Why Budget Airlines are Suddenly Failing

Summary

The video script discusses the challenges faced by US low-cost airlines, once thriving with high profit margins, now struggling with falling operating margins. It attributes the downturn to factors beyond the COVID pandemic, such as increased competition, irregular operations, and rising fuel costs. The script also explores how these carriers are adapting their business models, with some shifting strategies and others facing potential restructuring under activist investors, all in an attempt to survive in a changing market.

Takeaways

• 💰 In 2015, low-cost U.S. airlines like Southwest, JetBlue, Spirit, and Allegiant had impressive operating profit margins, with Allegiant reaching up to 30%.
• 📉 Over the past eight years, the profitability of low-cost carriers has significantly declined, with some now operating at a loss, while legacy carriers have seen a resurgence in profits.
• 😷 The COVID-19 pandemic caused a historic drop in air passenger volumes, affecting all airlines, but the subsequent recovery has been uneven, impacting business and leisure travel differently.
• 📈 Despite full recovery of passenger volumes in the U.S., hitting a record in summer 2023, the financial performance of low-cost carriers has continued to decline.
• 💼 The shift towards digitization has reduced business travel, with more meetings and conferences being held online, impacting airlines that traditionally served business travelers.
• 🛫 Legacy airlines have adapted by recalibrating their networks to capture more leisure travel demand, as seen with the increase in flights to vacation destinations like Las Vegas.
• 📊 Spirit Airlines attributes their struggles to oversupply in the market, but data shows that while their load factors have decreased, revenue per seat has not dropped significantly.
• 🚀 A significant factor in the decline of low-cost carriers is the increase in their cost per available seat-mile (CASM), especially due to a surge in fuel prices.
• ⛈ External factors such as severe weather and air traffic controller shortages have made it harder for airlines to operate on-time, impacting the low-cost business model.
• 🛩 Aircraft utilization rates have not returned to pre-COVID levels for airlines like Spirit, affecting their bottom line and ability to operate cost-effectively.
• 🛫 Low-cost carriers are facing the need for change to ensure survival, with airlines like JetBlue and Frontier making significant adjustments to their business models and operations.

Q & A

What were the operating profit margins for American low-cost carriers like Southwest, JetBlue, Spirit, and Allegiant eight years ago?

Eight years ago, Southwest and JetBlue had operating profit margins of 20%, Spirit had 24%, and Allegiant had a significant 30%.

How did the operating margins of low-cost carriers compare to legacy carriers like Delta and United during the same period?

During that period, Delta's operating margin peaked at 19.6%, and United's was at 13.6%, which were lower than the profit margins of the low-cost carriers.

What significant event occurred between 2016 and today that impacted the airline industry?

The most significant event was the COVID-19 pandemic, which led to the most dramatic collapse in air passenger volumes in modern aviation history.

How have passenger volumes in the US recovered post-COVID?

Passenger volumes in the US have fully recovered, hitting an all-time record in summer 2023, and are expected to reach similar levels in summer 2024.

What is the current state of operating margins for the four low-cost carriers mentioned in the script?

The current operating margins for these low-cost carriers are between 5.6% and -11.2%, indicating a significant drop from their previous highs.

What is the term used in the airline industry to describe the cost of operating a flight on a per seat, per mile basis?

The term used is CASM, which stands for Cost per Available Seat Mile.

Why did Spirit's CASM increase significantly between 2021 and 2022?

Spirit's CASM increased significantly due to a 45% rise in the cost to transport a passenger a mile, largely attributed to increased fuel prices.

What factors are contributing to the difficulty of operating airlines on-time in the US?

Factors include severe weather events, a shortage of air traffic controllers, and issues with aircraft engines, such as the PW1100G engine used by Spirit.

How has JetBlue responded to the challenges faced by low-cost carriers?

JetBlue has made drastic changes to their route map and schedules, including long-haul flights to European destinations and adjustments to domestic routes and service out of San Juan, Puerto Rico.

What changes has Frontier implemented in response to the challenges faced by low-cost carriers?

Frontier has fundamentally changed their pricing model to sell bundled fares like legacy carriers, simplified their operations by opening new hubs, and reduced operational complexity.

What recent development involving Elliott Investment management indicates potential significant changes for Southwest?

Elliott Investment management bought a $1.9 billion stake in Southwest, indicating their intent to push for substantial changes, including leadership and board changes.

What is the main challenge for low-cost carriers in optimizing their operations in the US compared to Europe?

The main challenge is the vast distance between cities in the US, which makes it harder to optimize costs relative to fuel expenses, which represent a higher proportion of overall costs on longer flights.