As prices rise across the globe, many Americans are looking to save money where they can, including travel. Yet the most recent slate of earnings reports from major US airlines indicates consumers aren't necessarily opting for budget airlines amid an inflation economy. During Q3 2023, low-cost airlines saw sluggish sales – while their legacy counterparts watched revenues spike.
Frontier Airlines, one of the larger low-cost carriers, lost $32m (£26m) during Q3. Spirit Airlines, likewise, lost $157.6m (£197m). Southwest Airlines, which is considered a hybrid low-cost-full-service carrier in the industry, tallied a net income of $240m (£193m), which was a drop of roughly 30% from last year.
It's not that people aren't investing in travel – quite the opposite. In May 2023, spending on flying and related travel expenses was up, as pandemic-related restrictions on international travel continue to ease, and international destinations that have been off-limits for years become especially appealing.
The big three legacy airlines – Delta, United and American – have reaped the benefits of this wanderlust. Each posted huge profits in Q3. American's net income was $263m (£212m); both United and Delta saw net income grow to $1.1bn (£890m). In Delta's case, that was an increase of nearly 30% year-over-year.
The lacklustre figures from low-cost carriers appear to be the result of a series of coalescing factors, says Helane Becker, a senior analyst at TD Cowen, who specializes in airlines, aircraft leasing and air freight. Many experts aren't terribly surprised by the numbers.
'Revenge travel'
As pandemic-era travel restrictions lifted, US consumers' desire to travel overseas spiked. So-called "revenge travel" meant many swapped domestic trips for long-hauls. This meant flying internationally on major airlines, something most budget airlines don't do.
Many budget airlines are finding themselves looking for travellers, as flyers opt for major carriers with competitive prices (Credit: Alamy)
"This year, there was a pivot to international [travel] from domestic," says Becker. Full-service airlines had a better quarter because they have "more long-haul international seats to sell and participate in". And for those who did fly within the country, Becker adds that travellers were looking for accommodations budget carriers don't provide – major carriers did better in large part because they have more premium seats available.
"If you don't cater to premium, if you can't bank on loyalty and if you don't fly internationally, this year's third quarter is likely to disappoint," Jamie Baker, a JPMorgan Chase analyst, wrote in an August report.
Business travel was also down, which reduced budget carriers' passenger volumes. Southwest, specifically, has put much effort into targeting business travellers, and struggled to fill seats as business travel demand waned in the era of Zoom and tight corporate spending.
Many budget airlines depend on lower fares to siphon price-conscious flyers from full-service carriers. But these major airlines have also been lowering fares recently to compete with low-cost carriers, who usually have a pricing advantage. The September Consumer Price Index report from the US Bureau of Labor Statistics (BLS) shows the average airline fare across carriers has fallen 13% year-over-year.
Generally, say experts, the people travelling during an inflation economy prefer to fly major, full-service carriers. That's in part because they're largely higher earners who aren't feeling the financial squeeze as much, and are willing to pay for the amenities budget carriers charge for, like checked baggage and seat selection.
"Low-cost and legacy airlines are very different types of airlines, and the budget airlines appeal to a very different type of customer," says Henry Harteveldt, a travel industry and airline analyst. "No surprise, the typical customer for a budget airline earns far less than the person who's flying Delta. According to the research we did in April, the average household income of a budget airline flier is approximately $78,000, and for someone who flew on American, Delta, etc., it was well north of $100,000," he says.
"In the current economic environment, you can see why some budget airlines are feeling the pain," adds Harteveldt. "Customers have lower incomes, less discretionary income, they're more susceptible to high interest rates and they're having to reprioritise what income they have, and that may mean they're not able to travel as much."
Filling 'a necessary gap'
There are a few key factors to consider when trying to forecast what happens next for low-cost carriers, says William McGee, a senior fellow for aviation and travel at the American Economic Liberties Project.
First, he says, it's important to remember low-cost carriers fill "a necessary gap" in the market: if those carriers didn't exist, there likely wouldn't be any other airlines to service low-income flyers. If travellers were faced with the choice between paying more to fly on a full-service airline or simply not traveling at all, McGee says he thinks most people, rather than breaking the bank, would choose to stay home.
The other, broader element at play is that the airline industry is in a precarious position, as there "is less competition and fewer airlines in the US than we've had at any time since before World War One".
There are currently 12 passenger, scheduled airlines operating in the US, he says, which is up from 10 a few years ago (low-cost carriers Breeze and Avelo are the new entrants). Before that, Virgin America was the last airline to launch in 2007. At the industry's peak in the mid-1980s, there were 80 airlines – but a series of bankruptcies, mergers and acquisitions have left consumers with slim pickings. Now, four airlines – Delta, United, American and Southwest – control roughly 80% of the market.
Many flyers are choosing international destinations, which means they're booking trips on major airlines (Credit: Getty Images)
Currently, JetBlue is trying to acquire low-cost carrier Spirit, which could further reduce competition. McGee says this is important because even if there are only a relative handful of low-cost carriers, they serve as a buoy to keep airfares from increasing.
"The mere presence of a low-cost carrier benefits everybody," he says, "as it forces the majors to lower their fares." If those airlines do go away – as Spirit might if it does merge with JetBlue – "people will be paying more in every city and every route."
Stakeholders, like the US government, may have an interest in doing what they can to keep low-cost carriers around. That includes potentially blocking the Spirit-JetBlue merger, which is currently being hashed out in federal court.
While McGee's concerns circle the longer-term existential concerns of low-cost carriers, in the more immediate, their survival will depend on how well they're able to handle the current economy and higher interest rates.
"I think we'll continue to have budget airlines, but how large they are, and how many of them? A lot of it depends on how well these airlines' management teams manage this tough economic climate," says Harteveldt. "We're not in a depression or recession, and I think these airlines can and will use the tools they have available to them to work their way through it." This might mean leaning into enhanced loyalty programs and simplified booking, which Frontier and Southwest, respectively, are introducing.
Ultimately, even as the larger airlines pressure their smaller, cheaper counterparts. But that doesn't mean low-cost carriers are in a death spiral – it's more of the fact that budget airlines find themselves in something of a "wrong place at the wrong time" scenario.
"This is an extremely cyclical industry. There are upcycles and downcycles, and within that, upcycles and downcycles for specific airlines and types of airlines – it's a rollercoaster, and it's way too early to worry about the demise of low-cost carriers," says McGee. "I don't see this as a harbinger of a trend – conditions were such that the majors were able to fill their flights and reap the benefits of that, but they have their own boom and bust cycles as well."
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