The airline marketplace has been subject to intense cost competition because it was deregulated, and the result has been several new air carries which specialize in regional program and no-frills operations. These carriers usually pay for older aircraft (which are less costly than ordering new aircraft) and often operate outside the industry-wide computerized reservations system. In exchange for these inconveniences, passengers receive low fares relative towards the market like a whole. This research examines a couple of low fare air carriers, ValuJet and Southwest Airlines, and considers them from the standpoint of capacity investments.
Until 1978, air transport rates have been approved by the government, which meant that price was not a primary competitive factor. Instead, airlines would compete on support and image. The airline market was characterized by giants (American, United, TWA) which offered nationwide and some international service, and by regional carriers, just like Southwest, which accessible short trips in between airports not served by the nationals.
The deregulation of 1978 introduced a case in which the national and regional carriers have been suddenly in a position to compete in an environment that resembled a free market. Rate schedules were lifted, cost fixing was eliminated and route management was removed.
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