In industry after industry, traditional market leaders are under attack from low-cost competitors. Pet Stuff, Countrywide Mortgage, and Geico serve as examples in the US retail, banking, and insurance industries of low-cost competitors that pose a serious threat, eating into the margins and market shares of their more established rivals. In the US airline industry, traditional carriers have faced low-cost competitors not once but twice, successfully beating them off in the early 1980s only to see a resurgence a decade later.

The first attack came after Congress deregulated the airline market in 1978. This encouraged a number of new carriers to enter the business, most of them offering a cut-price, "no frills" service. Though some were successful at first, it became clear within a matter of years that they were fighting an uphill battle. Low fares alone were not enough.

One of the most publicized failures was that of People Express, which expanded rapidly by using its low-fare, no frills concept on routes abandoned or little served by the major carriers. It thrived until the major airlines retaliated by using their yield management systems to sell spare capacity at equally...