How Southwest Pioneered The Low Cost Carrier Model

They are the largest low-cost carrier in the world, and hold the record for consecutive profitable years, reporting 46 years of money-making success in a row. Clearly, they’re doing something right, but what is it that has made Southwest Airlines such a massive success?

Close up of Southwest airplane
Southwest has led the charge for low-cost travel, but how? Photo: Unsplash

The whole idea behind Southwest Airlines was to make air travel accessible to all. While the legacy carriers in the US at the time were focusing in on the wealthy traveler, Southwest set out to disrupt the market at the lower end, giving more people the opportunity to fly.

Not only did Southwest’s low price strategy allow people to fly cheaper, it also drew many people into flying who would otherwise have taken a train or bus. It opened air travel in the US to the masses and did so while still being able to make money, which is no mean feat.

The first low-cost airline

The world’s first low-cost airline was Pacific Southwest Airlines, who began operating interstate flights between northern and southern California in 1949. Their strategy of sticking to just Cali flights avoided the expenses of federal regulation in other states. For 30 years they were practically the flag-carrying airline of California, until deregulation in 1978 when it expanded to other states.

PSA smiliner
The smiling face of PSA, the world’s first LCC. Photo: Wikimedia

This idea of keeping cost as low as possible at the airline’s end was fundamental to Herb Kelleher’s strategy for Southwest Airlines. Emulating the success of PSA, he replicated the idea of interstate, low-cost flights in Texas when he launched Southwest in 1971. While PSA wound up fairly soon after deregulation, however, Southwest went from strength to strength, to become the world’s biggest low-cost carrier today.

Whereas PSA had some good fundamentals in their low-cost strategy, Southwest really took it to the next level. In fact, Southwest has been so successful with their low-cost model, they’ve become the template for all successful low-cost airlines around the world.

How do they do it?

Southwest has a solid strategy for their business, one which has been replicated the world over. This is:

  • Low fares: Unrestricted fares available at a low price
  • Cheaper airports: Using secondary airports reduces the cost of landing there
  • Single fleet type: Using only one aircraft type reduces training for pilots, skills required of mechanics and spare parts bank required to remain operational
  • Schedule: An intelligently put together schedule, with short turnaround times and routes that maximize the airtime of every aircraft in the fleet
  • Point to point: Short, in-demand routes operating at a high frequency

One of the keys to Southwest’s success is keeping employees happy. While they rely on keeping costs low, they also aim to pay their staff a fair wage and have integrated perks like profit sharing to maintain high staff satisfaction and to stimulate a productive workforce.

Southwest cabin
Fewer frills but still a good customer experience. Photo: Southwest

For passengers, they do more than the average low-cost airline too. Their policy of two checked bags for free bucks the trend of most LCCs, and of the basic economy fares from legacy carriers too. While many of the ‘frills’ such as food and drink are missing (which helps them keen turnaround quick) Southwest strive to provide decent customer service so that people are happy to fly with them again.

The ‘Southwest Effect’

The airline has been so successful in disrupting US airfares that it even has an economic term named after it. The ‘Southwest Effect’ was first coined by the US DOT in 1993, to described how Southwest’s entry into a new market affected aviation services on that route.

The effect of the airline’s entry occurred in three stages. Firstly, they increased supply and offered lower prices on that route. This would lead the incumbent airlines to lower their fares in order to compete. As a result, the third element of the Southwest Effect would be that sales for all airlines would rise. The lower prices would lead to an increased demand for air travel, meaning that even those airlines who had to lower fares would see a rise in profits as a result of better load factors.

SWA Hawaii
Southwest’s arrival into a market (such as Hawaii) can force incumbents to lower fares. Photo: Southwest

Southwest isn’t the only airline to have such an impact on aviation at a regional scale. JetBlue has been noted to cause similar trends in the US, as has low-cost giant Ryanair in Europe. However, Southwest is the granddaddy of the low-cost flight, and CEOs of other low-cost airlines have openly acknowledged their debt to the airline for a solid, cost-saving strategy.

While other low-cost airlines have failed, Southwest remains strong. Although their ‘effect’ is less prevalent today than it once was, thanks to many legacy carriers bringing in their own low priced fares, Southwest still hold the torch as the original disruptor and the Godfather of all LCCs today.