JetBlue Airways introduced long-haul services on a large scale and therefore brought 'low-cost' competition to a type of routes formerly dominated by 'high cost' network carriers.
Against this background, the paper estimates the effects of entry by the low-cost carrier JetBlue Airways in long-haul domestic U.S. airline markets. For the period from 2000 to 2009, we find that non-stop fares were on average about 21 percent lower post-entry; however, the magnitude of the price effect depends on the pre-entry market structure. While entry into monopoly markets triggered an average price decrease of about 25 percent, the respective average price drop for entries into oligopoly markets lied at about 15 percent. Based on additional estimates of the price and income elasticities for long-haul domestic U.S. flights, we are able to calculate that JetBlue's long-haul entries alone led to an increase in consumer welfare of about USD 661 million, only referring to the effects in the first year after the respective entry events. Our empirical analysis reveals further that although the largest percentage price decreases are observed for entries in monopoly markets, the largest absolute increases in consumer welfare are realized by entries in oligopoly markets.
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Turning from the quantitative results of the paper to a discussion of their implications for the evolution of the U.S. airline industry, it can be expected that the low-cost-high-quality strategy of JetBlue Airways will put additional pressure on the revenue and net income situation of the network carriers particularly in long-haul markets. In the medium and long- run, these developments might trigger a further shakeout among the network carriers. Such a scenario becomes even more likely if the recent market entry of Virgin America is taken into account. This new entrant not only follows a similar low-cost-high-quality strategy but also focuses on long-haul coast-to-coast markets. Although Virgin will put additional pressure on network carriers it will also have to directly compete against JetBlue in many long-haul markets and will therefore put the sustainability of the entire low-cost-high-quality business strategy to the test.
From a policy perspective, the appearance and growth of JetBlue Airways is a clear sign that competition in the U.S. airline industry is alive and well.