FILE - A Spirit Airlines 319 Airbus taxis at Manchester Boston Regional Airport, Friday, June 2, 2023, in Manchester, N.H. (AP Photo/Charles Krupa, File)
The US low-cost airlines are in disarray.
Labour and maintenance inflation hasn’t abated, limiting the carriers’ ability to compete on price and causing losses.
US leisure travellers aren’t flying as much in the face of economic uncertainty. Also, many flyers soured on the budget-carrier model experience because of extra charges and flight delays.
Worst of all, the legacy carriers cracked the code on how to beat back low-cost competition by reducing fares on economy seats while making the bulk of their money on premium services at the front of the plane and lucrative credit-card deals.
Frontier Group Holding Inc has posted net losses in six of the last eight quarters.
Spirit Aviation Holding Inc, the one time fast-growing budget airline, has been the weakest of the pack and probably won’t survive after it filed last week for a second bankruptcy in less than a year.
Besides being plagued with the market forces aligned against the ultra-low-cost carriers, Spirit has suffered from a series of depressingly dramatic incidents that over time turned its brand into a version of comedy’s “Florida man does this ...”
The airline has tried to make a last-ditch pivot to offering premium seats to capture more business and affluent leisure customers.
During its last earnings conference call in August 2024, Ted Christie, the chief executive officer at the time, said Spirit was redefining itself as “a high-value, low-cost carrier offering a broader array of products including a more premium leisure travel experience at an affordable price.”
This was going to be a high mountain to climb, especially with Spirit’s brand image. The push into premium is an admission that low cost isn’t working as it once did in 2016, when Spirit was talking about annual growth of 15% to 20% for the foreseeable future.
Does Spirit’s floundering – amid the pandemic surge of costs and recent US domestic market weakness – spell the doom of low-cost airlines?
No. There’s room for low-cost carriers, but they need to stick to their knitting of providing point-to-point cheap flights.
They also need to improve their on-time performance and customer service, especially laggard Frontier, to beat the large airlines.
Budget flyers don’t mind no-frills, but they don’t want surprises. Many customers abandoned the airlines after they ended up paying the same or more for their flights than the full-service carriers because of all the extra charges.
Frontier, which also introduced premium seating, has the most to gain from low-cost airline consolidation, and its shares have jumped more than 13% since last Friday.
The Denver-based airline has the highest seat overlap with Spirit at 39%, according to Tom Fitzgerald, an analyst with TD Cowan.
JetBlue and Sun Country Airlines Holding Inc have the next largest overlap, both at 26%.
Still, there’s a legitimate question about whether the low-cost model is viable in the United States. The large airlines don’t have to match the lowest fare dollar-for-dollar because of the perks they offer.
Beyond a free carry-on bag, snack and even Internet service, the large carriers offer better on-time performance and frequency of flights. A large airline will be able to accommodate passengers on subsequent flights if there are delays or cancellations, say, because of the weather.
The legacy airlines, including Delta Air Lines Inc and United Airlines Holding Inc, have become more adept at charging their customers for premium services instead of giving them away as membership privileges.
This helps keep prices low on economy seats. These airlines also rake in much more money than budget carriers from credit-card deals given their well-heeled customer base.
Meanwhile, the larger airlines have the advantage of operating out of multiple hubs where passengers arrive from smaller cities – often from partner feeder airlines that operate smaller regional aircraft – to catch a connecting flight.
It takes a lot of coordination and airport gates, but this hub-and-spoke model fills up aircraft. And for those premium passengers waiting for a connecting flight, the big airlines have invested heavily in fancy lounges that often have lines to enter.
Southwest Airlines Co’s recent disruptive overhaul is a reaction to this market-power change. Although Southwest is no longer considered a budget carrier, its model of point-to-point flights and the use of secondary airports, such as Midway in Chicago and Baltimore for the Washington area, still provide a road map of how to compete with the hub-and-spoke airlines.
“As an ultra-low-cost airline, you have to keep your eyes on what made you successful,” said Ahmed Abdelghany, an associate dean and professor at Embry-Riddle Aeronautical University. “The airlines, I feel, got distracted a little bit from their mission.”
Point-to-point flights require fewer airport gates and allow for quicker aircraft turnaround times because there’s no need to coordinate for connecting flights, Abdelghany said.
They also save by tapping secondary airports and flying one type of aircraft to reduce pilot-training and maintenance costs.
The drawback to flying one type of plane – usually the Boeing Co 737 or Airbus A320 family of aircraft – limits the flexibility of flying new city pairs with different plane sizes.
Routes have to hit that sweet spot of garnering 175 passengers or so without bumping too much against the competitive advantage that the hub airlines have.
Sun Country and Allegiant Travel Co are small budget carriers that have found their niche and are profitable – even in this tough domestic market. They stuck to the basics.
It may be too late for Spirit, but Frontier can return to its roots: Cheap seats on point-to-point flights with no surprise fees, low operating costs, and planes that arrive on time. Easy to say, hard to do. — Bloomberg
Thomas Black is a Bloomberg Opinion columnist. The views expressed here are the writer’s own.
