Successful entry strategies on the deregulated US domestic market - the case of Southwest Airlines

Abstract

In slightly more than 30 years Dallas-based Southwest Airlines has grown into the fourth largest airline in the USA and the entire world. With its innovative low-cost low-fare no-frills business formula it has indeed revolutionized air travel. What is more the airline has become the most consistently profitable airline ever as well as the safest operator on the domestic US market. In this paper we will first discuss in much detail Southwest's business model as opposed to the traditional network carriers' approach. Then we will demonstrate that the unprecendented rise of Southwest Airlines - which has spawned an ever increasing number of epigones - reveals that the true effectiveness of strategic barriers to entry into the airline industry such as loyalty programs, computer reservations systems etc. has long been overestimated by economists, airline professionals, and policymakers alike. On the contrary, we show that infrastructure bottlenecks - which, in turn, are overwhelmingly caused or at least amplified by ill- designed allocation rules and access regulations - must be considered the only effective protection for inefficient incumbents.