Why low cost carriers influence the industry with low air fares

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Low cost carriers influence the industry with low air fares

Low cost carriers (or LCCs) have lower passenger revenue per available seat mile (or PRASM) compared to their legacy peers. In 2013, Southwest’s (LUV) PRASM was 12.83 cents and Jet Blue’s (JBLU) was even lower at 11.61 cents compared to Delta’s (DAL) 14.5 cents, American Airline’s (AAL) 13.38 cents, and United’s (UAL) 13.5 cents. The lower PRASM of LCCs was primarily because of low air fares driving down yield.

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How have LCCs contributed in moderating air fare increases?

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Over the last decade, with increasing mergers and consolidation in the U.S. airline industry and reduced competition, air fares were expected to increase dramatically. However, according to PricewaterhouseCoopers’ (or PWC) findings listed below, U.S. domestic airfares increased only moderately. Fares increased only by 2%. When they were adjusted for inflation they actually decreased by 0.5%, primarily because of the growth of LCCs. The table below illustrates the extent to which LCCs have contributed to keep the air fares low.

Average fare changes in LCC and non-LCC markets

  • In 1Q13, average fares in stable LCC markets—routes where LCCs carried greater than 30% of total passengers—were lowest at $189 and at a 30% discount to $269 offered in non-LCC markets.
  • Between 2008 and 2013, LCC entry markets—those non-LCC markets that became LCC markets in 2013—reported a 5% reduction in fares. LCC exit markets—those LCC markets that became non-LCC markets by 2013—reported a 28% increase in fares.
  • Although the fares are lowest in LCC markets, the rate of growth of fares, at 19%, has been higher compared to non-LCC markets, at 9%, because of increased cost pressures from rising fuel prices and increases in other operating costs faced by LCCs.
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