When JetBlue brings its competitively priced transatlantic flights to London, it’s pretty much guaranteed to shake up the market, particularly in the business travel sector. Coming in with low fares to a traditionally overpriced market often serves to drive down prices across the board, something that has become known as the ‘Southwest Effect’. Perhaps these days we should be calling it the ‘JetBlue Effect’ instead.
Lower fares all round
Everyone’s excited about the launch of JetBlue’s flights to London. But while passengers are getting hot under the collar for a launch date and details of the cabin, incumbent airlines might not be looking forward to the start of these flights with quite so much enthusiasm.
Speaking at a recent interview for Aviation Week, CEO of JetBlue Robin Hayes commented,
“The big opportunity for us in Europe is that we can come in, and we can significantly reduce the price. And so we actually think that will be a stimulant to getting people to fly again, because they’re going to look at this amazing product, they’re going to look at the price point and probably do double take, thinking ‘am really I’m going to get business class for that?’”
Cheap business class is great for passengers, but a massive threat to legacy airlines who rely on their premium fliers for revenue. And he’s right; experience shows us that the arrival of a price disruptor like JetBlue will invariably force other airlines to lower their price. Hayes commented,
“When we do this, we bring down fares in the entire market. Whether you fly us or not, you’re going to benefit from the lower fare.”
Some call it the ‘JetBlue Effect’, and the results are fair fares for everyone. Here’s what you need to know.
Starting with Southwest
The term ‘Southwest Effect’ was first coined in 1993 by the US Department of Transportation to describe the knock-on effect of the low-cost carrier’s entry at a new airport. The effect manifested itself in three key ways.
- Supply increased, and prices dropped: Southwest came into new airports with lower prices than incumbent airlines, who had often enjoyed a near-monopoly previously. Passengers now had a choice, and a variation in price to consider.
- Competitors lowered their fares: In order to compete with Southwest, incumbent airlines lowered their fares.
- Demand increased: By being more accessible in terms of affordability, and by forcing competitors to lower their prices, Southwest effectively stimulated demand to the benefit of all airlines operating from that airport.
So notable was this effect on the economics of the industry, a number of scientific analyses and research papers have been published on the subject. While Southwest pioneered this disruption to ticket prices, it’s not been the only air carrier notable for its influence on markets it has entered.
The JetBlue Effect
Despite Southwest being the first to coin the term, other airlines have actually been noted to have a greater “Southwest Effect” than the airline itself. Southwest suffered as a result of the global economic crisis, and between 2007 and 2012, it dropped from being able to lower fares by an average of $36 one way to just $17. Some might argue that it is no longer a truly low-cost carrier at all.
But where it led, others followed. Spirit, Allegiant and JetBlue were on the rise, and were capable of lowering average fares from $22 to $32 in the new markets they entered. Of all three, JetBlue was the most influential airline in terms of price disruption, so much so that in 2013, USA Today said, “You might want to start calling it the “JetBlue effect”.”
Of course, price disruption by low-cost carriers is not limited to the USA only. In Europe, Ryanair’s entry to a new market often has a marked increase on demand in the region, and other airlines are forced to lower their fares as a result. It’s not something that O’Leary and his team have always been welcomed for, but it has certainly opened up Europe to a much greater pool of travelers.
But Ryanair doesn’t fly transatlantic, and probably never will. So what can we expect the impact of JetBlue’s arrival in this market to do?
The effect on transatlantic
We already have a sort of yardstick for disruption in transatlantic prices. Norwegian, WOW and others already began offering dirt cheap economy tickets. Some would argue that it was this that stimulated the introduction of basic economy fares from many of the legacy airlines. However, as yet, no airline has attempted to disrupt the business class market.
It is here that we will see the most marked effect of JetBlue’s arrival. The airline has been keeping tight-lipped about its fare strategy, but has been clear it will offer the comforts of lie flat at a price the regular passenger can afford. If we assume they come in with sub-$1,000 fares in Mint, the demand for these tickets is going to be insane.
For many transatlantic operators, business is their bread and butter. As long as they have enough bums on seats at the pointy end of the plane, they can practically fly with the economy section empty and still turn a profit. This blatant overpricing has been the bane of the non-corporate flier for decades, with most of us forced to either save points or pray for an upgrade if we plan to sit anywhere other than coach.
We wouldn’t like to say exactly how this is going to pan out. What we do know is that, if JetBlue brings us the fair fares it promises, there’s going to be a lot of very comfortable, happy passengers hopping across the Atlantic next year. And if the legacies don’t want to lose out completely, they’re going to have to think again about their astronomical prices.
