Prior to $1978,$ the U$.$S$.$ airline industry was tightly regulated in a way that made it difficult for new airlines to enter. Deregulation lowered the floodgates and allowed a swarm of new players to enter the industry, with $29$ new airlines being established between $1978$ and $1993.$ Among these new entrants was Southwest, which pioneered the low$-$cost business model in the industry. Other low$-$cost entrants included Jet Blue and Air Tran. The low$-$cost players offered a bare$-$bones service, without the expensive frills of traditional carriers $($those frills included in$-$flight meals, ample business and first$-$class seating, and lounges in airports for premium travelers$).$ The new entrants had lower labor costs due to a flexible, nonunion workforce$$a crucially important factor in an industry where labor costs account for one$-$third of operating costs. They flew point to point $($which customers preferred$),$ rather than routing passengers through hubs and requiring them to change planes. They further lowered costs by standardizing their fleet around one model of aircraft $($the Boeing $737$ in the case of Southwest$).$

The incumbents responded to new entrants by trying to lower their own costs, not always successfully. Prices tumbled, load factors declined $($load factor refers to the average percentage of seats occupied on a flight$),$ and high profits prior to $1978$ were replaced by ongoing price wars and periods of heavy financial losses. Between $1980$ and $2016,$ the average price for a round$-$trip flight in the United States tumbled from $$653$ to $$367$ when adjusted for inflation. As prices fell between $2001$ and $2009,$ U$.$S$.$ airlines lost $$65$ billion in net income as they struggled to lower their costs and fill their planes.

The price wars were amped up by several factors. First, consumers increasingly came to see airline travel as a commodity product. The development of online price comparison sites in the $1990$s$,$ such as Expedia and Priceline, contributed to this trend. Second, Chapter $11$ bankruptcy laws allowed bankrupt airlines to continue operating as they reorganized their capital structure. Among the big carriers, United, Delta, and America have all operated under bankruptcy for a time since $2001.$ By allowing bankrupt airlines to continue to fly, Chapter $11$ regulations continue to keep unprofitable capacity in the industry, making it difficult for all airlines to get the load factors to cover their fixed costs. Third, adverse macroeconomic events, such as the $20012002$ and $20082009$ recessions, periodically exacerbated the excess capacity situation in the industry and intensified price competition.

However, after $40$ years of transformation, the industry does seem to have achieved some degree of stability. Many of the smaller players have exited the industry. A wave of mergers between larger airlines has resulted in a more concentrated competitive structure. By $2021,$ four airlines$$American$,$ Delta, United, and Southwest$$captured $75\%$ of all traffic. Although prices remained low, until the COVID$-19$ pandemic hit in $2020,$ they were no longer falling. Moreover, under the protection of bankruptcy reorganization, the legacy airlines have made improvements in lowering their cost structure. The airlines have also been helped by a decline in fuel costs since $2010$ and the introduction of more fuel$-$efficient aircraft $($although fuel prices spiked again in $2022).$ As a result, the breakeven load factor had fallen to $71\%$ by $2019$ from $81\%$ during the $20012010$ period. Meanwhile, demand for airline travel continued to expand until the COVID$-19$ pandemic hit in $2020,$ and now seems to be rebounding strongly after two soft years. Between $1980$ and $2016,$ the number of passengers flying in the United States increased from $400$ million to $824$ million. Higher demand and reduced competition have resulted in fuller aircraft. Load factors reached $84\%$ in $2019,$ up from $70\%$ in $2001.$ As a result, profitability returned to the industry. Between $2010$ and $2019,$ U$.$S$.$ airlines made $$104$ billion in net profit, making up for the losses of the $20012009$ period.

James Leynse$/$Corbis Historical$/$Getty Images

Sources: Airlines for America, Presentation: Industry Review and Outlook, April $10,2022,$ airlines.org; K$.$ Huschelrath and K$.$ Muller, $$Low Cost Carriers and the Evolution of the U$.$S$.$ Airline Industry,$$ ZEW Discussion Paper No $11051,2017$; J$.$ Mouawad, $$The Challenge of Starting an Airline,$$ New York Times, May $25,2012.$

Unfortunately for the airlines, the COVID$-19$ pandemic hit the industry particularly hard. As demand slumped, load factors fell to $58\mathrm{.}8\%$ in $2020$; prices came under pressure, falling by $18\%$ from their $2019$ level; and the industry lost an estimated $$35$ billion in $2020$ alone. However, demand surged in early $2022$ as the pandemic started to fade, suggesting that the industry might soon return to the good times.

Case Discussion Questions

$1)$ Was the flood of new entrants into the airline industry that followed deregulation in $1978$ good for customers? Was it good