The Southwest Effect :The success and profitability of Southwest's business model led to a common trend being named after the company, the Southwest Effect. Since Southwest's original mission in Texas was to make it less expensive than driving between two points (in the early 1970s, during the first major energy cost crisis in the U.S.), it developed a template for entering markets at rates that allowed the airline to be profitable, yet only on the basis of lean operations and high aircraft use. The key concept to the Southwest Effect is that when a low-fare carrier (or any aggressive and innovative company) enters a market, the market itself changes, and usually grows dramatically. For example, when fares drop by 50% from their historical averages, the number of new customers in that market may not just double, but actually quadruple, or more.
Lower fares increase demand
The term was coined in 1993 by the U.S. Department of Transportation to describe the considerable boost in air travel that invariably resulted from Southwest's entry into new markets, or by another airline's similar activity. Southwest offered dramatically lower air fares than established airlines that usually enjoyed a near-monopoly in the communities.
Competing airlines match Southwest fares
Airlines competing with Southwest Airlines resisted Southwest entering a new market, due in part by the necessity to lower fares in that market (and reduce profitability) to remain competitive.
Sales rise for all airlines in the market
The established airlines also feared losing passengers to Southwest Airlines. Instead, it was found that the entry of Southwest and the corresponding drop in air fares stimulated business in the communities and increased demand for air transportation.
Significant increase in real estate values in the market
According to Dr. Fishkind (www.fishkind.com), a top economic consultant, Southwest airlines arrival in a market tends to significantly increase real estate values in that market at a much quicker pace than normal and expected real estate appreciation.
Example cities
Providence, Rhode Island:
when Southwest began serving the community. Air travel increased from 100,000 passengers traveling per year to 800,000 passengers traveling per year which represents a 700% increase. (Yeh, 2004, page 153).Raleigh Durham International Airport 1999
The survey, which compared all routes and all airlines at RDU between fourth quarter 1998 and 1999, provides an enlightening perspective on the impact that Southwest can have.Of 14 routes served by Southwest, fares declined by an average of 40 percent for all carriers. The best bargain was a ticket to Baltimore, which is a Southwest hub city, where the price declined by 66 percent.
The study reveals an even more dramatic change in the number of passengers. On 14 RDU routes flown by Southwest, the number of passengers increased by an average of 92 percent (92%) for all carriers. The largest increase was to Baltimore, where traffic from RDU increased by 273 percent for all carriers.
Albany, N.Y., International Airport 2000:
Between the introduction of Southwest's service on May 20, 2000, and the end of that year, passenger boarding’s increased 22.5 percent to a record 1.44 million.Long Island MacArthur Airport (Islip):
In the first full year of Southwest's service, airport passenger traffic rose 133 percent.Between Hartford, Conn., and Baltimore/Washington:
The average one-way fare was reduced from $146 to $55 and after the first eight months of Southwest's service on this route, passenger traffic increased from 19,000 to 92,000 passengers per quarter (this route went from being the 1063th busiest city pair in the nation to 248th).Between Baltimore/Washington and Chicago Midway Airport 1993:
When Southwest began service on this route in September 1993, only 3,530 passengers per quarter paid an average one-way fare of $121. By the last quarter of 1997, more than 100,000 passengers per quarter were paying an average one-way fare of only $79 (this route went from being the 240th busiest city pair in the nation to 43rd).Northwest Florida Beaches International airport:
Will start servicing Panama City and the surrounding areas in the Florida panhandle in May 2010.
