Focus: Travel boom not enough to drive profits at US budget airlines Frontier, Spirit

Sun Country Airlines Holdings

21/09/2023 11:00

By Rajesh Kumar Singh
       CHICAGO, Sept 21 (Reuters) - Travel boom has delivered
bumper earnings for U.S. carriers, but no-frills airlines such
as Frontier  ULCC.O  and Spirit  SAVE.N  are struggling to
return to sustainable profitability. 
    That has made some of them weigh premium-price offerings,
including first-class seats, customer lounges and branded foods
even as they expect fares to remain the primary driver for
bookings.
    Ultra low-cost carriers offer a no-frills experience at
rock-bottom fares and charge heavily for ancillary services.
    They were tipped to be the big winners after the pandemic,
but persistent operational constraints have exacerbated their
cost pressures, making it imperative to find new high-margin
revenue streams. 
    
    With consumers more willing to splurge on travel, demand for
premium cabins has gone up. This together with soaring bookings
for flights to Europe and Asia have allowed the legacy airlines
- Delta  DAL.N , United  UAL.O  and American  AAL.O  - to
mitigate inflationary pressures.
    
     
    
    Budget carriers lack these products.
    Frontier CEO Barry Biffle said while he will not invest in
long-haul jets, he has been struck by a greater desire among
leisure travelers to pay for first-class seats on domestic
flights.
    Frontier is watching the trend "very carefully" and would
consider adding premium seats if it lasts for multiple years, he
said.
    "If people are really willing to pay that much for a
premium, maybe there is an opportunity," Biffle told Reuters.
    Similarly, Minneapolis-based ultra-low-cost carrier Sun
Country  SNCY.O  is contemplating opening an airport lounge and
offering branded food and beverage. CEO Jude Bricker said the
demand for services that offer even minor improvements to the
travel experience has doubled.
    "We're in discussions about things that I would have written
off in the past," Bricker said.     
    These offerings, however, entail a dilution of the
traditional no-frills business model that powered the earnings
of budget carriers before the pandemic. They also run the risk
of inflating costs.
    Frontier's Biffle called adding premium seats a "big
decision" and a "fairly expensive" move. That's why he is not
ready to change Frontier's business model "overnight."
    In the meantime, he is doubling down on costs. Frontier
plans to rework its network to allow almost all of its planes to
return to their stations every night, with a goal to contain
disruptions and save money.
      
    OPERATIONAL CONSTRAINTS
    No-frills carriers operate a single fleet, fly their
aircraft longer each day, and put more seats on every plane.
    Operational constraints have upended that playbook. A
shortage of air-traffic controllers has marred Frontier's
operations. Sun Country is grappling with a shortfall of
captains. Spirit has been forced to ground several planes due to
RTX's  RTX.N  engine problem.
    As a result, ultra low-cost carriers have not been able to
fully utilize their fleets - a strategy they relied upon before
the pandemic to lower operating costs and boost profits. 
    
    Meanwhile, surging pilot pay rates have ballooned costs.
Privately-owned Avelo Airlines has seen a 75% jump in its pilot
wage bill in the past two years. The bill is expected to
increase by another 10% following hefty pay raises at major
carriers, CEO Andrew Levy said.
    Weakening pricing power in their domestic market, as well as
a jump in fuel prices, have only added to their troubles.
    Biffle last week said Frontier is facing pressure to offer
"very, very low" fares to fill up its planes. Spirit has cut its
profit outlook for the current quarter, citing "heightened
promotional activity with steep discounting." 
    Frontier's shares are down by half this year. Spirit shares
are down 18%. In contrast, shares of United and Delta are up
20%, and American's shares have gained 5%.
    The divergence in performance has sparked questions about
the business model of low cost, low fares.
    United Airlines CEO Scott Kirby has called the model
"doomed" as he doesn't expect the constraints would go away
anytime soon. Some analysts are also calling for a review.
    "I don't know that the model is completely broken, but I
certainly think that it needs to be rethought," said Helane
Becker, airline analyst at TD Cowen.
    
    PRICE-SENSITIVE TRAVELERS
    CEOs of budget carriers, however, don't see the model losing
its appeal as long as fares determine travel bookings. The share
of discount carriers in domestic passenger traffic has gone up
after the pandemic, data from trade group Airlines for America
shows, thanks to travelers like Jacob Brown. 
    The 23-year-old Denver-based school teacher calls himself a
"big fan" of ultra-low-cost airlines. He has been using
Frontier's unlimited $140 monthly flight pass, which he said
translates into an average one-way fare of about $15.
    "I can't afford to fly Delta enough on my measly salary,"
Brown said. "But I can afford to fly budget carriers."

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GRAPHIC-Decreasing profit margins    https://tmsnrt.rs/45S3KJC
GRAPHIC-Increasing costs for budget airlines    https://tmsnrt.rs/3rgA1uQ
GRAPHIC-Falling utilization as compared to pre-COVID levels    https://tmsnrt.rs/3rb9Ndo
FOCUS-US airline pilots fight their unions to increase
retirement age     urn:newsml:reuters.com:*:nL4N39V3F5
Travel demand strong, but U.S. carriers fret over aircraft
delivery delays     urn:newsml:reuters.com:*:nL4N36U3WM
US sues to stop JetBlue's deal for Spirit, cites consumer harm  
  urn:newsml:reuters.com:*:nL1N35F1BD
ANALYSIS-Will abandoning American help JetBlue's Spirit merger?
Not by much     urn:newsml:reuters.com:*:nL4N38S3HE
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Reporting by Rajesh Kumar Singh, Editing by Nick Zieminski)
 ((rajeshkumar.singh@thomsonreuters.com; +1-313-484-5370;
Reuters Messaging:
rajeshkumar.singh.thomsonreuters.com@reuters.net))