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CompanyCase10(pricing)USAIRWAYS:THEAIRLINEPRICEWARSSupposeyouwantedtoflyfromSeattletoSanJose,California.ThefareinJune1995wouldhavebeen$22;in1997,itwouldhavebeen$59.thefarefromDetroittoMinneapolis–whichisroughlythesamedistance–wouldhavebeen4216.obviously,airlinesdon’tsettheirfaresbasedondistance.So,whydothesefaresvarysogreatly?OnereasonisthecontrastbetweenoperationsofdiscountairlinessuchasSouthwest(theSeattle-to-SanJoseroute)andamajorairlinesuchasNorthwestAirlines(DetroittoMinneapolis).SouthwestAirlines,knownastheLoveLinebecauseitsoriginalhomewasLoveFieldinDallas,Texas,isano-frillsairline.Itoffersnofoodservices,complimentarydrinks,extensivebaggagehandling,orotheramenities.Itfliesalimitednumberofdirect,usuallyshort,routes,carefullyselectingitsroutesbasedonthepopularityoftheflights.Iflotsofpassengersnormallytakeacertainroute,thenSouthwestmightchoosetooperateonlyonthatroute.Also,Southwestfrequentlyfliesintoalternativeairportsratherthanthemostpopularairport.TheSeattle-to-sanJoserouteisagoodexampleofaSouthwestroute.TherearemanypassengersflyingfromSeattletotheSanFranciscoBayareaofCalifornia.So,Southwestcutsfaresonthatroutetolurepassengers,andcutscostsbyflyingintoanearbyalternativeairport–inthiscase,SanJose.WhenSouthwestbeganoperationsatSeattle,competingairlinesroutinelychargedfarestoSanFranciscorangingfrom$89to$119.southwestenteredwithpricesbetween$39and$59.oneofthelocalairlinesreduceditspricesto$25andSouthwestrespondedwith$22.howdidthisprice-wartacticwork?Notsowell.Afterinstitutingthe$22fare,a137-seatSouthwestBoeingpulledawayfromthegateinSeattlewithonly19passengersonboard.Therevenuefromtheflightwas$418,comparedwithacostof$6,567.04–notexactlyarecipeforsuccess.Thingsweresobadthattheflightattendantjokinglyaskedpassengerstoshifttoonesideoftheplanesothatwhentheytaxiedpastthecompetition,itwouldlookliketheplanewasfull.Evenifheairplanehadbeenfull,revenueswouldnothavecoveredhalfthecostoftheflight.Iffarewarsresultinsuchlosses,whydoairlinesengageinthem?Theprimarycauseisrelativelyflatairtrafficgrowth.AlthoughthenumberofflyersgrewrapidlyafterWorldWarII,therateofgrowthslowedgreatlyinthe1980sand1990s.In1991,thenumberofairlineseatssoldactuallydeclined.Facinglowertraffic,airlinescutroutesandparkedsurplusaircraftintheSouthwesterndeserts.Cut-ratecompaniesthenleasedthesesurplusplanesatlowratesandwentintobusiness.So,reductionsbythemajorairlinesactuallyprovidedtheinexpensiveplanesthatfueledcompetition.Ascompetitionincreasedinaflatmarket,fareshadtodecline,withtheresultthatmanymajoranddiscountlineswereforcedintobankruptcy,includingEastern,TWA,Braniff,andMarkAir.ThisexplainsthesituationinDetroit,whereyouwouldprobablyhavebeenflyingNorthwestAirlines,notadiscountairline.BecauseNorthwestcarries74percentofDetroit’soutboundpassengers,ithasalockontheDetroittoMinneapolisroute.Withlittlecompetition,itcanchargehigherprices.Infact,Northwestisthenation’shighest-pricedairline.“Anypassengerwhopaysmorethan30centsamileisprobablybeingovercharged,”assertsTimHannegan,assistantdirectorforaviationcompetitionfortheGeneralAccountingOffice,watchdogfortheU.S.Congressonfederalprograms.Usingdatafrom1996,ConsumerReportsevaluatedmilegeandfares.Northwest’saveragecostforflightsupto300mileswas68centspermile.ExamplesofotherNorthwestfaresandmileageare:DetroittoTraverseCity,$154or74centsamile;DetroittoKalamazoo,$228or90centsamile;DetroittoGrandRapids,$135or$1.12permile.AccordingtotheConsumerReportsstudy,USAirwayswasthesecondmostexpensiveairlineat58centsamile,andSouthwestwastheleastexpensiveat17centsamile.Northwestcalledthestudy’sdataflawed,sayingthatthestudyignoredfixedcostsforflightsonrouteswithfewpassengers,whichraisesitsoverallcosts.TogetthekindoflockonanairportandroutesthatNorthwesthasinDetroitrequiresairlinestoserviceallroutes,notjustthemostpopularones.NotonlyisNorthwestexpensive,travelersalsogiveitlowratingsonfactorssuchason-timearrivals,easeofairportcheck-in,andconvenienceofscheduling.Asurveyofbusinesstravelersonninemajorcarriers,conductedbyJ.D.PowersandAssociates,foundNorthwestbelowaverageincustomersatisfactionforflightsunder500milesandonlyaverageforlongerflights.Thebest-ratedairlineswereContinental,TWA,United,American,andSouthwest.Allthissuggeststhatcompetitionamongairlinesresultsinlowerandbetterservice.Airlinesdon’tcompeteonlyonprice.Theyalsoofferspecialpromotions.Forexample,SouthwesthaslaunchedamileagewarinwhichitgivesfliersintheRapidRewardsProgramdoublemileagecreditsonflightsbetween20selectedWesterncities.ThatmeansthatafliermightqualifyforafreeflightbyflyingSouthwestonlyfourtimesinoneyear.Otherairlineshaveusedtie-inoffers.Forexample,inarecentpromotion,anyonepurchasinganAuroraLimitedProductionNumberedGoldRollerBallpeninaspecifiedtimeperiodreceived500bonusDeltaSkyMiles.PurchasersofanAuroraSoleThree-Piecepensetreceived1,000bonusmiles.Sometimesmultipleairlineswillparticipateinapromotion.Customerswhopurchaseda35mmSamsungcamerareceiveda32-pageTravelSaverbookletofferingdiscountsontravel,includingacertificatefor$500inairfarediscountsgoodforseveralairlines.Withallthisc