Most incumbents at the time of the entry of Southwest Airlines are showing small profits because of low consumer demand, high operation and maintenance costs. However, Southwest Airlines' introduction of a new business model significantly altered this situation.
It can be recalled that deregulation has lowered the barrier to entry in the industry as well as enhanced the competitiveness of the players which are previously receiving subsidy from the government. This, in turn, largely contributes to the cost efficiency of airline operators allowing them to charge lower prices to passengers. A low cost carrier like Southwest Airlines typically adopts a business model which offers only a single passenger class and a single type of airplane which allows the company to cut on training and servicing costs. Budget airlines also typically employ a very simple fare scheme which rewards early reservation by increasing the fare charged as the plane fills up. There is usually no reserved seating in order to allow customers to choose their own seats thereby encouraging early and quick boarding (Sorensen 2006). ...Show more