In a recent video by Wendover Productions titled “Why Budget Airlines are Suddenly Failing,” Sam Denby delves into the puzzling decline of budget airlines in the United States. Once riding high on monumental profit margins, these low-cost carriers are now struggling to stay afloat. Denby explores the multifaceted reasons behind this downturn and what it means for the industry.
The Golden Era of Low-Cost Carriers
Eight years ago, American low-cost carriers were thriving. Denby notes that Southwest Airlines pocketed 20 cents of every dollar in operating profit, JetBlue and Spirit made 20 and 24 cents respectively, while Allegiant topped the charts with 30 cents. These profit margins were remarkable, especially in an industry known for its volatility. In contrast, legacy carriers like Delta and United had significantly lower operating margins, peaking at 19.6% and 13.6% respectively.
The Shift in Fortunes
Fast forward to today, and the tables have turned. The once-dominant low-cost carriers are now grappling with operating margins between 5.6% and -11.2%, while legacy carriers have recovered to healthier margins of 8% to 10.9%. The COVID-19 pandemic undoubtedly played a role, causing a dramatic collapse in air passenger volumes. However, as Denby points out, the full recovery of passenger volumes in the US suggests deeper issues at play.
Competitive Pressures and Market Dynamics
According to Denby, airlines have attributed their woes to several factors. Spirit Airlines, for example, blames an “elevated capacity in many of the markets we serve,” implying that oversupply from other airlines has intensified competition. This is partly true, as the recovery in leisure travel has been robust, while business travel lags behind. Legacy airlines, traditionally focused on business travelers, have shifted their networks to capture more leisure demand, thereby encroaching on the turf of low-cost carriers.
Rising Costs and Operational Challenges
Denby highlights that one significant factor affecting budget airlines is rising operational costs, particularly fuel prices. Spirit’s cost per available seat mile (CASM) soared by 45% between 2021 and 2022. Similar increases were observed for other low-cost carriers, with Frontier’s CASM up by 17%, Allegiant’s by 32.1%, and Southwest’s by 39%. These increased costs have eroded the low-cost advantage that these airlines once enjoyed.
Irregular Operations and Maintenance Issues
Another critical issue is the increased difficulty in maintaining on-time operations. Denby explains that severe weather, particularly hurricanes, has become more frequent, disproportionately affecting airlines like Spirit, which operate many routes to and from Florida. Additionally, a shortage of air traffic controllers has compounded delays. Furthermore, maintenance issues, such as the Pratt and Whitney PW1100G engine flaw affecting Spirit’s fleet, have kept more planes out of service, further disrupting schedules and increasing costs.
Strategic Shifts and the Future
To combat these challenges, budget airlines are adopting various strategies. JetBlue is recalibrating its route map and schedules, cutting down on less profitable transatlantic routes in the winter and boosting domestic services. Frontier has taken a more radical approach, shifting away from the traditional budget model by eliminating many ancillary fees and simplifying its operations with more hub-centric routes.
More Drastic Changes
Southwest Airlines, which operates in a niche between legacy and ultra-low-cost carriers, has also felt the squeeze. The company announced several changes, including reducing service to certain markets and considering changes to its boarding and seating policies. Denby notes that Elliott Investment Management’s significant stake in Southwest has increased pressure for more drastic changes, indicating that the industry’s landscape is still evolving.
“Prices Really Aren’t Cheap”
People in the comments shared their thoughts: “Here’s a take. People hate Spirit Airlines. People put up with all their BS with bag checks, extra fees, and horrid customer service when they had no choice. With literally any reasonable competition in the market, people are going to bail on them.”
Another commenter added: “When you add up fees the budget airlines aren’t really much cheaper.”
One person concluded: “I mean the real issue with budget airlines is the prices really aren’t cheap”
Uncertain Future
Denby concludes that the low-cost carrier business model faces significant challenges in the US. Higher fuel costs and a range of operational difficulties have undermined their competitive edge. While these airlines are making strategic adjustments, it remains to be seen whether these efforts will be enough to ensure their survival. The future of budget airlines in the US appears uncertain, and they must adapt swiftly to navigate the turbulent skies ahead.
Mitigating Operational Challenges
What are your thoughts? What impact do you think rising fuel costs will have on the future of budget airlines? How do you feel about the strategic shifts low-cost carriers are making to survive? In what ways could operational challenges like severe weather and air traffic controller shortages be mitigated?
To dive deeper into this topic, check out the full video on Wendover Productions’ YouTube channel here.
