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

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

This is displacing smaller, low-fare carriers such as Spirit Airlineswhich filed for bankruptcy defense on Monday. Some travel industry experts say Spirit’s problems indicate budget travelers will be left with fewer choices and higher prices.

Other discount airlines are in much better financial shape than Spirit, but they are also far behind full-service airlines when it comes to recovering from the crisis. COVID-19 pandemic. Most industry experts believe Border Airlines and other so-called ultra-low-cost carriers will fill the vacuum if the Spirit shrinksand that competition still exists to prevent prices from skyrocketing.

Spirit Airlines has lost more than $2.2 billion since the start of 2020. Frontier hasn’t reported an annual profit since 2019, although that decline could end this year. AND Parent company of Allegiant Air still profitable, but less so than before the pandemic.

Such figures – and, of course, some advertising for his own airline – led United Airlines CEO Scott Kirby recently said low-cost airlines have a “fundamentally flawed business model” and customers hate flying with them.

The Kirby landing dance may be premature, but many analysts are wary of the short-term prospects for low-cost airlines, which charge cheaper fares but higher fees than major airlines.

What worries budget airlines?

Low-cost airlines have grown over the past two decades, undercutting the major carriers in ticket prices, thanks in large part to lower costs, including hiring younger workers who were paid less than their counterparts at Delta Air Lines, United and American Airlines. However, industry wages have risen sharply over the past two years, narrowing this cost advantage.

At the same time, major airlines launched and refined their simple “basic economy” tickets to compete directly with Spirit, Frontier and other low-cost carriers for the most price-sensitive travelers.

Low-cost airlines have also become less efficient in their use of aircraft and people. As their growth slowed, they ended up with more of both than they needed. In 2019, Spirit aircraft were in the air an average of 12.3 hours each day. By this summer, planes were spending an average of two more hours a day sitting on the ground, where they don’t make money.

Spirit’s costs per mile jumped 32% between 2019 and 2023.

Another problem is that airlines have added too many flights. Low cost airlines and Southwest Airlines were among the worst offenders, but full-service airlines continued to gain traction. To compensate for the decline in business travel, major carriers have increased the number of flights on domestic tourist routes. The result: too many seats on flights to popular tourist destinations such as Florida and Las Vegas, driving down prices, especially on economy class tickets.

Tom Fitzgerald, an airline analyst at TD Cowen, said that having done a good job of tweaking their offerings for basic economy class, larger airlines are now experiencing a boom in premium travel.

“Post-COVID, people seem to be willing to pay a lot more to get a better experience” with flights and accommodations, he said, “and legacy carriers are in a much better position to meet that demand. They have premium economy, they have first class.”

Looking for “something a little better” in the air

Budget airlines are responding by following the old adage: if you can’t beat them, join them. This means a shift to a premium, following rapidly growing household wealth among high-income earners.

Border Airlines organized my rates will be split into four packages in May, with higher-priced ticket buyers receiving extras such as priority boarding, more legroom and checked baggage. The airline has waived fees for changing or canceling tickets, except for the cheapest package.

The spirit followed in August with similar changes blocking middle seats and charging passengers extra for the comfort of aisle and window seats.

JetBlue Airwayswhich began flying more than 20 years ago as a low-cost carrier with amenities, has endured years of consistent losses. Under new CEO Joanna Geraghty, the first woman to lead a major U.S. airline, JetBlue is cutting unprofitable routes, strengthening core markets including the Northeast and Florida and delaying $3 billion in new aircraft deliveries.

Possibly the biggest change is coming at Southwest Airlines. Starting next year, Southwest will ditch the half-century open seating tradition — passengers choose their own seat after boarding the plane. Executives say extensive surveys have shown that 80% of customers prefer a specific location, and that’s especially true for coveted business travelers.

Coming out of the pandemic, “the clear preference is for premium increases,” said Southwest CEO Robert Jordan. “Premium in some ways defines itself – whether it’s extra legroom, first class for Europe, whatever it is – but there’s a growing desire for premium, for something a little better.”

Jordan said it’s unclear why demand for premium products and experiences has grown so quickly, but wealth figures offer one explanation.

The rich fifth of U.S. households have increased their wealth by $35 trillion since 2019 and is nearly nine times the wealth of the average fifth, according to the study. Federal Reserve. This gives the wealthiest families a lot of money to spend on premium travel.

More crowded planes may also encourage passengers to spend more to avoid the middle seat at the back of the plane.

Whatever the reasons, Delta executives say that by 2027, award ticket sales will exceed the airline’s main cabin revenue.

American problem?

In other parts of the world, low-cost carriers are doing well. They have recovered from the pandemic just like their smarter competitors.

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

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

“There is no shame for those who fly Ryanair or easyJet in Europe. By the way, not to pick on Spirit or kick them when they’re down, but this is kind of an airline boot call,” Baker recently told an audience of other airline pilots, who burst into laughter.

We monitor the competition

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

“I don’t think this segment will ever go away,” Bastian said this week after Spirit filed for bankruptcy. “I think there’s a market for it.”

At the same time, he said the switch to upscale flights from ultra-low-cost carriers was not having any impact on his airline. Delta targets upscale travelers but also introduced basic economy fares a decade ago when discounters posed a growing threat to poaching some Delta customers.

“Just 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 seat or the amount of space you have; it’s a shared experience.”