Low Cost Carriers and the Evolution of the U.S. Airline Industry

Since the deregulation of the U.S. airline industry in 1978, a substantial number of new carriers emerged; particularly those following a low cost strategy. Given those airlines’ rapid growth and market success the U.S. Department of Transportation (DOT) already identified a so called `low cost airline service revolution’ back in 1997. Almost fifteen years after the drafting of the DOT report, the low cost airline service revolution has not only continued – reflected in an increase of the domestic passenger market share from about 13 percent in 1997 to about 28 percent in 2009 – but also led to a substantial rise in the competitive interaction between network carriers and low cost carriers. Against this background of a substantial and further increasing relevance of low cost carriers, the paper aims at developing a comprehensive perspective of the evolution of the domestic U.S. airline industry in recent years. We find that network carriers (NWCs) und low-cost carrier (LCCs) each entered about 1,200 non-stop routes between 1996 and 2009. While entry activity of NWCs was much more pronounced between 1996 and 2003, LCCs have entered more markets per year since 2004. On the other hand, exit activity is much more pronounced for NWCs with in sum about 2,250 route exits, compared to only 391 exits on the side of the LCCs. A substantial fraction of the NWC exits were triggered by external and internal shocks such as recession or merger activity. Especially the entry activity in the largest 1,000 markets caused a general downward trend in concentration for the sample period as indicated by the Herfindahl-Hirschman Index developments. Accordingly, we observed a substantial downward trend in average domestic fare prices. While NWC experienced a substantial increase in average cost (excluding fuel costs), LCCs managed to lower their average cost over the years even further. Not surprisingly, while none of the NWCs managed to realize a net operating profit in the period from 2000 to 2009, all LCCs can report such a net operating profit.

Hüschelrath, Kai and Kathrin Schopen (2011), Low Cost Carriers and the Evolution of the U.S. Airline Industry, ZEW Discussion Paper No. 11-051, Mannheim, published in: Competition and Regulation in Network Industries.