Troubled Skies – Why are budget airlines failing?

By now everyone reading this will be aware of the major announcement that Southwest made on Thursday 7/25.  The original version of this paper was written on Friday June 19^th, nearly a week before Southwest announced changes to its 53-year-old business model.

Airlines are always in the news and never for a good reason. The interconnected systems that allow us to traverse the world are subject to a variety of negative events all of which can cascade to system failure. The consequences of failure are heightened during peak travel periods when airlines are running at close to capacity.

We last reported data on the US domestic airline business in 2023 after Southwest Airlines experienced a system wide failure in December 2022 that stranded 2-million customers. This event cost Southwest close to $1Billion in lost revenue, fines, and compensation.

Domestic flights in the USA are back to pre-pandemic levels and the summer of 2023 was the busiest ever recorded. Our data shows that 6% more people would like to travel during the 2024 summer season. Readers of this blog will be aware that there has been a shift in demand for business travel and that level is still considerably less than pre-covid times. The demand that airlines are facing is coming from leisure travelers, people visiting friends and family plus vacation travel. This is the segment that low-cost carriers focused on so they should be doing well, but this is not the case. All the low-cost carriers; Allegiant, Frontier, JetBlue, Southwest and Spirit are struggling; meanwhile the legacy airlines are close to their historical profit margins.

This blog will explain what is going on, but it proves that Brand Love does not equate to a successful business model.

In 2023 we reported that consumer Preference for Southwest had reached a record high and that this was counter to our expectations, which was for Southwest preference to decline because of the December 2022 system meltdown.

 

 

It seems that any publicity is good publicity and Southwest Preference increased between 2022 and 2023. It increased again during H1 2024 to 23%, higher than any other US airline.

Southwest is a low-cost carrier, which does not mean that it charges lower prices, it means that its operating model results in lower cost per seat mile than the legacy carriers, and some of this is based onto the customer. In 2015, the low-cost carriers charging less than the Legacy carriers made excellent profit margins.

 

 

Low ticket prices are not the purpose of Southwest, but 69% of consumers’ who prefer Southwest say low ticket prices is one of the reasons, with 44% saying it is the primary reason. All the legacy carriers also have consumers saying low ticket prices are one of the reasons that they prefer them over the competition, but to a much lower extent.

 

Who Prefers Southwest?

• Aged 55+
• Live in the West
• Not in paid employment
• No child in household
• HH income less than $60K
• Education less than University Grad

Leisure travelers have been paying for Premium seating. This option is not available to Southwest or Allegiant because their planes are not configured that way, and their consumers can’t support it. However, JetBlue offers premium cabins, Frontier is starting to offer a premium product and Spirit offers two types of Economy seats.

What does Southwest offer customers:

• One cabin – Economy class (no Business, Premium economy, or Basic economy)
• No extra charge for oversize passengers who occupy two seats
• 2 checked bags for free
• Ability to change flights up to 10-minutes before departure without cost
• Free inflight beverages and complementary snacks (Alcoholic $6 or $7 a drink)
• Inflight internet for $8 a flight
• Cabin crew inflight announcements
• A unique boarding experience

Converting Preference into flights

Southwest generates the highest level of Preference in 2024: 23%, but not everyone who prefers a particular airline will fly that carrier.

 

 

Southwest Airlines is efficient (73%) in converting its Preference into flights, only American does better at 76% and the most profitable airline Delta achieves 67%.

Travelers have different reasons for switching from their preferred airline, but the primary reason is Route availability (Destination not served by airline), the top reason for Southwest (20% of switchers), JetBlue (20%) and American (17%).

The top reason for people who switched from Delta was promotional pricing from the competition. Travelers switched to American (32%), United (22%), Southwest (17%) and Spirit (11%).

United lost travelers because it was too expensive, with American (35%) taking more of these switchers than any other airline.

Business Outcome

When measured in terms of the number of passengers, Southwest is the largest US carrier with 22% share of domestic passengers during 2023. This demand should show improved profitability for Southwest, but this is not the case.

 

 

Delta is the best managed airline in the USA and has been the most profitable for several years, even though it has a far more complicated operation than the low-cost carriers.

Something is clearly wrong with Southwest. Its costs have expanded as its volume has improved. The same is true for most other low-cost carriers.

 

 

All low-cost airlines are in an untenable situation, and something must change for them to survive. Each management team has presented the reasons for their problems (never the management team) and their plans to ensure a profitable future.

So, what is going on?

Low-cost carriers have lower operating costs than legacy airlines for five main reasons: More intensive use of aircraft, higher passenger density, use of secondary airports (with lower landing fees), paying staff less, using one type of aircraft.

When examining the cost per available seat mile (CASM) we see that cost have risen from 8¢ in 2015 to 11.67¢ in 2022. The low-cost airlines pay the same for fuel costs as the Legacy carriers, and between 2021 and 2022 the cost of aviation fuel increased by 47%.

 

 

Source: Bureau of Transport

 

The price of Jet Fuel has declined from its peak in 2022 but is well above its historic price.

Given the different business models, fuel price inflation affected the total operating cost of low-cost carriers more than legacy airlines.

Excluding the cost of fuel and the CASM for various low-cost airlines shows divergent trends between 2021 and 2022.

 

 

Examining the reasons for low-cost carrier price structures

1. Aircraft used more intensely (more flying hours per day).

Low-cost carriers used to average 12 flying hours per day during the summer season, but last year only achieved 10.6 hours per aircraft. The reasons for this are Weather affecting Florida, a lack of Air Traffic Control staff (affecting Florida more than other states). It has become much harder to operate an on-time airline and without this there is a need for slack (additional aircraft and crews at hubs to ensure that the system flows). This is practically impossible for Southwest since they don’t use a hub system.

2. They pack more people inside the same aircraft – no change.

Frontier reducing the number of seats to introduce a premium product.

3. They fly to cheaper secondary airports – no change.

JetBlue significantly changing their routes and cities served.

4. They pay their staff less.

This might have been true in the past but current salaries (excluding regional airlines) are similar across the aviation industry.

 

 

5. They simplify their operations by flying fewer aircraft types.

This reduces costs for Training Pilots, Cabin Cleaning, and Maintenance.

Southwest only flies B737s and most use the LEAP engines from CFM. It incurred higher maintenance costs and operational distributions because of Boeing’s problems.

JetBlue, Spirit, and Frontier all use Pratt & Whitney PW1100G engines and have incurred higher maintenance costs due to metal fatigue in the turbine.

6. Catering costs are much lower.

Southwest does not offer meals or perishable foods onboard; therefore, there is no need for refrigerated trucks to deliver drinks and food to planes. It’s a simpler operation than all other low-cost carriers who tend to charge for everything.

Twilight of the Gods – the future of low-cost carriers

This is the end of the classic low-cost airline business model in the USA, unless…

1. On-schedule predictability returns but this is outside the control of the carriers

• FCC recruited more ATC last year but still needs 3,000 more
• The weather becomes less volatile
• Maintenance issues are resolved

2. The price of Jet Fuel returns to $2.00 per gallon from its current $2.83. This is unlikely to happen as global air travel is expected to double by 2040.

All low-cost carriers have explained how they intend to return to profitability.

Allegiant plans to boost seat availability by 6% by reactivating older jets and is opening a series of new routes. Part of its business model includes earning commissions by selling passengers ancillary items like rental cars, hotel rooms, tickets to events, amusement park passes, and other add-ons. Additionally, Allegiant is expanding beyond travel with the Sunseeker Resort. The first opened in Charlotte County, Florida in December 2023.

Frontier has simplified their route structure and condensed operations to 13 hubs. Additionally, they are abandoning their low-cost structure, with bundled prices and the introduction of service classes. More is to come.

JetBlue is already changing with the introduction of their transatlantic flights. During the winter months these planes with their first-class suits are being used on domestic flights. Additionally, JetBlue is changing its route structure and building San Juan (PR) as a hub. JetBlue abandoned its plans to buy Spirit in March.

Spirit Airlines is preparing shifts to its merchandising strategy that will be geared toward higher-end flyers. It must appeal to travelers that fall outside of its core discount base to adapt to evolving customer preferences. Plans will be revealed in August.

Southwest is the company that originated the low-cost model that has been copied successfully around the world. However, they appear to be the company that has done the least to prepare for the future. Their plans call for a hiring freeze with the intention of reducing staff numbers by 2,000.

Clearly consumers like the current Southwest.

 

 

It has near universal awareness.

52% of those aware have tried Southwest.

61% of those who have tried have been retained in the brand either as a Loyal user or someone who says it is one of the airlines they use.

It is attractive to those who have not tried, this is mainly tied to route availability.

Very easy to understand why management is reluctant to change the “winning” formula.

A Southwest comparison vs. the leading airlines is informative. Its trial rate is only marginally less than legacy carriers. Retention is in line with the majors. It is Attracting the right number of people who have never flown Southwest and importantly its Loyalty rate among current users is best in class.

 

 

However, change is coming – Elliot Investment Management have bought an 11% stake. They want to replace the senior management, to make changes to operations that will enable Southwest to achieve the profit margins being delivered by legacy carriers. Effectively they will convert Southwest to the business model used by legacy carriers.

Update 7/25/2024: Earlier today Southwest announced three major changes to its customer experience:

1. Assigned seats

• Southwest has had an open seating policy since 1971. Data presented by Southwest indicates that 4 out of 5 Southwest customers would prefer to have assigned seats.

2. A Premium Cabinet

• Southwest has had one economy cabinet since it started. Its economy is superior to the economy provided by the ultra-low-cost carriers, providing free beverages and snacks, plus two checked bags.  The price of alcoholic beverages and Wi-Fi is lower than other low-cost carriers.
• JetBlue explained that 25% of customers prefer to pay for a premium seat.
• MSW has seen the growth of Divergent economy with some consumers willing to pay for luxury experiences and other searching value. The old middle is giving way, and legacy carriers have catered for this with four classes of service on the same plane: First or Business, Premium Economy, Regular Economy and Basic Economy.  Southwest are taking the first step to offer a more premium experience.

3. Overnight flights, from Las Vegas to the East coast.

• Implementation is planned for Valentine’s Day 2025.
• There is demand for overnight flights from the West coast to the East coast, but the driving factor was probably the possibility of using equipment for more hours per day. Additionally, storms and other adverse conditions tend to be higher in the mid-afternoon after the land has warmed up.

Satisfaction alone won’t drive your business forward—loyalty will.

Companies have been measuring customer satisfaction since the 1750s, and by the 1980s, it became a standard practice.

Here’s the thing: measuring customer satisfaction isn’t an end in itself. It’s a means to achieving customer loyalty.

As the old saying goes, “Satisfaction is worthless, loyalty is priceless.”

→ At MSW Research, we’ve found that satisfaction and loyalty share a significant relationship—a 1 to 3.3 ratio in explaining market share movements.

The focus on building loyalty is vital because acquiring new customers is 5 to 20 times more expensive than retaining existing ones.

Therefore, investing in customer satisfaction to foster loyalty isn’t just good practice—it’s smart business. 🎯

 

Brand health hinges on two dimensions: market strength and perceptual strength.

These dimensions come together in a two-by-two grid:

⭐ Top Right: High-Performance Stars
These brands excel in both market and perceptual strength.

🎯 Top Left: Niche Brands
High perceptual strength but low market strength.

🔖 Bottom Right: Generic Brands
High market strength but low perceptual strength, often seen as copies with a price point advantage but lacking perceived worth.

❓ Bottom Left: “So What” Brands
Low in both market and perceptual strength, this quadrant is both a graveyard and a nursery.

New Brands start here and might migrate to become high-performance stars, or migrate to become niche brands or generic brands. All new brands invariably start in the bottom left quadrant.

However, declining brands also move towards this quadrant until they eventually exit the marketplace.

Understanding these dynamics is crucial for brand strategy and growth.

At MSW Research, we help brands navigate these quadrants to maximize their potential and longevity.

So, are you taking care of your brand’s health?