Southwest Prepares for Battle in California With Fare Cuts (Analysis – Part 1)

Ever since I attended way back in August, I’ve been meaning to look at Southwest’s intra-California strategy in more detail.  Facing new competition from the combined Alaska/Virgin America, Southwest has really ramped up the rhetoric about California, and it has made some changes to the way it prices its offerings in the market.  It took me awhile, but I’ve finally been able to sit down with the data (thanks to Atmosphere Research’s Henry Hartveldt for sending it over) to see how this has been going.  Today, I’ll look at the strategy itself and bring in parts of an interview I did with Southwest’s EVP and Chief Revenue Officer Andrew Watterson back at the Boyd Conference.  Then tomorrow, we’ll look at the data.

There’s no question that California is a hugely important piece of Southwest’s system.  Southwest’s founders received a great deal of inspiration from Pacific Southwest Airlines (PSA), a carrier that pioneered the low-cost model in California long before deregulation. (Airlines that flew solely within one state didn’t have to worry about federal rules.)  In the 1980s, USAir purchased PSA and then swiftly dismantled it, leaving the door open for someone else to come in.  Southwest took full advantage.

USAir pulled out of most intra-California markets quickly, and American did the same with its acquisition of AirCal.  As Southwest grew, even United, which had flown many intraCal markets, pulled back to mostly only serve routes touching its hubs in Los Angeles and San Francisco.  The market was soon dominated by Southwest.

Fast forward to today.  While Southwest faces competition on all routes from LA and San Francisco, it outright owns most of the secondary markets.  It has no competition at all between Oakland and Burbank, Ontario, Orange County, and San Diego.  There isn’t a single other airline on Sacramento to Burbank, Ontario and Orange County either.  Same goes for Ontario to San Jose.  But other secondary markets have seen a resurgence of interest lately from Alaska Airlines after it acquired Virgin America.  Just look at these market entrances from Alaska:

  • Burbank – San Jose began 1Q 2017
  • Orange County – San Jose began 2Q 2016
  • San Diego – San Jose began 2Q 2016
  • San Diego – Sacramento began 1Q 2017
  • Orange County – San Francisco began 2Q 2017

Southwest, the so-called king of low fares, had been getting fat and happy in these markets as it regularly does when it doesn’t have to worry about competition.  Here’s a chart looking at the second quarter 2017 average fares for Southwest, right before changes started brewing.

The highest fares in the market are those with no competition at all today.  And look at what remains.  The three highest fare markets with competition are the ones that Alaska entered, taking away Southwest’s monopoly.

Southwest has been beating the drum about California for some time now.  It is understood that’s why the airline spending all this time and energy going into the Hawai’i market.  That’s an important market to Californians, so it’s an important market to Southwest. 

At the Boyd Conferece, Andrew took things a step further, telling me “one could say we are a California carrier based in Dallas.”  And so, Southwest woke up from its slumber, and it decided to make some changes.  I’ll let Andrew explain.

…we changed our pricing structure for the middle of the structure. We still have the walk-up fares, [and] the sale fares are actually very similar to where they were in the heyday. It’s the middle of the structure that we’ve changed. We’ve seen a real renaissance in travel demand.

And that’s why you see things like this in Ontario to Oakland for travel today:

This structure went into effect in the summer of 2017, and it only impacts the middle of the market fares.  As Andrew puts it:

There were pricepoints you couldn’t advertise, but it would be like, you know, we’re already advertising low fares. But what’s in between the Anytime fare and the sale fare is what the price-conscious business traveler or a last minute leisure traveler [would buy]. It was that range that we changed last year.

You probably assume like me that this was a competitive response, the awakening of a sleeping giant.  It’s hard to believe, but Andrew says that’s not true.  

This is almost 100 percent driven internally because we do short-haul very very well. And that short-haul had languished over a period of time, and we saw the drivers of that going away. This was our effort to force the pace of short-haul coming back. IntraCal is the epitome of short-haul business travel. We want to learn and migrate it to other parts of the network.

Andrew says that after short-haul travel took a hit post 9/11 thanks to onerous security procedures, it was time to revisit things.  Pre-Check has made lines short to non-existent in many places, and there should have been more demand than there was.  This was Southwest’s attempt to wake the market up, he says.

Is it working?  Well, come back tomorrow and we’ll dig in to the data.

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