Is the "Southwest effect" still strong? The case of U.S. airline industry

The "Southwest effect" - a sharp decline in prices associated with a traffic growth - has been under discussion since the early 1990s. The US carrier market has changed dramatically since then, especially with the rise of new forms of airlines in recent years. This thesis analyses the effect of ultra –low cost and low-cost carrier's entry on the average ticket fare and studies the price response of incumbents to entry by ultra –low cost and low-cost carriers in the U.S. airline industry. I use panel data - DB1B fare data and T-100 traffic data for the sample period from 2012 to 2016. In the descriptive analysis I apply the Kolmogorov–Smirnov test to compare the distribution functions of ticket fares for selected air routes. The results of fixed effects model indicate that the entry of ultra-low-cost has a negative impact on the average ticket fares on both monopoly and oligopolistic markets. I also find that incumbents significantly reduce their prices when JetBlue Airways and Frontier Airlines enter the market. Southwest Airlines doesn´t affect incumbents pricing strategy. The presence of the "Southwest effect" was not confirmed on routes operated by Southwest Airlines. As a result of that the "Southwest effect" can be interpreted as "the effect of ultra-low cost and low cost companies" in general.