MIAMI — At first glance, America’s ultra low cost carriers Frontier Airlines, Allegiant Air, and Spirit Airlines should be jumping for joy. All three airlines, particularly Allegiant and Spirit, have matured into some of the most profitable on planet earth, with Allegiant lapping the nearest competitor in the entire world by 7 percentage points in terms operating margin at 35% (versus Cebu Pacific at 28%) according to figures. Spirit’s Q1 performance was no slouch either, at 22%, and both carriers remain perched near the top of the global airline industry for this metric quarter after quarter.

But despite the hundreds of millions of dollars that each airline continues to generate in profits each year, the mood in the aviation analyst and investment community around this trio of top performers is remarkably bearish. This darkening mood, potentially worrisome for Frontier Airlines as the Denver-based airline pushes towards an initial public offering (IPO), emanates from a sense that the unrestrained financial hegemony of the ULCC business model may be under serious threat.

Low oil prices enable ULCC and legacy pricing to converge

The primary driver of this threat is undoubtedly the low price of fuel, because it causes the cost structure of legacy and ULCC airlines to converge, enabling the former group to more closely match the base fares of the latter with a portion of their inventory. To get a sense of why this is the case, we’ll do a little back-of-the-envelope math with aircraft operating costs. These figures are directionally accurate at the top level and relationally accurate (in the relative weight of various operating expense categories) but this is still back-of-the-envelope math without a ton of precision.

That being said, assume for a second that a ULCC and legacy are competing head to head on say a 1,200 mile route, both using the Airbus A320. At $3.00 per gallon oil, the A320 might cost say $14,000 for a legacy to operate, with fuel representing perhaps 45% of that figure or $6,300, leaving $7,700 in other operating costs. Now most ULCCs have marginal operating cost advantages over legacies on the order of 15-20%, which means that on the same route the ULCC would only have to pay $6,500 in additional marginal costs including fuel. Then adding in a flat capital cost of $4,000 per aircraft for each carrier (capital costs, like fuel costs, are determined by the market at large), the legacy would have total operating cost of $18,000 whereas the ULCC would have total operating costs of $16,800. Spread across 150 seats for the legacy (this is complicated somewhat by their ability to charge more for premium cabin passengers and last minute tickets), the legacy would need to charge an average of $120 one way per passenger to break even. The ULCC, meanwhile would only need to charge an average $93 to break even across 180 seats, allowing for the ULCC to theoretically undercut the legacy by $27.

But when fuel is $1.50 per gallon, the trip costs are respectively $14,800 and $13,000 for the legacy and ULCC respectively. This yields breakeven pricing of $99 for the legacy and $75 for the ULCC, which is only a $24 fare difference. But at the lower cost, the legacies have another advantage which is that their business and premium cabin travel demand is relatively inelastic, which means that those passengers will still pay say $350 one way for a portion of the 150 seats on offer, allowing the legacies to effectively match the ULCCs on a portion of the seats on offer and still make excellent overall profits. So in their 150 seats, American could offer say 50 for $75 to match the ULCCs and cut out a portion of their business, whereas Spirit would need to offer 100-120 seats at the same price to fill its airplane given that it almost exclusively appeals to price-sensitive flyers.

ULCCs must improve their product to compete

And that is the crux of the ULCC business model’s susceptibility to low fuel prices. In an environment where the legacies are emboldened to match or come close to the fares on offer by ULCCs, they can only appeal to the most price-sensitive of customers, passengers who will look to save every last dollar on their ticket. And even amongst those passengers, the legacies will steal away a chunk of passengers by offering some inventory at dirt cheap fares via “Basic Economy” at Delta or the equivalent for American and United. Because the ULCC business model also depends on high load factors to survive, this becomes something of an existential threat.

When every airline has dirt cheap fares, the arena of competition shifts to things like operational reliability, overall attractiveness of schedules (frequency and timings), and quality of service. And that is not an arena where America’s ULCCs are currently well equipped to compete. In fact, whether Spirit with its dismal operational metrics or Frontier with its abysmal rate of customer complaints, the two ULCCs competing head to head with legacies in the US are in rough shape on this dimension. Their rival Allegiant Air is relatively insulated from these effects by virtue of its low frequency network concentrated in secondary airports, though it is increasingly moving into primary hubs like Denver and Newark.

Spirit for its part has begun working to boost its on time performance and completion percentage by building more slack into its schedule and has attempted to reduce the impact of cancelled flights by introducing more spare aircraft into its rotations. New CEO Robert Fornaro was brought on, in part, to imbue Spirit with some of the operational excellence that his previous airline AirTran embodied during his term as CEO of that Atlanta-based ULCC. Frontier, on the other, hand is betting heavily on customer service technology, including a better bundled fare booking experience (to overcome some of the natural customer aversion to the a-la-carte business model) and empowering flight attendants with Samsung tablets in flight to fix its in-flight payment issue (previously 10% of flights went without allowing passengers to make inflight purchases due to technology malfunctions).

The ULCCs are in the earliest stages of making these customer friendly changes, and their efficacy will not be known for several months as US Department of Transportation customer service and operational statistics are released. Frontier still has to face up to its own operational challenges while Spirit also needs to improve on its frequently mediocre in-flight and airport experiences. And this will cost money (particularly due to decreased aircraft utilization and the cost of investing in service and product), increasing costs and reducing profits in the short term). But in Europe, Ryanair, who both Frontier and Spirit have modeled themselves after, successfully navigated this exact transition. The new, “cuddly,” Ryanair is as fabulously profitable as ever without engendering quite as much hate amongst customers. Our guess is that over the next 18-24 months, both Frontier and Spirit will manage the same.