Actual, Adjacent, and Potential Competition Estimating the Full Effect of Southwest Airlines

Abstract

Southwest Airlines is frequently credited with having an important influence on the success of airline deregulation in the United States. This paper uses an original set of competition variables to estimate the extent of that influence in 1998. The estimated savings – due to actual, adjacent, and potential competition from Southwest – were $12.9 billion. Southwest's low fares were directly responsible for $3.4 billion of these savings to passengers. The remaining $9.5 billion represents the effect that actual, adjacent, and potential competition from Southwest had on other carriers' fares. These savings amount to 20 per cent of the airline industry's 1998 domestic scheduled passenger revenue and slightly more than half the fare reductions attributed to airline deregulation. From a policy perspective, these results are both troubling and encouraging. On the one hand, it is troubling to find that a large part of the fare reductions from airline deregulation is due to one carrier. On the other hand, if entry by a carrier with the appropriate characteristics can make such a difference, policies that encourage entry – for example, relaxing the restriction on entry by foreign-owned carriers – may have a large impact on passenger welfare.