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Budget Airlines Are Driving Competition For Everyone

United Airlines made headlines recently with its announced introduction of Basic Economy pricing – and mostly not in a good way. Most of the coverage has focused on the fact that this plan no longer includes complimentary carry-on baggage or choice of seating, with the baggage fee recently drawing the ire of Senator Chuck Schumer.  However, this new fare is just the latest example of increasing competition between name-brand airlines and budget airlines such as Spirit and Frontier airlines.

When I lived in Michigan, there were a number of cheap routes offered by Spirit Airlines, and I can personally attest to many of the inconveniences – less legroom and comfort in seats, individual fees for baggage and seat choice, lesser customer service and fewer re-routing options if flights were canceled – but I can also attest to the cheaper price. And I benefited from Spirit even when I decided on another airline.

Research has confirmed that low-cost carriers (LCCs) provide close enough competition to have an important impact on legacy carriers’ fares. That 2016 study finds “LCCs have a much larger fare impact than do legacies, but that their fare-reducing effect diminishes as they become dominant on a route. It also finds that legacy carriers primarily affect each other’s prices, whereas LCCs have a significant impact on pricing by both other LCCs and legacies.”

In other words, Spirit is having a lot more effect on United than United is having on Spirit. In fact, low-cost carriers have been effective enough that the two types of airlines are in fact becoming more similar to each other along operational dimensions like route choice as well as in pricing structures such as United’s introduction of Basic Economy. In a recent academic book chapter on the economics of airlines, the authors conclude that the “current competitive atmosphere improves efficiency as the distinctions between legacy and low-cost carriers have become less obvious.”

While we may like to complain about service, the evidence is that when making tradeoffs between price and service, U.S. air travelers largely choose price.

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