US budget airlines are struggling. Will pursuing premium passengers solve their problems?

DALLAS– DALLAS (AP) — Delta And United have become the most profitable U.S. airlines by targeting premium customers while capturing a significant share of budget travelers.

That puts pressure on smaller, low-cost airlines Spirit Airlineswhich one filed for bankruptcy protection on Monday. Some travel industry experts think Spirit’s problems indicate that travelers on a budget will have fewer choices and higher prices.

Other discount airlines are on a much better financial footing than Spirit, but they too lag far behind the full-service airlines when it comes to business recovery the COVID-19 pandemic. Most industry experts think so Border airlines and other so-called ultra-low-cost airlines will fill the vacuum when the Spirit shrinksand that there is still enough competition to prevent prices from rising.

Spirit Airlines has lost more than $2.2 billion since the beginning of 2020. Frontier hasn’t reported a full-year profit since 2019, although that slump could end this year. And The parent company of Allegiant Air is still profitable, but less than before the pandemic.

Those kinds of figures – and of course some promotion for his own airline – were leading Scott Kirby, CEO of United Airlines to recently declare that low-cost airlines were using “a fundamentally flawed business model” and that customers hate flying on them.

Kirby’s touchdown dance may prove premature, but many analysts are wary about the near-term prospects for budget airlines, which charge cheaper fares but higher fees than the major carriers.

Low-cost airlines have grown over the past two decades by undercutting major airlines’ ticket prices, largely due to lower costs, including hiring younger workers who were paid less than their counterparts at Delta Air Lines, United and US airlines. However, wages have risen dramatically across the sector over the past two years, reducing that cost advantage.

At the same time, the major airlines introduced and refined their no-frills “basic economy” tickets to compete directly with Spirit, Frontier and other budget airlines for the most price-sensitive travelers.

The budget airlines have also become less efficient in using aircraft and people. As their growth slowed, they got more of both than they needed. In 2019, Spirit aircraft were in the air an average of 12.3 hours per day. This summer, the planes were still on the ground for an average of two hours a day, making no money.

Spirit’s cost per mile increased 32% from 2019 to 2023.

Another problem is that airlines have added too many flights. Budget airlines and Southwest Airlines were among the worst offenders, but full-service airlines piled on. To offset the decline in business travel, major airlines have added more flights on domestic leisure routes. The result: too many seats on flights to popular tourist destinations such as Florida and Las Vegas, driving down prices, especially for economy class tickets.

Tom Fitzgerald, an aviation analyst at TD Cowen, said the larger airlines, after doing a good job adapting their core economy offerings, are now enjoying a boom in premium travel.

“Post-COVID, people are apparently willing to pay a lot more for a better flight and accommodation experience,” he said, “and existing airlines are much better positioned to meet that demand. They have premium economy, they have first class.”

Low-cost airlines respond by following the old adage: if you can’t beat them, join them. That means going premium, following the rapidly growing prosperity of upper-income households.

Border airlines organized its rates in four bundles in May, with buyers of more expensive tickets getting extras such as priority boarding, more legroom and checked baggage. The airline has reduced the cost of changing or canceling tickets, except for the cheapest bundle.

Spirit followed in August with similar changes, blocking middle seats and charging passengers more for the comfort of aisle and window seats.

JetBlue Airwayswhich started flying more than two decades ago as a low-cost airline but with amenities, is digging itself out after years of steady losses. Under new CEO Joanna Geraghty, the first woman to lead a major U.S. airline, JetBlue is cutting unprofitable routes, strengthening core markets such as the Northeast and Florida, and delaying deliveries of $3 billion worth of new planes.

Perhaps the biggest change is coming at Southwest Airlines. Starting next year, Southwest will throw away half a century tradition of “open sitting” — passengers who choose their own seat after boarding the aircraft. Executives say extensive research shows that 80% of customers prefer an assigned seat, and that’s especially true for coveted business travelers.

As we emerge from the pandemic, “there is a clear preference for more premium,” said Southwest CEO Robert Jordan. “Premium is kind of self-determined – whether that’s extra legroom, first class for Europe, whatever it is – but is an increase in the desire for premium, something better.”

Jordan said it’s not clear why demand for premium products and experiences has grown so quickly, but wealth figures offer one explanation.

The top fifth of US households, as measured by income, have added $35 trillion in wealth since 2019 and own nearly nine times as much wealth as the middle fifth, according to the Federal Reserve. That gives the richest households enough money to spend on premium travel.

It could be that busier planes encourage passengers to spend more to escape a middle seat at the back of the plane.

Whatever the reasons, Delta executives say they expect premium ticket sales to surpass the airline’s revenue from main cabin tickets by 2027.

In other parts of the world, budget airlines are doing fine. They, like their more elite competitors, have recovered from the pandemic.

Some industry experts say low-cost airlines in Asia and Europe have always attracted a more diverse mix of passengers, while in the United States, wealthy, middle-class travelers look down on low-cost airlines.

Jamie Baker, an analyst at JPMorgan, says he has many college friends who work in London fly with the Irish airline Ryanair all the time, but he knows almost no one who has ever been on a Spirit or Frontier plane.

“There is no stigma for anyone flying with Ryanair or easyJet in Europe. Meanwhile – not to pick on Spirit or kick them when they’re in trouble – but it’s kind of the airline’s loot,” Baker recently told an audience of pilots from other airlines, who roared with laughter.

Delta CEO Ed Bastian is less dismissive of the “lower carriers” in the US than United’s Kirby.

“I don’t see that segment ever disappearing,” Bastian said this week, after Spirit’s bankruptcy filing. “I think there is a market for it.”

At the same time, he said that the luxury measures of ultra-low-cost carriers have no effect on his airline. Delta focuses on luxury travelers, but also introduced basic fares a decade ago, as discounters posed an increasing threat to steal some of Delta’s customers.

“Calling yourself a premium carrier and actually being a premium carrier are two completely different things,” Bastian said. “It’s not about the size of the chair or how much space you have; it’s the overall experience.”