Low cost carriers, like Southwest Airlines and AirTran Airways, successfully captured 30% of the U.S. airline industry’s domestic market, significantly decreasing the market share of legacy airlines, like United Airlines and Delta Air Lines. Low cost airlines forced legacy carriers to cut routes, close hubs, and merger with other legacy airlines.
So what is the competitive advantage low-cost carriers offer? You might be inclined to quickly say price. According to business travelers that have made the switch from legacy to low-cost, they like the flight availability options – less hassles is important for business customers.
Legacy carriers are known for using the hub-and-spoke model, while low-cost carriers offer point-to-point service. The low cost point-to-point system tends to decreases the number of connections made by travelers, while the hub-and-spoke model is heavily reliant on connecting flights.
In the past ten years, legacy carriers were forced to shut down hubs to weather passenger traffic shifted to low-cost carriers. US Airways, which at one point used Pittsburgh as a large hub (515 daily departures in 1996), now only serves a handful of destinations from the airport. When low-cost carriers moved in, US Airways saw profitability disappear; losing millions each month.
As USA Today’s Dan Reed writes, “The shift also is driven by consumers’ willingness to accept a no-frills approach to flying and a lower level of service than conventional airlines once provided. A growing number of fliers also are opting for the perceived convenience and value of flying on low-cost airlines where operations seem less complex and employees happier.”
In the future, consolidation looms. US Airways and United have held merger talks, but with little outcome. The merger of US Airways and America West in 2005 still is not complete, as the pilot contracts still have not merged into one. The Delta and Northwest merger went smoothly, and the carriers appear to be working well with each other.