A-La-Carte Pricing in the Airline Industry - Graduate Student ...

Despite this open question, it is certain that empty core disequilibrium leading to excesscapacity would interfere with the natural supply and demand dynamics that would allow pricesand capacity to adjust in the wake of exogenous shocks. Facing an inability to set fares at a levelthat would at least allow them to break even, air carriers thus faced additional pressure todiscover other pricing techniques that would allow them to remain competitive in themarketplace and earn revenues they were unable to capture through an increase in prices.Another factor adding to the revenue pressure from these exogenous shocks and perhapscontributing to overcapacity in the industry involves the competitive threat of LCCs. Interviewssuggested that the network carrier faced little pressure from LCCs in the 1980s and 1990s andwas unsure whether these carriers would materialize into a significant threat. While long-timeLCC Southwest Airlines maintained profitability throughout the 1980s and 1990s, that periodwas marked by the failure of several low-cost carriers, such as People Express and PacificSouthwest Airlines. Nonetheless, a number of small operations, such as Valujet and VanguardAirlines, also started up in the 1990s to utilize the low-cost model. As one interviewee said, ―Asyou get through the nineties, you get past the denial that LCCs will just somehow not be able togrow much because they‘re point to point, or whatever they were at the time. . . . Clearly theyhave a business plan that works and you have to rethink yours.‖As Franke (2005) points out, major network carriers did not take the LCC threat seriouslyuntil the 1990s, and even then, they perceived it as a regional phenomenon restricted to a nichemarket (17). Nonetheless, he points out that it was actually the downturn in airline demandfollowing September 11th that actually help the LCCs further attract previous network carriercustomers who were looking to pay less for air travel (15). As mentioned above, LCCs actuallyremained profitable following this period while the network airlines took heavy losses. It was36