Study: The ‘Spirit Effect’ lowers fares, spurs demand

Legacy U.S. airlines drop ticket prices substantially when low-cost carriers begin competing with them on established routes. Meanwhile, on those same routes, overall market demand increases by more than half with the entry of Spirit, Frontier or JetBlue.

That’s what the website Hopper, which tracks GDS searches in order to analyze airfare prices and demand, found in a recent study.

“It’s an ultra-low-cost world after all,” wrote study author Nick Young.

To conduct the study, Young and Hopper's chief data scientist, Patrick Surry, combed 5,000 domestic routes, of which American, Delta, United or the now defunct US Airways had served approximately half for at least two years. Among those routes were 142 in which Spirit, Frontier or JetBlue began offering competing service during the timeframe studied.

In those cases, price-conscious flyers were the winners, according to Hopper, with the lowest fares dropping by an average of 50%. Even accounting for the $55 in ancillary fees that the average Spirit customer pays, for example, the lowest price still typically remained well below what the majors were offering.

Perhaps more significant is the way the legacy carriers responded to the competition. According to Hopper, they dropped fares by an average of 20%.

Two decades ago, similar price drops by the majors were known as the “Southwest Effect,” Hopper said, a reference to what would happen in markets with the onset of competition from the Dallas-based low-cost  carrier, which has evolved into what many now consider the fourth major U.S. airline.

Today, Young wrote in the study, “it’s more likely to be called the ‘Spirit Effect.’”

Hopper presented specific examples of routes in which pricing was transformed by the Spirit Effect.

One case in point: As the sole carrier in the Houston-Kansas City market, United was selling fares at an average price of more than $300 when Spirit began servicing the route in April 2014 with fares of $150. Almost immediately, United brought its fares down to below $150. As of last September, when the timeline presented by Hopper in the study ends, United’s Houston-Kansas City prices averaged close to $180, while Spirit was selling roundtrips for approximately $90.

Another example: Delta and American were selling roundtrip fares between Cincinnati and Dallas for more than $300 and fares at US Airways were more than $400 when Frontier entered the market in September 2014. By May 2015, American and US Airways had discontinued the route, while Delta’s fares were below $200. Frontier, meanwhile, was selling fares for close to $100.

George Hobica, president of the website Airfarewatchdog.com, said Hopper’s findings mesh with what he sees regularly as he searches ticket bargains to post on his site.

Roundtrip fares on routes such as New York-Chicago or Boston-Chicago, which used to be around $200, can often be found for $80, he said.

“What we’ve seen is that in many cases [the legacy carriers] don’t match the exact fare,” Hobica said. “But they figure the other airlines are charging $50 or $60 roundtrip for a carry-on, so they’re going to price $50 or $60 more.”

Discount carriers even impact airfares after they leave a route, according to Hopper. Of the approximately 2,500 routes it analyzed that have been serviced by a legacy carrier for the past two years, 18 of them had seen Spirit, Frontier or JetBlue exit the market. In those cases, the researchers found that airfares increased by 11% but not by the full 20% by which the discount carriers typically reduce the major airlines’ fares.

“The existence of an LCC at any point changes the face of the market,” Young wrote.

Prices, though, aren’t the only impact that Frontier, Spirit and JetBlue have on a route when they enter the market, according to the study. They also increase route demand.

In fact, while Hopper’s analysis of airfare search impressions led the authors to the conclusion that demand for the major carrier’s service decreases by 20% upon entry of a low-cost competitor, they also concluded that overall demand for the route goes up by 60% as result of the more affordable prices.

Steve Belleme, business development manager for Broward County, Fla., which operates Fort Lauderdale-Hollywood Airport,  said that he definitely sees that boost in demand due to the many low-fare options available there. Fort Lauderdale is the home of Spirit, and, buoyed by the much lower passenger enplanement fees that it charges carriers than neighboring Miami Airport, the airport also hosts several other discount airlines. In fact, ultra-low-cost carriers (ULCC) or LCCs comprise 65% of the airport’s flights.

“We draw from both north and south because of the fares,” Belleme said, referencing Miami as well as the Palm Beach County market, home of Palm Beach Airport. “It does benefit the airport to have low-fare carriers, for sure.”

In the face of increasing ULCC competition from Spirit, Frontier and Allegiant Air, American announced in October that it plans to introduce an unbundled economy fare package sometime this year. United followed suit during its earnings call last week, saying that it will introduce an entry-level fare during the second half of the year. Delta made a similar introduction in 2012 with its Basic Economy tickets, which come without advance seat assignments and offer no changes or refunds.

In an interview, Young said Delta offers Basic Economy specifically on routes in which it competes with an ULCC, a move he expects American and United will match.

“I think for this year, at least, we’ll continue to see the Big 3 expand their unbundled fare offerings,” he said. “I think we’ll see unbundling on every route they compete directly with the ULCCs on.”

Young also said that he hopes the legacy carriers will increase the amenities they offer to economy passengers.

There’s evidence that’s happening. United, for example, announced in December that it is bringing back free snack service in its economy section on all flights within the U.S. and to Canada, the Caribbean and Latin America.

Meanwhile, airlines continue to enhance in-flight WiFi.

A second Hopper study, also completed in December, shows that providing such services can woo even economy flyers.

More than one-third of ticket shoppers don’t purchase the cheapest flight, Young and Surry found by combing the website’s own data on fare offers and purchase decisions.

On average, shoppers paid 9.4% above the lowest available fare for Virgin America, the brand that Hopper found commanded the highest premium.