Carriers like Spirit Airlines and Southwest Airlines are trying to redefine themselves to consumers
The cheap seats may have gotten too cheap. Low-cost carriers like Spirit Airlines (SAVE) and Southwest Airlines (LUV), who were facing existential threats to their businesses before a “capacity” problem started a race to the bottom for fares, have started trying to upgrade themselves in the eyes of consumers. The dilemma facing them was spelled out in a research note last month by the analyst Thomas Fitzgerald at TD Cowen.
“Low-cost and ultra-low-cost carriers in the U.S. enjoyed an impressive run of growth in the first two decades of the 21st century. They disrupted full-service carrier business models, took significant share, changed consumer expectations, and hastened industry consolidation,” he wrote. “We believe that has changed. The empire has struck back.”
When historically not-cheap players like JetBlue Airways and United Airlines (UAL) have super-cheap budget options that are only getting cheaper, it becomes harder for its competitors to distinguish themselves with price alone.
Southwest Airlines, which is trying to turn things around after a few years of uneven financial performance, is fighting off an activist hedge fund that wants to clean house in its C-suite and board of directors. One big change the airline is making is that it will let customers board planes in an orderly fashion, a normalization measure flying in the face of decades of tradition.
Likewise, Spirit Airlines has been known for guaranteeing that a fare only bought a seat on its plane. Actually choosing that seat, or bringing a carry-on bag, or even getting some mid-flight refreshments — parts of the flying experience that passengers with its competitors had come to expect — cost extra. But now that Spirit is fighting for its corporate survival following its abandoned merger with JetBlue, the carrier is introducing fares that guarantee a “normal” flying experience.
Chris Hydock, an assistant professor at Tulane University’s A. B. Freeman School of Business, said that budget airlines have to bounce back from rock-bottom and help consumers reimagine their services beyond a what-you-pay-for-is-what-you-get basis.
“There has been a big push to de-bundle airline services,” he said. “The un-bundled option is so complicated that bundled options are offering new experiences.”
Frontier Airlines (ULCC), whose stock ticker is literally “ULCC” (ultra-low-cost carrier), rolled out a new wave of premium seating in May, and on its most recent earnings call said the efforts were “accretive.” CEO Barry Biffle spelled out the proposition in fairly simple terms: “At the end of the day, whether you’re sitting on a plane for an hour or four hours, people like a slightly better seat.”
One factor that might work out in the two companies’ favor is that an overabundance of planes in the sky means that airlines will start pulling back from certain routes and cities. The likes of Spirit and Southwest, then, will have more room to grab market share and reintroduce themselves to consumers who might have gotten used to doing their regional travel on higher-end services.
But adopting a more traditional business model carries risks. Spirit Airlines made more than half of its $5.3 billion in passenger revenue last year from “ancillary” streams like bag-checking and seat-choosing fees, according to its most recent annual report; Frontier made nearly two-thirds of its $3.5 billion from those streams. Hydock summed up the messaging opportunity in front of them: “We’re still cheap, but we’re offering some of the luxury options that our competitors do.”
Skytrax has a new entrant into the top decile, and none of them are in the same spot as they were last year
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