Spirit Airlines pioneered the ultralow-cost model, then failed. What does it mean for budget carriers?
As Spirit Airlines’ final flight — 1833 from Detroit — descended into DFW International Airport shortly after midnight Saturday, one of its pilots declared over air traffic control frequencies, “It’s hard to believe this is it.”
The goodbye from the airline known for its boisterous banana-colored planes and bare-bones fares sent shockwaves through an industry that hadn’t seen a major carrier fail in years, leaving more than 900 people without jobs in Texas. Some have said it’s the most significant failure since the collapse of Pan American World Airways and Eastern Airlines in 1991. Experts — including analysts, as well as current and former airline executives, who spoke with The Dallas Morning News — weighed how Spirit’s failure would affect the remaining budget airlines.
Henry Harteveldt, an airlines analyst and founder of Atmosphere Research Group, told The News that Spirit’s collapse doesn’t spell doom for the budget airline sector.
“The irony of Spirit’s failure is that it makes the remaining budget airlines that much stronger … because you take out a competitor,” said Harteveldt. “It reduces competition by however much, depending on where those airlines operate and you take out that much more pricing pressure.”
“Despite what [United Airlines CEO] Scott Kirby says, the budget airline model is not broken. The budget airline sector is not dead. The budget airline sector is alive and will be OK .”
Budget airlines, like Spirit and Frontier, have been grappling with soaring fuel costs amid the Iran war, which has thinned the margin for error for airlines already navigating financial headwinds. Offerings like premium products and the creation of basic economy fares from legacy carriers like American Airlines have also lessened the appeal for value airlines.
Spirit leaves behind its budget airline counterparts that are each navigating different priorities this year.
Avelo Airlines, which plans to operate at McKinney National Airport by the end of the year, has undergone network restructuring in the last year. Allegiant Air is completing a merger with Sun Country Airlines. Breeze Airways, a privately held budget airline, is expanding its reach by adding more markets to its network.
“Of course I’m worried because fuel prices just doubled,” said Andrew Levy, CEO and founder of Avelo. “I got to pass that on to the consumer. We’re not in any imminent danger of the company having a problem. This is a very uncertain situation. It’s very volatile.”
“The government may need to step up and do some things that perhaps … maybe treat smaller airlines in a way that’s unique. Give us the chance to gain a toehold in an ultra-competitive industry dominated by giants.”
“We’re each in a different place. Two of us are private. That’s particularly challenging because we can’t just go into the equity markets and sell equity, for instance, right? [Publicly traded] Allegiant and Frontier, they don’t want to do that, shareholders hate that.”
To combat the widening competitive disadvantage, the trade group representing budget carriers, the Association of Value Airlines, has asked the Trump administration to consider a $2.5 billion pool that budget carriers could use since they have been most affected by a spike in fuel prices, according to media reports.
“The value airline model still works here in the U.S., when the market isn’t distorted,” Jonathon Freye, executive director of the Association of Value Airlines, said. “The unfortunate thing is Spirit launched 30 years ago, and since then we’ve had decades of bad policy decisions that unfortunately have distorted the true competitive environment.”
Bill Swelbar, an aviation analyst for the Swelbar-Zhong Consultancy, pointed out that budget airlines aren’t the only carriers struggling.
“Last week, Alaskan got a double downgrade from Citi, so no airline is immune here. ‘What it is that high fuel prices will do in the immediate term is expose the cracks in models that are going to struggle to recover.’
The history of low-cost flying
While Spirit was seen as the modern disruptor in a consolidated industry where four airlines control roughly between 75% to 80% of the country’s market share, low-cost flying first emerged decades ago.
Many recognize Pacific Southwest Airlines as “America’s first low-cost carrier.” The California-based carrier began flying in 1949 and operated hubs in Los Angeles, San Diego and San Francisco.
Pacific Southwest offered “low fares and quality service,” says the San Diego Air and Space Museum website, which added that the carrier sometimes offered fares at half the cost of a ticket on Chicago-based United Airlines or Trans World Airlines, which was acquired by Fort Worth-based American Airlines in 2001.
“PSA, at the time, operated exclusively within the state of California, and therefore was not subject to government price regulations by the old Civil Aeronautics Board,” Harteveldt said.
Following PSA’s model, as Harteveldt explained, was Dallas-based Southwest Airlines, which in 1971 launched service exclusively within Texas with $1 cocktails and $20 fares that beat competitors by $14, according to previous reporting from The News.
“At one time, Southwest was the low-fare airline in the country,” Harteveldt said. “They had such an impressive ability to stimulate travel through their discounted fares that there was something called the ‘Southwest Effect,’ that when Southwest started flying to an airport … they grew the number of people who were flying in and out.”
After Southwest came other airlines seeking to cater to low-fare-seeking customers, like People’s Express Airlines, which was acquired by Continental Airlines in 1987.
In time, carriers like Spirit, JetBlue, Frontier Airlines, Avelo Airlines, Breeze Airways, Allegiant Air and Sun Country Airlines emerged to create a sector of air travel that catered to those looking for the best bang for their buck, not necessarily the most luxe experience.
“It really has opened up air transportation to a larger group of people,” said Ted Christie, the former CEO of Spirit. “When I grew up, it was a luxury good. The only people who traveled by air were the very wealthy or people who were traveling for business. That’s not the case today and that’s a product of those low-cost airlines bringing that type of service.”
Budget carriers keep costs down for consumers in part by lowering their own operating costs. For example, some budget airlines operate a uniform fleet. JetBlue and Frontier operate an all-Airbus fleet. While not exactly classified as a low-cost airline anymore, Southwest has remained steady in its commitment to an all-Boeing fleet. Spirit also only operated Airbus aircraft.
“Spirit pioneered the ultra-low-cost model here in the United States,” Harteveldt said.
“It had been made popular in the 2000s over in Europe by EasyJet and Ryanair, where you paid for everything you’re taking. Your base ticket price just included the seat and the seat belt. If you wanted to check a bag, you paid for that. If you brought a bag on the plane, you paid for that. If you want something to eat, you paid for that.”
Swelbar argues “I don’t think we can just lump together the value airlines and say it’s a model.”
“There are two models, and Spirit and Frontier adopted a model that was built around traffic that the large carriers would spill or not have enough seats to accommodate right?” Swelbar told The News. “They would attract those customers. They’ve lived off of American and Delta and United spill traffic for a long, long time. And then the network carriers put basic economy in place.”
“If the spill model is not dead, then it is on life support.”
Swelbar said that the strategy that Allegiant and Sun Country have deployed, which is to fly a less-than-daily, seasonal schedule, has been a success in the budget airline sector.
“They stay in their lane. There is a segment out there. Allegiant has been a wildly successful company for a very long time. Sun Country, it was born in 1982 and [is] doing the same thing. They just understand who they are.”
The road ahead
As TD Cowen Analyst Tom Fitzgerald laid out in a research note this week, the budget airline space has encountered several challenges post-COVID pandemic.
“Maintenance expenses spiked due to supply chain bottlenecks. Airport infrastructure projects drove landing fees higher and made it challenging to offer heavily discounted fares in major cities. Spirit was also hit the hardest by the GTF engine groundings.”
The note added that the “revenue environment” benefited full-service airlines, which “had honed their revenue segmentation chops and were using larger aircraft to offer enough economy seats to compete w/ the [ultralow-cost carriers].”
Fitzgerald’s note credited full-service airlines for pivoting into leisure markets when corporate travel was slow to recover, saying they had “a better overall value prop,” with benefits like a better schedule, network, customer service reliability, and loyalty programs.
“Smaller airlines have to do a few things in order to compete,” said Christie. “One is continue to voice the things that they believe, the value that they believe they bring to the market to the powers that be.
“The second is they got to find alternate places where they can serve, where lower fare-type consumers will gravitate. Through a combination of those two things, the low cost model can find its niche but it’s a constant battle.”
Big airlines have been laser-focused on catering to more affluent customers, part of the reason United Airlines and Delta Air Lines have been able to run up profit margins in recent years. Even Southwest and American are investing in their own onboard upgrades.
Meanwhile, budget carriers have tried to match that with premium options of their own, but at a cheaper price. Frontier is in the process of introducing its own first-class seating. Avelo also offers extra-legroom seating. JetBlue is known for offering spacious seats, even in regular economy, in addition to free Wi-Fi and snacks.
“If you look at most of our carriers, they’re starting to add things like Wi-Fi on board, they’re starting to add a premium front of cabin experience,” said Freye. “The proposition of moving from the back of cabin to the front of cabin to a Delta first-class experience is a colossal difference in price.”
“We think on our value airlines, right, you’re just considering perhaps a marginal increase to get perhaps that larger front seat.”
Levy, who is a former United Airlines executive, argues that the “free capital” issued by the government to bailout legacy airlines following the pandemic tilted the competitive balance in their favor, hurting small airlines. He also points to other disadvantages, like “burdensome rules” such as the requirement to include all taxes and fees included in a fare upfront, thus increasing the appearance of the price to consumers.
“Large airlines have been doing things in Washington to tilt the scales in their favor since I’ve been in this industry for 32 years,” he said.
“Using their market power, their size, their access to decision makers … to impose regulations that are directed more favorably toward them and unfavorably toward the smaller, low-cost airlines who they’ve always viewed with incredible hostility.”
Freye said his trade group has requested DOT expedite regulatory reforms it seemed open to late last year and “take a more active involvement in ensuring that airport infrastructure is utilized efficiently.”
“When our carrier enters a market, we think that there are some airports across the country where airport infrastructure is being perhaps purposely underutilized, for the purpose of keeping out the smaller value carriers like ours who can come in and offer more competitive fares,” Freye said.
Spirit’s exit may provide an opening for budget carriers to expand in big markets where space has been at a premium. For example, the two gates at DFW Airport that Spirit operated from will be reassigned at a later date, the airport previously told The News. DFW Airport suddenly lost more than 4,000 flights the budget carrier was scheduled to fly through November along with hundreds of other canceled flights in markets across the country.
Spirit competed at DFW with legacy carriers on routes to global markets like Chicago, Los Angeles and New York.
Multiple airlines have already seized on the opportunity to diversify their network.
Low-cost JetBlue immediately announced it was heightening its focus at Fort Lauderdale International Airport, where it previously competed with Spirit. Frontier Airlines announced major fare discounts and said it would add nine routes as well as 15 daily flights across 18 of Spirit’s former markets. Breeze Airways is also expanding its network. Avelo said it was offering major discounted fares and using regional airports to serve routes previously flown by Spirit.
Yet, as Levy points out, the challenge for budget airlines dealing with the current spike in costs still remains.
“We’re in a fortunate position at Avelo where we entered this period with a very strong cash balance, the most cash we’d ever had as a company,” he said. “We’re absolutely burning cash right now.”
Levy said his airline was doing things like cutting flights to “make our numbers work at where fuel prices are.”
Harteveldt said budget airlines have to turn their focus to improving their on-time performance and customer experience.
“They have to remember that even though people may not be paying a lot of money for their tickets, they do have a responsibility to treat their customers courteously and professionally, to be responsive to customers when problems occur, and to put the customer first,” he said.
“I think if they were to be more customer-focused, it would go a long way in improving their own reputations and make that sector that much more appealing to fly.”
And Freye emphasizes, “The reality is this is a really high-cost environment.”
“And I think the longer that this goes on, the more difficult it will be for our carriers to continue offering affordable air fares, to connecting smaller communities to the vacations and important trips that they want to take to see families, to get out and explore.”