Southwest Airlines: Supply and Demand Conditions and Price Elasticity of Demand

Supply and Demand Conditions

The United States mainline passenger airlines industry has numerous players which include United Airlines, Delta Air Lines, JetBlue Airways, American Airlines, Spirit Airlines, and Southwest Airlines, among others. The presence of numerous players in the mainline passenger airlines industry means that there is a surplus in supply. This means that airline companies have to come up with strategies that generate demand in the market. Southwest Airlines adopted a low-cost strategy where they charge lesser than the competitors for the same routes. Such strategies, combined with different strategies from the other airlines, influence the overall demand for air travel in the US.

Figure 1: Annual growth in global air traffic passenger demand from 2006 to 2019 (Statista, 2019a)

According to Statista, the years between 2011 and 2018 saw a consistent variation in demand compared to the years between 2006 and 2010. The demand for air travel was 5.3 percent in 2012. This saw a gradual increase over the years to 8.1 percent in 2018. This increase was driven by more domestic and regional carriers across the US opting for low-cost business models. Further, the demand over these years can also be attributed to the sharp increase in the middle class in the American market. This increase translated into an overall improved financial performance of the aviation industry. In 2018, there was a global rise in oil prices, which saw declining demand due to the increase in air prices. However, the slight reduction in oil prices at the beginning of 2019 has generated a cautious optimism, which has seen an increase in demand. The increasing demand over the last nine years has seen airline companies develop new products and adopt segmentation.

Focusing on domestic market share, the supply of air travel is currently as illustrated in Figure 2 below. Southwest Airlines has a market share of 17.7 percent as compared to American Airlines, whose market share is 17.8 percent. Apart from American Airlines, Southwest Airlines has to face competition over the domestic market from Delta Air Lines, United Airlines, Alaska Airlines, JetBlue Airways, Spirit, Frontier, SkyWest, Hawaiian, and other minor airlines. To overcome this competition, Southwest Airlines has adopted a low-cost strategy which places the airline as the second most favorite in the US. According to Evans (2019), this strategy ensures service or product attractiveness compared to those of the competitors. Apart from low-cost, Southwest Airlines also ensures product attractiveness by ensuring high accessibility. Currently, Southwest Airlines has a fleet size of 754 aircraft, making it the fourth-largest fleet size globally behind American Airlines, Delta Air Lines, and United Airlines. With such a fleet size, Southwest Airlines can serve 101 destinations across the world, which increases its competitive advantage despite the supply size.

Figure 2: Domestic market share (Statista, 2019b)

Just as the demand for air travel has been increasing since 2012, the demand for Southwest Airline services has also been increasing. As shown in Figure 3, the demand for Southwest Airlines has increased since 2011 based on the passengers’ revenue. Following the increasing demand, Southwest has introduced new products such as Business Select, Upgraded Boarding, WiFi & Inflight Entertainment, Southwest Vacations, and EarlyBird Check-in. Through these new products, Southwest Airlines can stay relevant to its growing consumer base with different needs. Although initially focused on low-income travelers, the high and increasing demand has caused Southwest to segment its ticketing options. Currently, Southwest Airlines has three ticketing options, which are ‘Wanna Get Away,’ Anytime, and Business Select. To maintain its competitive advantage, Southwest Airlines have to keep on refining their strategies and customer options.

Figure 3: Southwest Airlines’ revenue passengers from FY 2011 to FY 2018 (Statista, 2019c)

Price Elasticity of Demand

The price elasticity of demand in the airline industry is clear in Figure 1. In the figure, the demand for air travel dropped from 8.1 percent in 2017 to 7.4 percent in 2018. This drop in the demand was caused by the rise of ticket prices following an increase in fuel prices. The air travel industry is highly sensitive to global fuel prices. Apart from fuel prices, ticket prices also vary due to seasonal factors. According to LeBeau (2019), ticket prices increase sharply due to summer travel seasons. Other causes include global conventions such as the Olympics and World Cup. Such sharp increases in demand exert pressure on the existing airline’s companies, which then increase prices since more consumers are willing to pay more or higher to acquire the service.

Consumer responsiveness to price changes in the air travel industry is affected by the inability to postpone consumption. For instance, during events such as the World Cup or Olympics, travelers who must visit these events cannot postpone their travel due to an increase in prices or price changes. Consumer responsiveness is also affected by income levels. With price increases, travelers with low income might postpone traveling until prices reduce.

Generally, Southwest Airlines have a long history of resisting price elasticity of demand. However, the 2019 summer travel demand caused the company to increase its one-way ticket prices by $5 (LeBeau, 2019). This affected more than 180,000 travelers who had booked the airline. Southwest Airlines responds to the price elasticity of demand to maximize profits from travelers who will be willing to pay more during specific travel seasons. Southwest Airlines also increases the price with the demand to avoid making losses when fuel and other costs increase. Increasing prices after a sudden increase in demand also aid the airline to invest in airport upgrades and more technology to accommodate the sharp demand.

References

• Evans, L. (2019). Southwest airlines generic strategy, intensive growth strategies & competitive advantage. Retrieved 28 July 2019, from http://panmore.com/southwest-airlines-generic-strategy-competitive-advantage-porter-intensive-growth-strategies-ansoff-matrix
• LeBeau, P. (2019). Airfares climb ahead of busy summer travel season. Retrieved 28 July 2019, from https://www.cnbc.com/2019/05/09/airfares-climb-ahead-of-busy-summer-travel-season.html
• Statista. (2019a). Annual growth in global air traffic passenger demand from 2006 to 2019. Retrieved 28 July 2019, from https://www.statista.com/statistics/193533/growth-of-global-air-traffic-passenger-demand/
• Statista. (2019b). Domestic market share of leading U.S. airlines from April 2018 to March 2019*. Retrieved 28 July 2019, from https://www.statista.com/statistics/250577/domestic-market-share-of-leading-us-airlines/
• Statista. (2019c). Southwest Airlines’ revenue passengers from FY 2011 to FY 2018 (in millions). Retrieved 28 July 2019, from https://www.statista.com/statistics/595498/revenue-passengers-southwest-airlines/