Deregulation
The airline industry has been subject of intense price competition since it
was deregulated, and the result has been a number of new carriers which
specialize in regional service and no-frills operations. These carriers
typically purchase older aircraft and often operate outside the
industry-wide computerized reservations system. In exchange for these
inconveniences, passengers receive low fares relative to the industry as a
whole. This research examines two low fare air carriers, ValuJet and
Southwest Airlines. By investigating these air carriers, we can better
understand the economic impacts of price versus service in the airline
industry as a whole, as well as, the impacts on passenger and investor
confidence. Until 1978, air transport rates were approved by the
government, which meant that price was not a primary competitive factor.
Instead, airlines would compete on service and image. The airline
industry was dominated by giants (American, United, TWA) which offered
nationwide and some international service, and by regional carriers, such
as Southwest, which offered short trips between airports not served by the
nationals. Deregulation of the airline industry brought about in 1978
introduced a situation in which the national and regional carriers were
suddenly able to compete in an environment that resembled a free market.
Rate schedules were lifted, price fixing was eliminated and route
management was removed. The main factors that affected whether an airline
could serve a particular city was whether or not that city had enough
gates for the new carrier, and whether the carrier was able to afford to
purchase them. Companies such as Southwest recognized potential for low
fares, and began building a niche for themselves by offering low fares
with equivalent low levels of service. Southwest\'s success gave rise to a
new generation of low fare airlines, with ValuJet entering the market in
the early 1990\'s. Unfortunately, ValuJet suffered a string of accidents
which brought the future of this air carrier into question. ValuJet is a
low-priced airline that offers inexpensive tickets for regional travel.
Based in Atlanta, the airline serves the Southeastern United States and
competes with Continental Airlines as well as with other small regional
carriers. It serves 31 cities primarily in the southeastern United
States. The airline began its service with flights to Tampa and Orlando
from Atlanta in 1993. The no-frills strategy paid off for the fledgling
airline, which posted half again as many revenue passenger miles in April
1996 as it did in April 1995. However, the company announced that it was
slowing the expansion of its services, voluntarily, at the same time that
it posted this impressive revenue mark (Cole & Pasztor, 1996, p. A6).
Perhaps due to overexpansion or to poor luck, Valujet experienced a series
of mishaps in its short history. In January 1994, a DC-9 skidded off a
runway in Washington which resulted in the entire airport being shut down.
In June 1995, a ValuJet flight went through an emergency evacuation after
an engine failed and shrapnel flew into the cabin. Additional incidents,
including one where the landing gear collapsed after a particularly
forceful landing, led the FAA to begin an intense review of ValuJet in
February 1996. This review found that ValuJet was in compliance with FAA
regulations, but cited concern about pilot training and aircraft
maintenance (Larson, 1996, p.30). In May 1996, Valujet flight 592 crashed
in the Everglades, killing all aboard and resulting in a shutdown of the
carrier for several months. When ValuJet began flying again, it did so
with a reduced schedule, and considerable speculation about whether the
company will be able to continue operations long-term. The company is
also involved in litigation resulting from the crash, and the long-term
prospects for the company are questionable. The following chart
identifies key operating statistics for Southwest (seat miles are in
millions, cost factors are in cents) (Shammas, 1996, p. 5541P):
1995 1994 1993 Revenue Passenger Miles (RPM) 2,624 941 44 Available
Seat Miles (ASM) 3,813 1,471 63 Load Factor 68.8 % 64.0 % 69.7 % Revenue
per RPM 13.4 13.8 13.1 Cost per ASM 6.8 6.8 9.8 Because Southwest\'s
flights are generally an hour or less in length, the airline saves money
by not having to serve meals. It has a liberal work rule arrangement with
its unions, so productivity is high, and overall costs are low. For
example, Southwest gets 672 hours per year on average from pilots versus
371 for American Airlines pilots, and 60 percent more passenger miles per
flight attendant (Levinson, 1993, p. 34). These figures enable the
company to realize profits during years in which the industry as a whole
was suffering. The following chart identifies key operating statistics
for Southwest (seat miles