The airline industry has been subject of intense price competition since it was deregulated, and the
result has been a number of new carriers which specialize in regional service and no-frills operations.
These carriers typically purchase older aircraft and often operate outside the industry-wide computerized
reservations system. In exchange for these inconveniences, passengers receive low fares relative to the
industry as a whole. This research examines two low fare air carriers, ValuJet and Southwest Airlines.
By investigating these air carriers, we can better understand the economic impacts of price versus
service in the airline industry as a whole, as well as, the impacts on passenger and investor confidence.
Until 1978, air transport rates were approved by the government, which meant that price was not a primary
competitive factor. Instead, airlines would compete on service and image. The airline industry was
dominated by giants (American, United, TWA) which offered nationwide and some international service, and
by regional carriers, such as Southwest, which offered short trips between airports not served by the
nationals.
Deregulation of the airline industry brought about in 1978 introduced a situation in which the
national and regional carriers were suddenly able to compete in an environment that resembled a free
market. Rate schedules were lifted, price fixing was eliminated and route management was removed. The
main factors that affected whether an airline could serve a particular city was whether or not that city
had enough gates for the new carrier, and whether the carrier was able to afford to purchase them.
Companies such as Southwest recognized potential for low fares, and began building a niche for themselves
by offering low fares with equivalent low levels of service. Southwest’s success gave rise to a new
generation of low fare airlines, with ValuJet entering the market in the early 1990’s. Unfortunately,
ValuJet suffered a string of accidents which brought the future of this air carrier into question.
ValuJet is a low-priced airline that offers inexpensive tickets for regional travel. Based in Atlanta,
the airline serves the Southeastern United States and competes with Continental Airlines as well as with
other small regional carriers. It serves 31 cities primarily in the southeastern United States. The
airline began its service with flights to Tampa and Orlando from Atlanta in 1993. The no-frills strategy
paid off for the fledgling airline, which posted half again as many revenue passenger miles in April 1996
as it did in April 1995. However, the company announced that it was slowing the expansion of its
services, voluntarily, at the same time that it posted this impressive revenue mark (Cole & Pasztor,
1996, p. A6).
Perhaps due to overexpansion or to poor luck, Valujet experienced a series of mishaps in its short
history. In January 1994, a DC-9 skidded off a runway in Washington which resulted in the entire airport
being shut down. In June 1995, a ValuJet flight went through an emergency evacuation after an engine
failed and shrapnel flew into the cabin. Additional incidents, including one where the landing gear
collapsed after a particularly forceful landing, led the FAA to begin an intense review of ValuJet in
February 1996. This review found that ValuJet was in compliance with FAA regulations, but cited concern
about pilot training and aircraft maintenance (Larson, 1996, p.30).
In May 1996, Valujet flight 592 crashed in the Everglades, killing all aboard and resulting in a shutdown
of the carrier for several months. When ValuJet began flying again, it did so with a reduced schedule,
and considerable speculation about whether the company will be able to continue operations long-term.
The company is also involved in litigation resulting from the crash, and the long-term prospects for the
company are questionable.
The following chart identifies key operating statistics for Southwest (seat miles are in millions, cost
factors are in cents)
(Shammas, 1996, p. 5541P):
1995 1994 1993
Revenue Passenger Miles (RPM) 2,624 941 44
Available Seat Miles (ASM) 3,813 1,471 63
Load Factor 68.8 % 64.0 % 69.7 %
Revenue per RPM 13.4 13.8 13.1
Cost per ASM 6.8 6.8 9.8

Because Southwest’s flights are generally an hour or less in length, the airline saves money by not
having to serve meals. It has a liberal work rule arrangement with its unions, so productivity is high,
and overall costs are low. For example, Southwest gets 672 hours per year on average from pilots versus
371 for American Airlines pilots, and 60 percent more passenger miles per flight attendant (Levinson,
1993, p. 34). These figures enable the company to realize profits during years in which the industry as
a whole was suffering. The following chart identifies key operating statistics for Southwest (seat miles
are in billions, cost factors are in cents) (Klein, 1996,