Why are cheap airlines being ignored by American travelers?

 Why are cheap airlines being ignored by American travelers?

The third quarter of 2023 saw large profits for major US airlines, while low-cost carriers' profitability suffered. Is this the start of the end for low-cost airlines?

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Many Americans are searching for ways to save costs wherever they can, especially when it comes to travel, since costs continue to grow globally. Nonetheless, in an inflationary climate, customers may not be gravitating toward low-cost carriers, according to the most current list of financial reports from major American airlines. In the third quarter of 2023, sales for low-cost airlines were weak, although revenue for traditional carriers increased.

One of the major low-cost carriers, Frontier Airlines, lost $32 million (£26 million) in the third quarter. Spirit Airlines also suffered a $157.6 million (£197 million) loss. With a net income of $240 million (£193 million), Southwest Airlines—regarded as the industry's combination low-cost-full-service carrier—saw a roughly 30% decrease from the prior year.

It's not that individuals aren't making travel-related investments; quite the opposite. May 2023 saw an increase in spending on flights and associated travel costs as pandemic-related limitations on international travel begin to loosen and as previously unattainable foreign locations have grown in popularity.

The three major legacy airlines, American, United, and Delta, have profited from this attrition. Each had a record-breaking third quarter of earnings. United and Delta's net profits increased to $1.1 billion (£890 million) whereas American's net income was $263 million (£212 million). In the instance of Delta, it represented an annual rise of around 30%.

According to Helen Baker, a senior analyst at TD Cowen with expertise in aircraft leasing, air freight, and airlines, a number of convergent variables seem to be responsible for the disappointing results from low-cost carriers. The figures don't surprise many analysts.

"Revenge Trip"

The desire of American customers to visit overseas surged when travel restrictions loosened during the epidemic. The term "revenge trip" refers to the practice of trading several short-distance excursions for lengthy ones. This required traveling abroad on commercial flights, something that is not often done by low-cost carriers.

According to Baker, "there was a shift in travel this year from domestic to international." Because they had more long-haul foreign tickets to sell and engage in, full-service airlines had a stronger quarter."" According to Baker, passengers inside the nation were searching for similar lodgings for those who did choose to fly. which low-cost airlines do not provide: The main reason major airlines did better is because they had more available premium tickets.

"This year's third quarter is probably going to be disappointing if you don't pay premiums, if you can't rely on loyalty, and if you don't fly internationally."

Budget airlines saw a decrease in passengers as a result of a fall in business travel. In the age of Zoom and constrained corporate budgets, business travel has been less popular, and Southwest in particular has struggled to load its planes with passengers.

Low rates are a key strategy used by many low-cost airlines to lure budget-conscious passengers away from full-service airlines. However, in an effort to compete with low-cost carriers, who often have a price edge, these big airlines have also lately started to cut their rates. The US Bureau of Labor Statistics (BLS) September Consumer Price Index data indicates a 13% year-over-year decline in average airline tickets across all airlines.

Experts state that passengers who travel in an inflationary environment often choose to fly with large, full-service airlines. This is partially due to the fact that most of them are better incomes who are less concerned with money and are prepared to pay for services like checking that are charged by budget carriers. Baggage and choice of seat.

"Low-cost and legacy airlines are very different types of airlines, and budget airlines attract very different types of customers," states Henry Harteveldt, an expert for the travel sector and airlines. As expected, the average passenger on a low-cost airline makes far less money than a Delta traveler. Our April study indicates that the average household income of a low-cost airline passenger is around $78,000, with the majority of these passengers being Americans. According to him, the average family income of someone who travels is around $78,000. For example, at Delta, it was somewhat more than $100,000.

Everyone benefits from the sheer existence of low-cost airlines since they compel bigger businesses to reduce their rates. - McGee, William

"In the current economic climate, you can see why some budget airlines are feeling the pain," said Harteveldt. "Consumers are more sensitive to higher interest rates, have lower discretionary income, and must reprioritize their income, which may limit their ability to travel."

Resembling 'a essential gap'

When forecasting the future of low-cost airlines, there are a few key elements to take into account, according to William McGee, senior fellow for travel and aviation at the American Economic Liberties Project.

Firstly, it's crucial to keep in mind that low-cost airlines cover "an essential gap" in the market since, in the absence of such carriers, there probably wouldn't be any other airlines catering to low-income passengers. When given the option to choose for a full-service airline at a higher cost or to cancel the trip altogether, McGee believes that most individuals would prefer to remain home instead of becoming broke. Would like to remain.

"There is less competition and fewer airlines in America than at any time before World War I" highlights the second, more significant factor at play: the perilous state of the airline sector.

He reports that the number of scheduled passenger airlines operating in the United States has increased to 12 from 10 a few years ago, with the entry of low-cost carriers Breeze and Avlo. Virgin America was the last airline to debut in 2007 before this. There were eighty airlines during the height of the sector in the middle of the 1980s, but customers now have fewer options due to a string of bankruptcies, mergers, and acquisitions. Currently, four airlines hold nearly 80% of the market: American, Southwest, United, and Delta.

JetBlue is now attempting to purchase Spirit, a low-cost airline, which might further diminish competition. According to McGee, this is crucial because, despite their rarity, low-cost airlines act as a buffer to prevent pricing increases.

He claims that "everyone benefits from the mere existence of a low-cost carrier because it forces larger companies to lower their fares." In the event that Spirit and JetBlue combine, those airlines may cease to exist, in which case "people will have to pay more in every city and on every route."

It may be in the interest of stakeholders, including the US government, to take all reasonable steps to keep low-cost carriers in business. This may include preventing the Spirit-JetBlue merger, which is now being denied by a federal judge.

While McGee is concerned about the long-term viability of low-cost carriers, their immediate survival will be determined by how effectively they manage the present economic climate and rising borrowing rates.

According to Harteveldt, "I believe low-cost airlines will persist, but their size and quantity will vary." A lot hinges on how well these airlines' management teams handle this challenging economic climate." Handles.” "I believe these airlines can and will use the tools at their disposal to deal with this; we are not in a recession or depression." This may indicate a preference for the more sophisticated reward systems and streamlined booking processes that Frontier and Southwest are launching, respectively.

In the end, low-cost airlines are not always in a death spiral, even as bigger airlines exert pressure on their smaller, less expensive rivals. Rather, it's more like these carriers are caught in a "wrong place at wrong time" situation.

"The industry is very cyclical. It's a rollercoaster ride, and it's too soon to worry about the low-cost carriers going out. There are ups and downs, and within that, there are ups and downs for certain airlines and kinds of airlines."It will happen," McGee replies. "I don't think it's a sign of a trend; the big companies took advantage of the right circumstances to grow and succeed, but they also go through cycles of boom and bust."