Bloomberg - May 16th 2023
Low-cost airlines are known for no-frills, cramped cabins and annoying fees for everything from bottled water and printed boarding passes to seat selection. You get what you pay for, basically. But that’s only one component of these airlines’ business model. The other key part is aggressive growth: More flights on the schedule mean more opportunities to spread costs around and make it economical for Spirit Airlines, Frontier Airlines and the like to chase market share with rock-bottom headline fares.
Before Covid, these airlines could grow as much as they wanted and could afford. These days, a stubborn scarcity of planes and workers makes it virtually impossible for carriers of any shape and size to fully satisfy demand that has come roaring back from the pandemic doldrums. These curbs on growth are jamming up the operating model of low-cost airlines and giving large full-service carriers such as United, Delta and American Airlines a competitive advantage that will be hard to reverse.
If you’re grumpy about high prices and canceled flights, you should save some complaining for an aerospace manufacturing sector that still doesn’t seem to have learned its lesson on resiliency planning. The airplane supply chain remains crippled by labor shortages and production challenges, pushing out wait times for new planes and repair work on older ones. Certain engines are also requiring maintenance earlier than expected, further crimping the number of planes airlines can fly at any given time. There aren’t enough air-traffic controllers, particularly at the facility responsible for the New York area’s three main airports, which has only 54% of the staff it needs. The Federal Aviation Administration has asked carriers operating in the region to slash flights during the busy summer travel season to help ease the pressure.
These constraints are hitting the low-cost carriers particularly hard: Spirit has had to trim its 2023 flying plans four times since initially giving guidance, while Frontier has cut its capacity growth target twice, according to Melius Research analyst Conor Cunningham.
The collective pressure on aviation infrastructure means airlines need to operate with higher levels of buffer staff and planes and lighten up their schedules if they want to successfully deliver passengers from point A to point B — all of which erodes the low-cost carriers’ historic cost advantage and eats into their profits. Fuel and labor inflation isn’t helping. Pilots remain particularly scarce, and Spirit is still struggling with attrition even after reaching a two-year contract with its union that will increase pay by an average of 34% over the period.
The large legacy carriers are getting burned by plane and pilot shortages, too, but the silver lining in their case is that when fewer seats are to be had, these airlines can charge higher fares. Ticket price inflation feels different if all a traveler gets is a bare-bones seat on a plane that may or may not make it to its destination on time, if at all.
Frontier and Spirit cater primarily to leisure travelers in North America. This market boomed early once the pandemic started to subside, but its recovery is starting to look close to tapped out. The big airlines, by contrast, have substantial transatlantic and Asian operations that should experience a surge of demand this summer after the dismantling of Covid travel restrictions that were still in place in many countries last year. Delta is operating its largest-ever transatlantic schedule this summer and feels confident enough in the international travel recovery that it’s reportedly in talks with Airbus for a significant order of wide-body jets.
The low-cost carriers say that supply constraints won’t last forever and that they can eventually power up their networks as they used to, but they might be waiting a long time. While engine makers GE and Raytheon have both said they’re seeing modest improvements in supply chain logjams, commentary from Safran, Airbus and Rolls-Royce is less optimistic. Investors aren’t holding their breath: Spirit Airlines’ shares are down about 20% this year and are trading at about half the price at which the company agreed to sell itself to JetBlue (the Justice Department sued to block the merger; the airlines are appealing), while shares of Frontier have dropped even more. United shares, by contrast, are up more than 20%.
Jim Hepple is an Assistant Professor at the University of Aruba and is Managing Director of Tourism Analytics.