The Spirit Effect: Ultra-Low Cost Carriers and Fare Dispersion in the U.S. Airline Industry

Abstract

I study the relationship between competition and price dispersion by evaluating the competitive role of “ultra-low-cost carriers” (ULCCs) in the U.S. airline industry. These carriers have significantly lower unit costs than do traditional “low-cost carriers” (LCCs), and the ULCCs focus almost exclusively on leisure travelers, and offer unbundled products with low base fares and fees for many ancillary services. Public statements in carriers’ earnings calls from 2012 to 2019 indicate that “legacy carriers” responded to ULCC expansion by increasing fare segmentation and further reducing fares at the bottom of the fare distribution. Using data from 2012Q1 to 2019Q4, I show that ULCC presence significantly widens fare dispersion, whereas competition from legacy carriers and LCCs does not meaningfully affect fare dispersion in most cases. More generally, my results show that failing to account for firm-level heterogeneity could lead to inappropriate conclusions about the relationship between competition and price dispersion.