Southwest Prepares for Battle in California With Fare Cuts (Analysis – Part 1)

Fares, Southwest

Ever since I attended the Boyd conference way back in August, I’ve been meaning to look at Southwest’s intra-California strategy in more detail.  Facing new competition from the combined Alaska/Virgin America, Southwest has really ramped up the rhetoric about California, and it has made some changes to the way it prices its offerings in the market.  It took me awhile, but I’ve finally been able to sit down with the data (thanks to Atmosphere Research’s Henry Hartveldt for sending it over) to see how this has been going.  Today, I’ll look at the strategy itself and bring in parts of an interview I did with Southwest’s EVP and Chief Revenue Officer Andrew Watterson back at the Boyd Conference.  Then tomorrow, we’ll look at the data.

There’s no question that California is a hugely important piece of Southwest’s system.  Southwest’s founders received a great deal of inspiration from Pacific Southwest Airlines (PSA), a carrier that pioneered the low-cost model in California long before deregulation. (Airlines that flew solely within one state didn’t have to worry about federal rules.)  In the 1980s, USAir purchased PSA and then swiftly dismantled it, leaving the door open for someone else to come in.  Southwest took full advantage.

USAir pulled out of most intra-California markets quickly, and American did the same with its acquisition of AirCal.  As Southwest grew, even United, which had flown many intraCal markets, pulled back to mostly only serve routes touching its hubs in Los Angeles and San Francisco.  The market was soon dominated by Southwest.

Fast forward to today.  While Southwest faces competition on all routes from LA and San Francisco, it outright owns most of the secondary markets.  It has no competition at all between Oakland and Burbank, Ontario, Orange County, and San Diego.  There isn’t a single other airline on Sacramento to Burbank, Ontario and Orange County either.  Same goes for Ontario to San Jose.  But other secondary markets have seen a resurgence of interest lately from Alaska Airlines after it acquired Virgin America.  Just look at these market entrances from Alaska:

  • Burbank – San Jose began 1Q 2017
  • Orange County – San Jose began 2Q 2016
  • San Diego – San Jose began 2Q 2016
  • San Diego – Sacramento began 1Q 2017
  • Orange County – San Francisco began 2Q 2017

Southwest, the so-called king of low fares, had been getting fat and happy in these markets as it regularly does when it doesn’t have to worry about competition.  Here’s a chart looking at the second quarter 2017 average fares for Southwest, right before changes started brewing.

The highest fares in the market are those with no competition at all today.  And look at what remains.  The three highest fare markets with competition are the ones that Alaska entered, taking away Southwest’s monopoly.

Southwest has been beating the drum about California for some time now.  It is understood that’s why the airline spending all this time and energy going into the Hawai’i market.  That’s an important market to Californians, so it’s an important market to Southwest. 

At the Boyd Conferece, Andrew took things a step further, telling me “one could say we are a California carrier based in Dallas.”  And so, Southwest woke up from its slumber, and it decided to make some changes.  I’ll let Andrew explain.

…we changed our pricing structure for the middle of the structure. We still have the walk-up fares, [and] the sale fares are actually very similar to where they were in the heyday. It’s the middle of the structure that we’ve changed. We’ve seen a real renaissance in travel demand.

And that’s why you see things like this in Ontario to Oakland for travel today:

This structure went into effect in the summer of 2017, and it only impacts the middle of the market fares.  As Andrew puts it:

There were pricepoints you couldn’t advertise, but it would be like, you know, we’re already advertising low fares. But what’s in between the Anytime fare and the sale fare is what the price-conscious business traveler or a last minute leisure traveler [would buy]. It was that range that we changed last year.

You probably assume like me that this was a competitive response, the awakening of a sleeping giant.  It’s hard to believe, but Andrew says that’s not true.  

This is almost 100 percent driven internally because we do short-haul very very well. And that short-haul had languished over a period of time, and we saw the drivers of that going away. This was our effort to force the pace of short-haul coming back. IntraCal is the epitome of short-haul business travel. We want to learn and migrate it to other parts of the network.

Andrew says that after short-haul travel took a hit post 9/11 thanks to onerous security procedures, it was time to revisit things.  Pre-Check has made lines short to non-existent in many places, and there should have been more demand than there was.  This was Southwest’s attempt to wake the market up, he says.

Is it working?  Well, come back tomorrow and we’ll dig in to the data.

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9 comments on “Southwest Prepares for Battle in California With Fare Cuts (Analysis – Part 1)

  1. Glad you at least touched on the historical aspect of this. The only correction I would offer is that Southwest wasn’t “inspired” by PSA. They were a direct clone/copy of it. But practically speaking, that’s neither here nor there at this point in history. The USAir takeover was a disaster from the start and is a merger that never should’ve happened.

    PSA already had one foot in the grave at the time. Someone else should’ve gotten them….but I digress. The 1990-1993 Recession and fallout from the first round of 80’s mergers and the first Gulf War definitely paved the way to where we are today.

    I could drone on and on about the history and ‘what if’s’. But this site doesn’t seem to be all that big on nostalgia, so I’ll stop here.

    I just have one question:

    Why not Fresno?

    Probably the largest market in the country that does not have Southwest service. Once upon a time, FAT should or would’ve been a classic Fresno market. Yet to this day, remains a gaping hole in a market they otherwise reign supreme. If you look at the overall catchment area and potential market, I can’t think of any reason why FAT couldn’t support at least 8-12 daily profitable flights.

    Trying to dissect the FAT market is a challenge. For one thing, it suffers from a classic chicken-or-egg conundrum: The fares are so high because the traffic is so low. And the traffic is so low because the fares are so high. The vast majority of people going to or from FAT opt for the additional hassle of driving to LAX or SFO. If some or all of those locals were to actually stay local, what would the counts look like?

    And then there’s the demographics issue. Yes, Fresno and the surrounding counties (Kings, Tulare, and Madera) have a lot of the most dirt poor people in the Country. No doubt that brings down the overall averages ‘on paper’ significantly. But those same areas also have a substantial middle and upper class population as well. But it’s difficult for them to appear irrelevant given how much poverty there is mixed in with it.

    About the closest Southwest ever came to Fresno was at the end of 1993 when they bought out Morris Air, who did serve at the time. And then FAT almost immediately got the axe. I don’t think a single red belly ever landed at FAT.

    IFP was the other, but that actually made more sense, since then, as in now, would be hard pressed to produce even 4 daily profitable flights, never mind the 8+ that WN generally requires.

    I’d love to hear your take on all this.

    1. Matt D – I don’t think Southwest is particularly interested in stations that can be 8 to 12 flights a day unless they’re vacation destinations like in the Caribbean. Southwest doesn’t seem too happy unless it can get good volume and frequency. For whatever reason, it has decided Fresno isn’t the right place to be. If you look at cities it has entered recently, it has shown little interest in small airports that aren’t vacation spots. There doesn’t seem to be a real need from a strategic perspective either since nobody provides a good level of service in Fresno.

    2. Fresno is not that far away from both the LA Basin and the Bay Area. I don’t see how there would be enough people to justify sending 737s on to any place within California.

      I think if this state could ever get its act together and build a decent high speed rail system, it would be the best solution to get from these larger San Joaquin Valley cities to either the LA Basin or the Bay Area.

    3. I’m a former Fresnan who was flying out of FAT back in the days of Air LA, DC-8s to DEN/ORD, and PSA jets flying SFO-SCK-FAT. The drive-off issue has plagued FAT ever since deregulation, apparently there’s no reliable way to measure them to add to the PDEW figures to get a true idea of the market.

      Beyond that, while they’ve changed quite a bit in recent years I think at its heart (pun intended) Southwest is still a very conservative company, with a business model that changes incrementally. If you add up the metropolitan areas where FAT would be the closest airport, you get around 2.5 million or so, and if you factor in driving hassle you could even add another 900k for Bakersfield. But that’s still not a big market by WN standards. If WN could capture some of the connecting market going to SF or LA, that’d help, but you’d lose parts of the northern and southern capture area (if they have to go to SF or LA, why not just drive?), and unless you’re connecting internationally no one is going to want to fly into LAX and have to change terminals outside security. WN can’t offer the sheer number of connection opportunities for time-sensitive (and less price-sensitive) travelers the network carriers can offer through the hubs (AA to DFW, LAX, PHX, DL to SLC, UA to DEN, LAX, SFO, and ORD seasonally.)

      If a LCC/ULCC is going to go into Fresno (other than F9’s tiny operation today), I think it’ll be Spirit – they could offer good connections over LAS (maybe even drive Allegiant off the FAT-LAS route) and possibly another hub as well.

    1. Anthony – You’ll see more details in the data tomorrow, but the screenshot I included showing the last minute walk-up at about $50 below where the normal walk-up is should give you a good sense of what they’re doing.

  2. Watterson is full of it. If they’re changing their short haul pricing, why did their SAN-SJC average fare go down from $129 in 2015 to $91 in 2018 but DAL-HOU went from $145 to $156 in the same period? Oh wait, Alaska didn’t enter DAL-HOU. Or maybe the shorthaul renaissance hasn’t hit Texas just yet.

  3. How do we get Southwest official changed from a low-cost carrier title to legacy? They are no bargain anymore and act just like the rest when it comes to price.

    1. Very much agreed. WN may have a somewhat different business model from the three legacy carriers, but in terms of butts moved, planes, and fares, WN is basically a “legacy” carrier, and has been for a few years now, definitely not a ULCC or LCC. They should be included in comparisons with United, Delta, and American.

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