The Southwest Effect and International Travel

Update

Have International Travelers Flying from the Caribbean, Mexico and Central America to U.S. Destinations Enjoyed Cheaper Flights?

FareCompare.com has released a second set of findings based on a comprehensive analysis of the Southwest Effect in new international routes. The study reveals that while consumers traveling to the U.S. did experience the Southwest Effect initially, those average lowest fares have since increased, returning to the levels they were prior to Southwest’s foray into those markets.

No, the Southwest Effect did not stick for travelers outside the U.S.

Read the full study

The Southwest Effect

If you know anything about Southwest Airlines, you’ve probably heard about the Southwest Effect, the drop in ticket prices when the Texas-based airline enters a new market. The phrase wasn’t coined by Southwest but dreamed up by Department of Transportation analysts who studied the phenomenon back in 1993.

As airfare analyst and FareCompare CEO Rick Seaney notes, the effect isn’t just about one airline. “The Southwest Effect is essentially a competition effect,” Seaney said, adding, “Competition has been decimated the past six years by mega-mergers so it’s good to see what happens when airlines compete.”

FareCompare’s Approach

FareCompare analyzes more than 17 billion of itineraries daily to find the lowest available prices on existing flights.  We decided to find out if the Southwest Effect can be felt on an international scale by investigating price changes on some of the airline’s new routes launched last fall: non-stops between Houston and the following eight international destinations:

Belize: Belize City (BZE)

Costa Rica: Liberia (LIR) and San Jose (SJO)

Jamaica: Montego Bay (MBJ)

Mexico: San Jose del Cabo (SJD), Puerto Vallarta (PVR), Mexico City (MEX), and Cancun (CUN)

Methodology

For this analysis, we compared current and past available fares published by those airlines who share full details with all of their distribution partners.

The first analysis compared 70,410 airfare searches of the first quarter 2015 with first quarter 2016 searches to determine if baseline price changes had occurred. Prices were based on the average of the lowest detected prices for round-trip fares with advance purchase of between 14 and 34 days before departure, for stays from 4 to 14 days. [Note: “Average lowest prices” will be generally cheaper than what consumers may see.]

The second analysis compared a total of 233,704 airfare searches between January 2015 through mid-April 2016, using the same filters applied to the first analysis.

Initial Conclusions

The Southwest Effect appears to extend to international destinations, with caveats. Comparing 2015Q1 to 2016Q1, average lowest prices on round-trip flights to the eight destinations dropped significantly with one noticeable exception; fares to San Jose del Cabo rose slightly when Spirit’s seasonal service ended (which has since resumed).  Quarter-over-quarter, price drops for all destinations averaged out to $155 or nearly 25%. Comparing April 2015 up through mid-April 2016, price drops for all destinations averaged $197 or a whopping 39%.

Southwest Effect through the Years

In recent years, some reporting has suggested Southwest’s influence as a price-dropping phenomenon has declined; back in 2013, for example, USA Todayreported on a study from MIT’s International Center for Air Transportation that noted while Southwest’s presence at an airport in 2007 could lower average one-way fares by about $36, in 2012 the fare-drop was only about $17.

Things changed again in 2014 when the restrictive Wright Amendment that prevented Southwest from flying non-stop to cities outside Texas and border states was lifted. At this point, prices to and from Dallas and other Texas cities dropped dramatically, a trend that continued to some extent into 2016. Example: Southwest launched a sale on April 18, 2016 for the fairly expensive pre-summer season which included Dallas-New York flights for $114 one-way.

Now, we see the Southwest effect going international, but it’s important to note two other factors that must be included in any analysis of this particular situation.

Competition from Low Cost Carriers and the Southwest Effect

Southwest is not the only U.S. airline taking advantage of the Caribbean/Mexico/Central American market: Spirit beat Southwest by six months in offering service to Mexico City, Cancun, San Jose and San Jose del Cabo which we find to be a major component of the “Southwest Effect” that is occurring in these markets. (Spirit has been flying to a number of other Caribbean destinations for years, while JetBlue has become an aggressive player in some Caribbean markets as well).

More from our analysis:

Q1 – 2015:

• Across all market-carriers, low prices averaged $584.

Q2 – 2015:

• Prices across these markets averaged $512 ($72 lower) as Spirit entered Cancun, Mexico City, San Jose del Cabo and San Jose.

Q3 – 2015:

• Prices rose to $545 as Spirit ceased seasonal service to San Jose del Cabo, where average low prices skyrocketed from $610 in August to $1,165 in September, bringing the overall average way up. Likewise, fares for Puerto Vallarta, with limited competition, rose $90 from $650 in Q2 to $740 in Q3.

Q4 – 2015:

• Spirit retreats from Mexico City in Q3, though heavy competition from Aeromexico keeps prices low. Meanwhile, Southwest enters the eight new markets; average low prices drop to $484. United Airline’s low prices drop an average of $97.

Q1 – 2016:

• Prices to the eight markets continue to drop to $430. Compared to Q1 2015 at $584, prices are much lower.

April 2016:

• Prices are down to $302 as the return of Spirit’s seasonal service continued to bring United prices down in San Jose del Cabo, as well as continuing downward price pressure in Mexico City. In fact, now is the cheapest time to go in at least the past 18 months, which is as far back as our analysis went.

Based on our findings, more competition means lower prices for passengers – whether that competition comes from Southwest or other carriers such as Spirit. It appears that Southwest doesn’t have to be in the market in order for the so-called “Southwest Effect” to occur.

Factoring in the Zika Virus

Any discussion of the Southwest Effect in the Caribbean, South and Central America or growing low cost carrier competition in the region must include the impact of Zika virus fears. An informal analysis showed that low prices from Miami to 17 different Zika-impacted markets had dropped an average of nearly $200. At the moment, however, it remains unclear precisely how much the virus has impacted fares relative to new market competition but airlines have been proactively waiving change fees and/or offering refunds for certain travelers who booked flights to affected areas. According to Delta’s April 14, 2016 Q1 earnings call, the airline’s Chief Revenue Officer said, “Zika-related cancellations had a very small impact on Latin America.”

What the Southwest Effect Means for Travelers

Which airline has the lowest price: Just because the Southwest Effect has made an impact in certain countries, it does not mean the airline has the lowest prices. Yes, sometimes Southwest might have the best deals to the Caribbean or Mexico or beyond but sometimes another airline will, or another. That’s because no single airline always has the cheapest price, which is why airfare shoppers must compare fares, and that means comparing fare of U.S. and international carriers.

Factor in the fees: When shopping for airfare, don’t forget to factor in the fees and here’s where Southwest shines: it does not charge for carry-on bags, it does not charge for two checked-bags, and it does not charge a change fee – and this is true for domestic and international flights.

Benefits for travelers: The Southwest Effect means better overall deals for U.S. travelers; for international travelers, it also means better deals plus more non-stop access to the U.S.

Southwest Effect – Is Cuba next? Expect to see more good deals to Havana once we know which airlines will allowed to fly to Cuba. Among those vying for U.S. government approval are Southwest, low cost carriers and larger airlines alike. U.S. to Cuba flights are expected to begin later this year.

The Southwest Effect – Growth of a Scrappy Little Airline

It took a while for the Southwest Effect to reach full strength. When the scrappy little airline began flying in 1971 it was too busy trying entice customers to worry about any ‘effect’ but entice them they did, luring business travelers onboard with free bottles of liquor. As the Southwest site proudly notes, this stunt briefly turned the airline into Texas’ largest distributor of Chivas, Crown Royal and Smirnoff.

Since then, the carrier grew and expanded and merged, most recently with low cost carrier AirTran. Today, Southwest joins American, Delta and United as one of the Big Four, the largest U.S. airlines that control nearly 80% of all passenger traffic in the country.

The Authors

The research project to identify the Southwest Effect was lead by Dr. James C. Stone, Ph.D., Lead Data Scientist at FareCompare, supported by Anne McDermott, Editor and the entire analytics and communications team at FareCompare. The team continues to analyze the data, looking at customer benefits by ticket point of sale, effect on flights that include one-stop and price changes in other routes to Latin America by low-cost carriers, including Spirit Airlines and Mexico’s Interjet.