A few days ago I had a talk with graduating senior and former Sound Economics writer, Tesha Shalon about her thesis on the impact of low cost carriers (LCCs) in the domestic airline market. In her thesis, she compares the profit and revenue of these airline companies to legacy carriers, who prospered during the airline regulatory era before the late 1970s. Tesha examines the effect of these LCCs on the profit and revenue of legacy carriers, while analyzing the extent to which LCCs’ profit compares to that of legacy carriers.
Since deregulation in 1978, airline carriers have been forced to cut costs in order to keep up with competition and turn a profit. The government used to regulate air transportation through the Civil Aeronautics Act (CAB). This Act controlled the entry and exit of carriers, regulated fares, and oversaw mergers. But ever since deregulation, LCCs have disrupted the industry by undercutting all pre-deregulation, legacy carriers. “Instead of increasing value, this competition decreases the value and experience of flying for coach passengers.”
Tesha created three different models to find if this business structure utilized by LCCs yield the most success in terms of profit. She used a fixed effect model to compare different airlines against the baseline carrier (Southwest) to determine which airlines are better suited to the current market structure. Two of her models showed that LCCs make “$37 more than a legacy carrier per passenger in net income dollars” and are “22% more profitable than the average legacy carrier.” Tesha discovered evidence for the success of Southwest’s and similar LCCs’ business model in the domestic airline market. She found significance within her models and contributed to the ongoing debate about LCCs and the profitability within the airline market.