The “Southwest effect” - a large decrease in fares paired with an increase in traffic - has been discussed around the airline industry since the term was first coined in a government study in the early 1990s. But the airline industry has drastically changed since then - Southwest has become the largest domestic airline, and many of its competitors have had the chance to restructure through bankruptcy.
This study examines some of Southwest's latest city additions, as well as a few of the airline’s intra-California routes where it is now a dominant player. Using publically-available government data, the change in passengers and average fare was measured. The change in average fare was also evaluated with a two-sample t-test, while the difference in distribution of fares was evaluated with the Kolmogorov-Smirnov test. The results indicate that Southwest can stimulate traffic and lower fares, the effect of its entrance into a new market decreases over time. In addition, an analysis of some key intra-California routes indicates that the opposite of the “Southwest effect” can happen once Southwest becomes the dominant player on a route.
Recommended CitationWebb, Daniel, "The Evolution of the “Southwest Effect”" (2012). Honors Projects in Finance. Paper 21.