Prices Drop As Low Cost Airlines Expand Domestic Market Share

Prices Drop As Low Cost Airlines Expand Domestic Market Share

Low cost airlines (such as Airtran, JetBlue, Spirit and Southwest) are expanding their share of domestic air travel to the benefit of travelers. In 2000 low cost airlines accounted for only 11% of domestic air traffic vs. 26% as of August of 2009. Although average domestic fares have risen and fallen over the past decade, the net impact has been that airline ticket prices have fallen 11% from an average of $340 in January of 2000 to $301 in the fall of this year.

The decrease in prices is much more noticeable (a drop of a little more than a 33% over the past 15 years) when taking into account inflation over that period.

The reason that low cost carriers are increasing their market share and forcing ticket prices to drop is two fold: First airlines with lower costs are able to move into new markets quickly with cheaper fares. High debt and labor costs limit legacy airlines, such as American, Continental, Delta, US Air and United, in their ability to compete profitably. Even after coming out of bankruptcy many of these airlines continue to have overleveraged balance sheets. Second, legacy airlines are increasing their focus on more profitable international routes because their yield (revenue per mile) is higher on such routes, thus giving up some domestic routes to the low cost airlines.

Legacy airlines have increased their international traffic from 32% of their total business in 2000, to 39% in 2008. This growth may prove problematic as the recession spreads around the world, impacting US corporate travel abroad, and international corporate travel.

Most industry analysts are forecasting that airfares will remain low, or even decline, as low cost airlines continue to expand into more domestic cities. Package prices (typically airline tickets and hotel reservations purchased together) bring the effective price of airline tickets down even further.

Airline travel has become a commodity to many travelers. As with most commodities, customers are willing to go wherever they can find the lowest airfare.

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