Essay by adil110 May 2005

download word file, 6 pages 5.0


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


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...