Low Fares Done Wright: Airline Responses to Low-Cost Entry Following Regulatory Changes

Abstract

How do the established airlines in the United States respond to competition from low-cost carriers? I investigate the entry of low-cost titan Southwest Airlines into over a dozen nonstop routes from Dallas, Texas in 2014 following the lifting of the Wright Amendment, a legal restriction on flights from Dallas that had previously blocked Southwest from entering many markets dominated by American Airlines and other large legacy carriers. Using 2012-2017 panel data on route-level airfares from the United States Department of Transportation, I run a difference-in-differences analysis of routes affected by the Wright Amendment, with the law’s repeal as an instrument. I estimate that Southwest caused American and the other legacies to lower their fares by 22%, or $62, on average, on routes where Southwest added nonstop flights. This estimated effect was strongest on the most competitive routes and grew for the first two years but then weakened. The entry of Southwest still lowers airfares today, despite the airline’s growing nationwide dominance, and even in markets where the legacies have already responded to competition from ultra-low-cost carriers such as Spirit Airlines.