Delta

Low Cost Carrier Growth in the U.S. Airline Industry: Past, Present, and Future

Harumi Ito∗ Darin Lee†

April 9, 2003

JEL Classifications: L11, L93 Keywords: Airlines, Market Entry, Deregulation

∗ Department of Economics, Box B, Brown University, Providence, Rhode Island, 02912. E-mail: harumi@itosun.pstc.brown.edu, Tel: (401)-863-2887, Fax: (401)-863-1970. † LECG, LLC. 350 Massachusetts Avenue, Suite 300, Cambridge, MA 02139. E-mail: darin lee@lecg.com. Tel: (617)-761-0108, Fax: (617)-621-8018. The views expressed in this paper are those of the authors and do not necessarily reflect those of LECG, LLC.

Low Cost Carrier Growth in the U.S. Airline Industry: Past, Present, and Future

Abstract This paper documents the growth of low cost carriers (LCCs) in the U.S. airline industry since 1990. By estimating simple probit models, we quantify the market characteristics which have influenced nonstop LCC entry in 351 city-pair markets over the past decade. We confirm that pre-entry market density is the single most important factor influencing LCC entry into a city-pair market. For each of the large-hub-and-spoke carriers, we quantify their past, present and future exposure to LCCs. In particular, we predict which markets currently not served by LCCs are the most likely to be entered in the future. Finally, we predict the proportion of network carrier revenue that may ultimately be exposed to nonstop LCC competition.

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“We’ve finally reached the point, perhaps, where [low cost carrier] penetration may be fatal.” – David Grizzle, Senior Vice President, Continental Airlines.1

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Introduction

The growth of low cost carriers (LCCs) in the U.S. and elsewhere is arguably the single most important factor currently shaping the airline industry. While LCCs accounted for 7% of U.S. domestic passengers in 1990, their geographic scope was fairly limited, and for the most part, LCC service was synonymous with a single carrier, Southwest Airlines. In contrast,...