Editor’s Note: The following is a series of interviews carried out by the author in May 2020. The series has covered so far the state of the industry and fleet (available in the Special May/June 2020 issue of Airways), the future of the Passenger Experience, Route Networks, Hubs, Scheduling, and Connectivity, and what’s next for the US Regional Airlines. Check our subscription plans if you wish to access this and other prime-quality content.
In this new chapter on the Future of Air Travel in the age of COVID-19, the author will explore, together with a panel of airline CEOs, frontline staff, journalists, analysts, and bloggers, the future of low-cost airlines in the United States.
The Domestic Leisure Travel
While Spirit (NK), Frontier (F9), and Allegiant (G4), the so-called ‘Big Three’ Low-Cost Carriers (LCCs) in the United States, capture around the 12% of market share by domestic revenue passenger miles (RPMs), they have an outsized effect on the US airline industry.
Madhu Unnikrishnan, Editor of Airline Weekly, believes “LCCs are in a good position, given that consensus holds that domestic leisure travel will recover faster than business travel.” With this vacation and VFR (visiting friends and relatives) traffic recovering first while business travel remains at a standstill, LCCs have been the quickest to build their capacity back up.
According to Cirium data, Allegiant plans to fly up to 88% of its 2019 capacity, while Spirit will bring back up to 86%. It’s a stark contrast when compared to American Airlines (AA), and Delta (DL), which plan a return of up to 60% of domestic capacity, and to United at 55% according to OAG Schedule Analyzer data.
A Lost Summer Season
Low-cost carriers used the last economic downturn in 2008-2010 to their advantage, and have begun to capitalize on the current COVID-19 crisis as well. However, this crisis is different, and it’s changing by the minute. With spiking cases reigniting around much of the USA leading to plateauing and even falling demand, storm clouds are gathering.
The short summer season is already lost, and what little opportunity there is to salvage it, the spike in infected cases is beating any possibilities of short-term recovery. With scant business travel on the horizon, the typical post-Labor Day travel drop combined with likely mass layoffs hitting on October 1st will render this ‘The Autumn of discontent,’ as dubbed by airline analyst Jamie Baker.
Henry Harteveldt, Principal of Atmosphere Research, paints a dire future for the Low-Cost carriers at the hands of The Big Four. “I think the LCCs in the US, and potentially some of them elsewhere, are going to feel pain like they’ve never felt before.”
Selling Low Fares
Southwest Airlines (WN) is the most aggressive in the landgrab for market share, as it is aiming to increase the capacity to fly its full schedule by year’s end. The current capacity is already well-exceeding demand, and with the ‘Big Four’ legacy carriers in desperate need of cash flow, and the Basic Economy (BE) cabin product at their disposal, no one should count them out either.
Ben Baldanza, a former CEO of Spirit Airlines, pioneered the modern-day Ultra-low-cost carriers in America. He is unsurprising sanguine about their prospects, “LCCs will do well and may become a larger share of a smaller pie. They can start to make money sooner because of lower costs, and everyone will be selling low fares for a while. They also don’t carry the traffic that’s most likely to return never.”
Airline analyst Seth Kaplan looks to past economic crises as a model for what could happen, “LCCs have generally done relatively well in past recessionary environments. Of course, we’ve never seen anything quite like this, so the precedent is less useful than usual for analyzing the situation. But it’s reasonable to think airlines that are more exposed to short-haul markets, and that depend less on big-money, premium, long-haul travel, will be relatively well-positioned.”
The Success of LCCs
“Some of the most price-sensitive customers can’t afford to travel at all during a recession, which you might think would hurt LCCs most. But those passengers are replaced by others who ‘trade down,’ just as a Whole Foods or Waitrose customer might become a Walmart or Tesco customer, a premium airline customer might become an LCC customer.”
Courtney Miller, Managing Director of Analysis for The Air Current, doesn’t believe that the success of LCCs in past crises is necessarily a prelude to this black swan. “As much as the low-cost carriers have experienced crises in the past, they were fairly well insulated.
9/11 came as the LCCs and new ULCCs were just getting ramped up, so they were able to grow into it and continue taking money away from the major airlines, which took years to learn how to compete with their pricing. The financial crisis hit the top of the economy, and LCCs still had room to grow into a massive opportunity.”
“Today, major airlines know how to compete against the ULCCs, especially with basic economy, and the unconstrained growth opportunities are much harder to find. The LCCs also have little to no experience shrinking and have long been able to leverage the ability to grow with the ability to keep costs low. An airline not growing becomes a much more expensive airline pretty quickly,” continues Miller.
A Challenge to Fill Non-stop Aircraft
“This existential need to grow, along with the sheer amount of aircraft headed their way, could put them in some difficult situations. I’m thinking Frontier and Spirit, specifically. Ironically, as challenged as Frontier and Spirit, maybe for the reasons mentioned.”
Miller believes that the LCCs could challenge themselves and their business models “as large non-stop aircraft become difficult to fill without hub feed. The network carriers have a better toolset with which to consolidate what traffic remains, but the ULCCs largely do not, which will probably mean super steep discounts and no profitability.”
Miller isn’t all doom and gloom seeing a bright side for one LCC player: Allegiant, which has invested in a less capital-intensive, mainly second-hand Airbus A320 family aircraft, have been vocal in the market for additional aircraft, and the strength of their heartland markets.
A Focus on Basic Economy
“Allegiant is quite well-positioned with its fleet of used aircraft. They can park aircraft cheaper than Frontier and Spirit can of their new aircraft, and as such, have a better ability to wait it out. They are also protected by many of the secondary and tertiary cities they serve, with little to no competition. Further, plummeting aircraft values will be a good thing for buyers of those aircraft, which Allegiant is, and not good for sellers of those aircraft, which Spirit and Frontier could be,” Miller says.
Harteveldt doesn’t expect the US legacy carriers to sit by idly and let their market share erode. “We’re going to see the airlines that offer basic economy, sit on top of LCCs, almost penny for penny, simply to get every passenger they can get onto their planes.”
The legacy network model has an advantage with BE in Harteveldt’s view, “They [legacy carriers] can afford not to discount basic economy to the exact penny that LCCs are doing. You can also justify it by saying, ‘yes, we charged for bags, but you know, we give you onboard amenities.’ They will prevent LCCs from getting any more business than possible. Frankly, I think they use these fares to starve the budget airlines out of existence.”
How Long Airlines Can Hold Their Breath
Gordon Bethune, a former CEO of Continental Airlines, famously said once, “You’re only as good as your dumbest competitor.” He sees a bleak future for all the players. “I bet it would be how quickly the LCCs will run out of money. They’re a cash machine. They always kind of started to run in the airline for cash. And unfortunately, we [at Continental] had a Profit and Loss that included depreciation and other variables that reduced our net income.
“So, we’re running for the long run, and they’re just running to make this payroll. But you got to match that behavior with a rational business plan. That’s pretty tough because of how long you can hold your breath, and the big boys will live because we can’t afford to let them die. But they know that they won’t look like prize fighters or winners, they’ll get hit too.” Bethune concludes.
In the last episode on the Future of Air Travel in the age of COVID-19, the author will debate on whether there are winners and losers in the airline industry post the COVID-19 crisis.