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- US low-cost airlines were exceptionally profitable around 2016. Southwest and JetBlue each achieved approximately 20% operating profit margins, Spirit reached 24%, and Allegiant reached 30%. These results were remarkable for an industry traditionally characterized by thin margins.
- Low-cost carriers were outperforming major legacy airlines. At the same time, Delta's operating margin peaked at 19.6%, while United's reached only 13.6%. Despite charging lower fares, budget airlines were generating substantially higher profits.
- The financial balance shifted dramatically by 2024. The four low-cost carriers discussed had operating margins ranging from 5.6% to -11.2%, while legacy airlines had recovered to approximately 8% and 10.9%. The former leaders were now fighting for survival while established competitors had regained their financial strength.
- COVID-19 initially devastated the entire airline industry, but it does not explain the prolonged decline of low-cost carriers. US passenger volumes recovered to record levels in summer 2023 and were expected to reach another record in summer 2024. Legacy airlines continued improving financially after the recovery, whereas low-cost carriers experienced another deterioration.
- The recovery in leisure travel has been much stronger than the recovery in business travel. More Americans are flying for vacations and family visits than before, but businesses have increasingly adopted digital meetings and reduced employee travel for conferences and meetings. Business travel therefore remained below pre-pandemic levels.
- Legacy airlines have adjusted their networks to capture more leisure passengers. Traditionally focused more heavily on business travelers, they have redirected capacity toward popular vacation destinations to benefit from stronger leisure demand.
- Las Vegas illustrates the change in airline capacity allocation. The airport recorded approximately 412,000 scheduled flights in 2023, around 10% above its pre-pandemic average.
- New York's JFK airport experienced a different recovery. As a major business-travel market, JFK still had slightly fewer scheduled flights in 2023 than before COVID-19. The contrast with Las Vegas demonstrates how airlines have redirected capacity toward leisure destinations.
- Spirit Airlines attributes some of its financial difficulties to excessive industry capacity. The company argues that competitors are operating too many flights in its markets, creating pressure on the competitive environment. The narrator considers this explanation partly credible but insufficient to explain Spirit's financial collapse.
- Spirit's aircraft occupancy has deteriorated. Its load factor fell from 84.7% in 2015 to 81.3% in the period discussed. This is consistent with increased competition and additional available seats, although lower occupancy alone does not establish that excessive capacity caused the company's financial problems.
- Spirit's revenue performance declined much less dramatically than its profitability. Revenue per seat-mile was approximately 10.08 cents in 2015, compared with 9.63 cents in the period discussed. It had reached a high of 10.44 cents in 2022. Although the decline is meaningful, the narrator argues that it cannot explain a collapse from a 24% operating margin to approximately -7.5%.
- Spirit's operating costs provide a much stronger explanation for its financial deterioration. Its CASM (cost per available seat-mile) remained around eight cents between 2015 and 2021, with relatively modest increases. Between 2021 and 2022, however, it increased by 45%, reaching 11.67 cents.
- The distinction between low fares and low operating costs is central to understanding the crisis. A low-cost carrier is defined by its ability to operate flights more cheaply, not simply by charging passengers less. If its operating costs rise to levels that eliminate its cost advantage, the underlying business model becomes difficult to sustain.
- Fuel prices were a major contributor to Spirit's cost explosion. Fuel prices surged in March 2022. When fuel expenses are excluded, Spirit's operating cost per available seat-mile actually declined slightly between 2021 and 2022.
- JetBlue experienced a similar pattern to Spirit in its non-fuel costs. Its operating costs excluding fuel remained approximately flat between 2021 and 2022. This suggests that rising fuel prices accounted for much of the immediate cost pressure at both airlines.
- Other low-cost airlines experienced substantial increases in non-fuel operating costs. Between 2021 and 2022, Frontier's non-fuel CASM increased by 17%, Allegiant's by 32.1%, and Southwest's by 39%. Fuel therefore cannot explain the entire deterioration across the sector.
- Airline management teams increasingly identify irregular operations as another major problem. Delays, cancellations and operational disruptions have made it harder to operate aircraft efficiently and maintain the tight schedules on which low-cost carriers depend.
- Spirit previously achieved exceptionally high aircraft utilization. Before the pandemic, its aircraft regularly operated for around 12 hours a day or more during peak summer periods. Aircraft could fly from before dawn until late evening, sometimes overnight, with minimal ground time between flights.
- Spirit has struggled to restore its previous aircraft utilization. Despite recovering passenger demand, its aircraft utilization peaked at only 10.8 hours per day in 2023. Fewer operating hours mean fewer opportunities to generate revenue from each aircraft.
- More frequent severe weather has increased operational difficulties in the United States. The narrator cites an increase in the average number of Category 4 or 5 hurricanes hitting the country, from approximately one annually in 2000 to more than two in the period discussed.
- Spirit's route network makes it particularly vulnerable to hurricanes. A disproportionate share of its flights serve destinations in Florida, where beaches attract leisure travelers but severe weather can disrupt airline operations. Hurricanes and other weather events make it harder to maintain schedules.
- Airlines need more scheduling flexibility to absorb disruptions. When weather prevents flights from operating on time, carriers need additional time between flights to recover their schedules. This reduces the efficiency of airlines that previously relied on very short aircraft turnaround times.
- Air traffic controller shortages are another source of delays. FAA staffing shortages limit the number of aircraft that can be handled at a given time. Departures may consequently be delayed until sufficient air traffic control capacity becomes available.
- Florida has also been particularly affected by air traffic controller shortages. This compounds the weather-related problems experienced by Spirit and other leisure-focused carriers with significant operations in the state.
- Pratt & Whitney engine problems have created another significant operational burden. Almost half of Spirit's aircraft fleet consists of Airbus A320neo aircraft equipped with Pratt & Whitney PW1100G engines. The engines were originally attractive because of their advanced efficiency.
- A manufacturing defect led to accelerated inspections of certain PW1100G engines. Pratt & Whitney identified a potential problem involving metal used in the engines that could cause turbine cracking. The inspection schedule was consequently brought forward.
- Spirit initially lost seven aircraft to the accelerated engine inspections. The problem subsequently continued to leave an above-average number of its aircraft unavailable for revenue-generating service.
- The engine problem also affects JetBlue and Frontier. Both airlines operate aircraft equipped with the PW1100G, although Spirit has the greatest exposure among US low-cost operators because of its reliance on this engine type.
- Operational disruption creates costs beyond lost flying hours. Spirit's weaker on-time performance generates expenses associated with compensating passengers, arranging hotels for unexpected overnight stays and handling cancellations.
- Poor reliability can also damage future revenue. Passengers frustrated by repeated delays and cancellations may choose other airlines for subsequent journeys. This creates a longer-term commercial cost beyond the immediate expenses of disruption.
- Low-cost airlines face a double financial penalty from operational problems. They generate less revenue because aircraft spend fewer hours flying, while simultaneously incurring additional expenses to manage delays and cancellations.
- JetBlue is responding by restructuring its international and domestic network. The airline has increasingly operated long-haul European routes using narrow-body aircraft with substantial business-class seating. The service has received positive reviews, achieved acceptable passenger occupancy and expanded to additional destinations.
- JetBlue initially made a significant scheduling mistake with its European operations. It planned approximately the same seat capacity throughout the year, despite transatlantic demand being substantially lower in winter than in summer. Most competing transatlantic airlines reduce their winter schedules to reflect seasonal demand.
- JetBlue has begun making some European routes seasonal. Under increased economic pressure, it has reduced or eliminated winter service on selected routes, concentrating capacity during the stronger summer travel season.
- JetBlue is redistributing aircraft from seasonal European routes to domestic markets. Planned redeployments include routes from Phoenix to the East Coast, New York to Vancouver and New York to San Juan.
- Growing demand for premium travel among leisure passengers creates an opportunity for JetBlue. More vacation travelers are willing to pay for business-class seats than before the pandemic. This allows airlines to capture higher-paying leisure demand rather than relying exclusively on traditional business travelers.
- JetBlue has an advantage over many budget competitors in pursuing premium leisure passengers. Although most of its aircraft are configured entirely with economy seating, it has a separate group of aircraft with business-class cabins. These aircraft can be redirected toward domestic markets when European demand falls during winter.
- JetBlue is also expanding San Juan, Puerto Rico, as a significant operational hub. Puerto Rico is a US territory with approximately three million residents, but no major US airline traditionally maintains a hub there.
- Existing airline networks have primarily connected Puerto Rico to mainland US tourist markets. Flights from mainland hubs work reasonably well for bringing American vacationers to the island but are less convenient for residents seeking connections to other destinations.
- JetBlue wants San Juan to serve both mainland connections and regional international travel. Its expanding network includes destinations across Latin America, such as Cancún and Colombia, which are relevant to Spanish-speaking Puerto Rican passengers.
- Frontier is making an even more fundamental change to its business model. In May 2024, it announced that it would stop charging separately for seat assignments, carry-on baggage and changes to bookings, moving toward bundled fares similar to those offered by United, Delta and American.
- Frontier's new pricing strategy reduces the distinction between budget and legacy airlines from the passenger's perspective. Rather than relying heavily on individual fees for services, Frontier intends to sell more comprehensive fare packages.
- Frontier is also simplifying its operational structure. Historically, it operated a complicated network of scattered routes across the country, often requiring aircraft and crews to follow lengthy sequences of flights over several days.
- Frontier's former network made operational disruptions particularly difficult to resolve. An aircraft and its crew might travel from Salt Lake City to San Antonio, New Orleans, Cancún and St. Louis without passing through a Frontier hub. A delay early in the sequence could disrupt every subsequent flight.
- The absence of convenient aircraft and crew replacements made delays cascade through Frontier's network. Because aircraft and personnel were far from operational bases, the airline had fewer opportunities to substitute resources and restore its schedule.
- Frontier has responded by developing a much larger hub network. It now has 13 hubs across the United States, and only 3.5% of its flights do not pass through one of them.
- The new hub structure makes Frontier's operations substantially simpler. Many flights can operate as out-and-back journeys from a hub. Flights that do not follow that pattern still have more opportunities to reach a hub where replacement aircraft or crews can help recover from disruptions.
- Frontier expects operational simplification to improve aircraft utilization and reduce costs. Fewer cascading delays should allow aircraft to spend more time generating revenue rather than waiting for disrupted schedules to recover.
- Southwest is experiencing similar financial pressures despite occupying a different market position. It operates between traditional legacy business-focused airlines and ultra-low-cost carriers, but has also struggled with the post-pandemic operating environment.
- Southwest reported a $231 million net loss in the first quarter of 2024. This was particularly disappointing because the company had gone 11 years, or 47 consecutive quarters, without reporting a loss before the pandemic.
- Southwest's operational reputation was damaged by its Christmas 2022 meltdown. The disruption affected thousands of passengers and continued for more than a week during one of the busiest travel periods of the year. Its reputational consequences continued to affect the company in 2024.
- Boeing's 737 MAX quality-control problems also contributed to Southwest's difficulties. The airline faced continuing challenges associated with its aircraft supplier, limiting its ability to control all aspects of its operating situation.
- CEO Bob Jordan announced a restructuring plan to address Southwest's performance. The company would stop operating in Bellingham, Cozumel, Houston and Syracuse, while reducing capacity in Atlanta and Chicago.
- Southwest's decision to abandon entire markets was a significant departure from its recent history. Although Bellingham, Cozumel and Syracuse were relatively small markets, it was the first time since 2019 that the airline had completely withdrawn service from particular markets.
- Southwest planned to slow hiring and reduce its workforce by approximately 2,000 employees. This was part of its effort to bring operating expenses and capacity into better alignment with demand.
- Southwest began reconsidering its traditional open-seating system. Management was examining whether to abandon its no-assigned-seats approach and introduce assigned seating or additional seating privileges that passengers could purchase.
- Southwest had already made several scheduling adjustments in March 2024. It reduced midweek flying, cut short-haul business-market services and operated fewer flights outside peak hours.
- The March adjustments helped make Southwest's financial situation more manageable toward the end of the quarter. They demonstrated that reducing poorly performing capacity could provide some immediate operational relief.
- Southwest's proposed changes were considered insufficient by some investors. The airline's financial performance attracted the attention of Elliott Investment Management, which entered the company in early June 2024.
- Elliott acquired approximately $1.9 billion worth of Southwest shares. Its investment represented roughly an 11% ownership interest, giving the fund significant influence over the company's future.
- Elliott is a prominent activist investment firm founded by Paul Singer. Forbes had described Singer as Wall Street's most feared activist investor, reflecting the firm's reputation for aggressively pressuring companies to restructure.
- Activist investors generally acquire significant minority stakes to influence corporate decisions. They seek to increase the value of their investments by pushing management, boards and other stakeholders to change business strategies or restructure leadership.
- Elliott has a history of pursuing substantial changes at companies in which it invests. Its previous targets include Barnes & Noble, Cabela's, AT&T, athenahealth and the Italian football club AC Milan.
- Elliott's reputation made its investment particularly unsettling for Southwest's existing leadership. The firm was not known for taking a gentle approach to restructuring, and its limited experience in the airline industry did not diminish its willingness to challenge management.
- Elliott began its involvement by seeking changes to Southwest's leadership. A presentation published on its website served as a public strategy document outlining its proposed direction for the airline.
- Elliott used Southwest founder Herb Kelleher's words in its presentation. It invoked the company's founding legacy while arguing for changes to the board and a refreshed leadership team.
- Elliott specifically called for board changes and new executive leadership. Its proposed intervention went beyond minor adjustments to schedules or pricing and challenged the people responsible for running the airline.
- CEO Bob Jordan publicly resisted pressure to resign. He announced that he would not step down in response to Elliott's demands.
- Southwest subsequently weakened its financial outlook, strengthening Elliott's argument for more radical intervention. In an SEC 8-K filing, the company revised its expected decline in revenue per available seat-mile (RASM) to 4–4.5%, compared with its earlier forecast of 1.5–3.5%.
- Elliott's success in restructuring Southwest remained uncertain. The investment and leadership dispute were still in their early stages, and it was not yet clear whether the fund would achieve its objectives.
- There are concerns that Elliott's focus on short-term shareholder gains could damage Southwest's long-term business. Industry experts warned that aggressive restructuring might sacrifice important elements of the company's underlying competitive advantage.
- Some airline insiders believe Elliott may misunderstand what made Southwest successful. The company developed its identity and operating model over approximately five decades, and changes that improve immediate financial results could undermine those foundations.
- Nevertheless, criticism of Southwest's resistance to change is widespread. Even people concerned about Elliott's approach recognize that the airline has been slow to adapt to changing market conditions.
- The future of Southwest will involve substantial changes regardless of who drives them. Its existing management may implement reforms internally, or Elliott may force more extensive changes through investor pressure.
- The wider crisis raises a fundamental question about whether the low-cost airline model is sustainable in the United States. The narrator contrasts the difficulties facing American budget airlines with the continued viability of similar businesses in Europe.
- Europe's geographical structure provides advantages to low-cost airlines. Its population centres are more densely distributed, and passengers generally do not need to travel the same enormous distances between destinations as they do in the United States.
- The United States presents a different operating environment because of its geographical scale. Cities are much farther apart, making domestic flights longer and increasing the importance of fuel expenses.
- Low-cost airlines have traditionally reduced expenses through several operational advantages. These include minimizing aircraft ground time, using secondary airports, paying employees less and fitting more seats into aircraft.
- Fuel is one major expense that low-cost carriers cannot substantially reduce relative to their larger competitors. Spirit must pay approximately the same market price for fuel as United when operating a flight between New York and Los Angeles.
- Longer American domestic routes make fuel a particularly significant cost disadvantage. On a five-hour flight, fuel accounts for a larger share of total operating expenses, leaving a smaller proportion of costs that budget airlines can reduce through operational efficiencies.
- The American low-cost airline crisis is the result of several pressures occurring simultaneously. Higher fuel prices have combined with weather disruptions, air traffic controller shortages, aircraft engine problems, lower aircraft utilization and changing passenger demand.
- The central argument is that American budget airlines are losing the operating-cost advantage that originally made their business model successful. Their difficulties cannot be explained by excessive competition or weak passenger demand alone. The combination of higher unavoidable costs and increasingly difficult operations is making it harder to offer low fares while remaining profitable.