The deregulation of the airline industry has brought about healthy price competition with multiple existing major carriers. Price competition resulted in the lower average fares paid on both short and long-haul routes. Moreover, demand for flight, especially short trip is extremely elastic because passenger may choose ground transportation means such as trains, cars etc instead, if the fare is high.Deciding to increase price to match United Airlines may make Southwest Airlines loose customersOakland had become the main base of Southwest’s Northern California operation and was the fastest growing of California’s ten major airlines in terms of air traffic.
That’s why it believed to have ‘symbolic significance” to Southwest. Oakland-Ontario had been among the most hotly contested route among the nine where United and Southwest competed head-to-head and Southwest had lost market share on this route since October 1994.After Shuttle by United decided to discontinue servicing in Oakland-Ontario route, Southwest could firmly hold on this route. If Southwest chose to increase approx 15% ( $10.
00) to match Shuttle by United, it is likely that it would lose the market share because other “low-fare, low frill” carriers like Kiwi International Airlines, ValuJet, Reno Air definitely will take the chance and jump in. If it remains the lowest pricing strategy, it may be able to capture more customers and increase market shares in all routes.To vigorously fight with Shuttle by United to maintain its stronghold in California, Southwest had boosted its advertising and promotion budget for the intra-California market. Promotions such as 21-days advance fares, other discount fares and “The Company Club” for frequent flyer program were heavily promoted. The effect of this promotion was that Southwest’s fare was $44. 00, down by $25. 00 compared to nominal price.
Increase in price may even out the high advertising cost and compensate partially for promotion that were implemented