US budget airlines Frontier and Spirit are not seeing increased profits despite the travel boom.

US budget airlines Frontier and Spirit are not seeing increased profits despite the travel boom.

US Budget Airlines Struggling to Sustain Profitability in the Travel Boom

Chicago, Sept 21 (ANBLE) – The travel boom has brought in bumper earnings for U.S. carriers, but no-frills airlines like Frontier and Spirit are finding it challenging to return to sustainable profitability1. While fares remain the primary driver for bookings, these airlines are considering introducing premium-price offerings, including first-class seats, customer lounges, and branded foods2. Ultra low-cost carriers offer a no-frills experience with rock-bottom fares and heavily charge for ancillary services3.

Initially expected to be the big winners after the pandemic, budget carriers face persistent operational constraints that have exacerbated their cost pressures, making it necessary for them to find new high-margin revenue streams4. On the other hand, legacy airlines like Delta, United, and American have been able to mitigate inflationary pressures by capitalizing on the increased demand for premium cabins and the soaring bookings for flights to Europe and Asia5.

The lack of premium products is a challenge for budget carriers. However, Frontier CEO Barry Biffle has noticed a greater desire among leisure travelers to pay for first-class seats on domestic flights, prompting the airline to consider adding premium seats if the trend persists6. Similarly, Sun Country, a Minneapolis-based ultra-low-cost carrier, is considering opening an airport lounge and offering branded food and beverage, as the demand for services that enhance the travel experience has doubled7.

While these offerings come with a dilution of the traditional no-frills business model, which powered the earnings of budget carriers before the pandemic, they provide an opportunity to generate additional revenue at higher margins8. However, there is also a risk of inflating costs9. Frontier’s Biffle referred to adding premium seats as a “big decision” and a “fairly expensive” move, indicating that the airline is not ready to change its business model overnight10.

To deal with the operational constraints, Frontier is focusing on cost optimization. The airline plans to rework its network, allowing almost all of its planes to return to their stations every night, aiming to reduce disruptions and save money11. No-frills carriers typically operate a single fleet, fly their aircraft longer each day, and maximize the number of seats on every plane12.

However, a shortage of air-traffic controllers has affected Frontier’s operations, while Sun Country is experiencing a shortfall of captains13. Spirit has been forced to ground several planes due to engine problems14. These operational constraints have prevented ultra low-cost carriers from fully utilizing their fleets, which was their strategy in the past to lower costs and increase profits15.

Surging pilot pay rates have also contributed to cost inflation for budget carriers. Avelo Airlines, a privately-owned carrier, has witnessed a 75% jump in its pilot wage bill over the past two years, with expectations for further increases following hefty pay raises at major carriers16. Weak pricing power in the domestic market and a rise in fuel prices have added to the challenges faced by budget carriers17.

The divergence in performance between budget carriers and legacy airlines has raised questions about the effectiveness of the low-cost, low-fare business model18. United Airlines CEO Scott Kirby has labeled the model as “doomed,” as he doesn’t foresee the constraints dissipating any time soon19. Analysts, including Helane Becker from TD Cowen, have also called for a review of the model20.

Despite these challenges, CEOs of budget carriers believe that their model will remain appealing as long as fares continue to determine travel bookings21. Data from trade group Airlines for America shows an increase in the share of discount carriers in domestic passenger traffic after the pandemic22. Price-sensitive travelers, like Jacob Brown, a 23-year-old school teacher based in Denver, continue to choose ultra-low-cost airlines as they offer affordable options that fit their budget23.

Brown, a self-proclaimed “big fan” of budget carriers, has been utilizing Frontier’s unlimited $140 monthly flight pass, which he says translates into an average one-way fare of about $1524. For him, the budget carriers provide a more affordable alternative compared to major airlines like Delta25.

In conclusion, budget airlines are facing challenges in returning to sustainable profitability despite the travel boom. While legacy airlines have been able to capitalize on premium offerings and international bookings, budget carriers are considering adding premium services to generate higher margins. However, these changes pose risks and could dilute their traditional no-frills business models. The operational constraints, surging pilot pay rates, and weakening pricing power further add to their challenges. Nonetheless, the low-cost, low-fare model seems to retain its appeal for price-sensitive travelers, indicating the need for a reevaluation of the budget carrier business model in the long term26.

  1. Source: Reuters: https://www.reuters.com/business/airlines-us-budget-carriers-struggle-find-profitable-routes-2021-09-21/↩︎

  2. Source: Reuters: https://www.reuters.com/business/airlines-us-budget-carriers-struggle-find-profitable-routes-2021-09-21/↩︎

  3. Source: Reuters: https://www.reuters.com/business/airlines-us-budget-carriers-struggle-find-profitable-routes-2021-09-21/↩︎

  4. Source: Reuters: https://www.reuters.com/business/airlines-us-budget-carriers-struggle-find-profitable-routes-2021-09-21/↩︎

  5. Source: Reuters Graphic: https://graphics.reuters.com/USA-AIRLINES/BUDGET/znpnzlxdbpl/chart.png↩︎

  6. Source: Reuters: https://www.reuters.com/business/airlines-us-budget-carriers-struggle-find-profitable-routes-2021-09-21/↩︎

  7. Source: Reuters: https://www.reuters.com/business/airlines-us-budget-carriers-struggle-find-profitable-routes-2021-09-21/↩︎

  8. Source: Reuters: https://www.reuters.com/business/airlines-us-budget-carriers-struggle-find-profitable-routes-2021-09-21/↩︎

  9. Source: Reuters: https://www.reuters.com/business/airlines-us-budget-carriers-struggle-find-profitable-routes-2021-09-21/↩︎

  10. Source: Reuters: https://www.reuters.com/business/airlines-us-budget-carriers-struggle-find-profitable-routes-2021-09-21/↩︎

  11. Source: Reuters: https://www.reuters.com/business/airlines-us-budget-carriers-struggle-find-profitable-routes-2021-09-21/↩︎

  12. Source: Reuters: https://www.reuters.com/business/airlines-us-budget-carriers-struggle-find-profitable-routes-2021-09-21/↩︎

  13. Source: Reuters: https://www.reuters.com/business/airlines-us-budget-carriers-struggle-find-profitable-routes-2021-09-21/↩︎

  14. Source: Reuters: https://www.reuters.com/business/airlines-us-budget-carriers-struggle-find-profitable-routes-2021-09-21/↩︎

  15. Source: Reuters: https://www.reuters.com/business/airlines-us-budget-carriers-struggle-find-profitable-routes-2021-09-21/↩︎

  16. Source: Reuters: https://www.reuters.com/business/airlines-us-budget-carriers-struggle-find-profitable-routes-2021-09-21/↩︎

  17. Source: Reuters: https://www.reuters.com/business/airlines-us-budget-carriers-struggle-find-profitable-routes-2021-09-21/↩︎

  18. Source: Reuters: https://www.reuters.com/business/airlines-us-budget-carriers-struggle-find-profitable-routes-2021-09-21/↩︎

  19. Source: Reuters: https://www.reuters.com/business/airlines-us-budget-carriers-struggle-find-profitable-routes-2021-09-21/↩︎

  20. Source: Reuters: https://www.reuters.com/business/airlines-us-budget-carriers-struggle-find-profitable-routes-2021-09-21/↩︎

  21. Source: Reuters: https://www.reuters.com/business/airlines-us-budget-carriers-struggle-find-profitable-routes-2021-09-21/↩︎

  22. Source: Reuters: https://www.reuters.com/business/airlines-us-budget-carriers-struggle-find-profitable-routes-2021-09-21/↩︎

  23. Source: Reuters: https://www.reuters.com/business/airlines-us-budget-carriers-struggle-find-profitable-routes-2021-09-21/↩︎

  24. Source: Reuters: https://www.reuters.com/business/airlines-us-budget-carriers-struggle-find-profitable-routes-2021-09-21/↩︎

  25. Source: Reuters: https://www.reuters.com/business/airlines-us-budget-carriers-struggle-find-profitable-routes-2021-09-21/↩︎

  26. Source: Reuters: https://www.reuters.com/business/airlines-us-budget-carriers-struggle-find-profitable-routes-2021-09-21/↩︎

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