announced yesterday that they are going to be launching service between Boston and Philadelphia, taking on US Airways as the only two carriers to offer non-stop service on that route. The fare changes since the initial announcement have been dramatic, to say the least. Dan Webb over at the Things in the Sky blog has some of the numbers behind the expected effect that this announcement will have. Yes, just looking at the walk-up fares available on the route ($550 one-way the week before Southwest shows up, $59 one-way the week after, a roughly 90% drop!) give light to some potential issues that US Airways can expect to see. But even more damning are the numbers available from the federal government.
The Bureau of Transportation Statistics collects and publishes a ton of data from air carriers. And it is all available on their website, assuming you can figure out how to generate the queries correctly. When you figure that out you get stats like these:
The important takeaway from these numbers is that, on average, US Airways brings in about $141,000 in revenue daily from passengers flying between Boston and Philly, at an average of $344.60 from each customer. This is only considering the O/D traffic between these two cities – there are plenty of connecting passengers, too – but that revenue number is very strong. With the introduction of the $59 fares it isn’t too hard to extrapolate out that the average fares are going to drop. A lot. Probably down near the $100/passenger numbers that Manchester and Providence are seeing today. Plus, Southwest is likely to pick up some of the load that US Air is getting right now, cutting the total number of passengers that US Air gets revenue from.
But even if the load numbers hold steady the drop in revenue will be a huge hit on US Air. At a $100/passenger average fare each way the annualized hit that US Airways will see in their revenue will approach $35MM. Yup, $35,000,000. That’s a lot of money to lose, especially for a carrier that hasn’t been particularly profitable lately.
There are some reasons to believe that US Airways is still going to do OK on the route. For one thing, they offer up to 15 flights on the route each day while Southwest is starting with only 5 daily trips. Customers are big fans of having choice in their travel schedules. But the five daily flights should offer sufficient options to put a dent in the US Airways numbers. And US Airways has a pretty strong collection of loyal frequent flyers in the Philadelphia area though it is not at all clear just how many of them are loyal only because they have no better option.
Is this a death knell for US Air? Hardly. They’re still pretty strong and they’ve got some options still in front of them. Of course, if they also end up backing out of the LaGuardia/Washington National slot swap as is being reported now, that will further hurt their pricing power in a number of markets. It is going to be a bumpy road for the foreseeable future.
Hat tip to Dan for the graphic with the numbers!
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Its also worth mentioning that Southwest brings in low introductory fares into markets but then generally raises them afterwards-I wouldnt expect $59 each way to last for long
The $59 fares won’t last forever but I would not at all be surprised to see the average fare hover surprisingly close to the $100 price point.
It is also worth noting that the $59 intro fare isn’t really all that low compared to what they could have come in with. If they really wanted to piss US Air off they could have started at $29 or $39 and had a lot of fun. The $59 fares are actually probably close to the point they need to be to hit break-even on operational costs.
It’s pretty clear that total traffic will grow on the PHL-BOS route; the current O&D figures are a third of what they were before US started charging outlandish fares. That will mitigate the losses somewhat, though the maximum fare WN is charging is about $150 each way (vs. a $600 each way refundable fare before WN).
Also, much of the traffic that US carries is going BOS-PHL-XXX, at much lower fares than BOS-PHL. Some of this is likely to be replaced by BOS-PHL O&D traffic at relatively higher fares.
US is still going to take a hit, though.
Indeed, traffic is going to grow on the BOS-PHL route but that traffic will come from the other cities that currently have the loads. So they’ll be losing business in other areas as they gain on the O/D traffic.
Certainly I have no way to know the exact amount that US Air is going to suffer by but the idea seems pretty solid – they’re going to hurt from this. A lot.
US Airways SUCKS.
I have a $646.19 credit for a flight. I want to use my $646.19 credit towards a new flight that only cost $300. I was told that I would be stuck with a $150 change fee but my credit was large enough to cover that. US Airways now wants me to pay an additional $150 on a credit card and forfiet the remaining balance. How does that make sense? A $300 flight is now going to cost $800.
Now I know why I prefer to fly Southwest.