Southwest Prepares for Battle in California With Fare Cuts (Analysis – Part 2)
Welcome back to the second part of a look at Southwest’s pricing changes in intra-California markets. If you missed the dynamics that led to this change yesterday, I’d recommend heading over to the post first. Now, we’re going to look at the numbers. Thanks to Henry Harteveldt at Atmosphere Research for providing the DOT Origin and Destination Survey data.
I went back to the beginning of 2016 and looked at the data through the second quarter of this year, the most recent data out there. I know that this strategy wasn’t just about intra-California markets — it includes short-haul markets that behave the same, like LA to Vegas and Phoenix — but I looked only at intra-California flights for this analysis. All the data you see below is solely for Southwest passengers flying nonstop within California.
Here’s a look at the total number of passengers along with the average fare in these nonstop markets as an aggregate. (I excluded the Long Beach markets because they are crazy outliers, as you’ll see later.)
Anyone want to guess when the fare change went into place? As Southwest explained, it introduced a new lower level walk-up fare, so the average fare did indeed go down while the number of passengers jumped. Could this all be share shift? No. There was definitely some stimulation, and you’ll see it in the market-specific charts down below. But was it enough stimulation to offset the lower average fare. Well…
On the aggregate, it looks like Southwest hasn’t grown passenger numbers enough to offset the fare decline. Overall, revenues are down. This puts real doubt into the idea that Southwest was doing this just to goose the market. There has to be another reason.
But first, it is tempting to think there could be outliers here. After all, there are a lot of markets that could behave differently from each other. So, I broke out each market to see. Here’s a look at the average fare.
Remember how I said Long Beach was an outlier? Uh, yeah. You can see just how low those fares are here. But what I find most interesting is how the rest of these markets really moved in lockstep with each other with very few exceptions. I’m sure competitive dynamics caused fares in LA to San Francisco to take a nose dive. That’s the one you see in the tank with the two Long Beach markets. But other than that, the average fares moved together.
Now let’s look at Southwest’s passenger numbers.
It’s similar here, but there are a couple more outliers. You can see the increase in passengers from LA to San Francisco, though that undoubtedly didn’t make up for the fare plummeting. Then there’s the drop in Orange County to San Francisco. That was due to Southwest losing slots at Orange County, so it cut back. It has since pulled out of the market entirely. Other markets, however, behaved the same as each other.
Now let’s look at the overall revenue picture.
Pretty much across the board you can see a decline in revenue after the fare change went into effect. Southwest says it’s very happy with the fare changes, but the numbers would suggest otherwise.
This looks a lot like Southwest is running a prevent defense. The airline knows that it can’t count on owning the California market without a challenge anymore. Right now it’s Alaska that’s trying to make a move, but there’s also David Neeleman’s Moxy on the horizon that could decide to make waves if it saw the opportunity. Instead of waiting to react until those airlines get a toe-hold, Southwest is making a definitive statement that it will fight hard, even if it means a negative financial impact for now.
