ULCC Airlines are Morphing in the US

With the demise of ultra low cost carrier Spirit, the ULCC market is being widely criticized as an obsolete business model and one that can’t compete with the more sophisticated products from the full service airlines. We view the problem from a different perspective – namely margins. The problem has been that for many years, the business model for the ultra low cost carriers translated to them being ultra low revenue carriers.

The industry is changing, and many of the low cost carriers have enhanced their product, are looking hard at the economics of their business models, and introducing changes.

Product Enhancement

For most ULCCs, the product is not great. You get what you pay for, and are typically seated in a packed airplane, full of all economy seats with no room to stretch your legs and such tight pitch between rows that a reclining passenger in the row ahead makes it impossible to open a laptop on the tray table that may be resting on your knees. Customer service is minimal, and al a carte service means paying a high price for a can of soda that would be free on the major carriers.

Some industry pundits have likened some ULCC leisure flights as the equivalent of jail time. Spirit, of course, was the butt of late night talk show jokes anytime something went wrong, which in the airline industry is virtually every day, for every carrier. But a reputation once gained is difficult to shake, particularly with bright-colored airplanes that are readily identifiable.

Recently, however, many ULCC started to change. Spirit offered their higher cost “big seats” that were essentially first class seats and legroom without the first class amenities. If you were lucky and they were available, you could upgrade to the larger seats for a fee. That would be a better experience, especially for people like me, spoiled by years of flying first and business class internationally, but perhaps people like me were not a good fit for the typical Spirit customer’s fare expectations.

Frontier Airlines is introducing a first class cabin, with 8 seats per aircraft (2 rows of 2×2) that are wider that the traditional cabin. That first class product is being introduced in 2026 and will be included on new aircraft deliveries as well as being retrofit to the existing fleet.

JetBlue is introducing domestic first class. Southwest Airlines has introduced assigned seating and extra legroom seating, and is still enhancing its product.

Generating Additional Margin Drives Business Model Changes

Why the change? The answer is revenue. Being a ULCC doesn’t mean you need to remain an Ultra low revenue generator. Delta and United are earning higher than average industry margins by focusing on premium travel. Given Frontier’s low cost profile, a first class offering at higher fares translates to a bit more revenue sinks to the bottom line, enhancing margins. Perhaps the success of Delta and United in attracting premium customers has awakened the LCC and ULCC industry to additional revenue generation options. While not everyone is upending their LOPAs and service classes, virtually all LCCs and ULCCs are increasingly revenue focused.

Allegiant, which is acquiring Sun Country, has developed alternative utilization strategies and a three-legged low cost model with a profitability driven lower utilization strategy, combined with charter, and freight operations. They are an outlier ULCC with strong margins.

Ancillary Revenues and Profitability

The fact that virtually all US carriers lose money on flying at today’s airfares, but make up for it with loyalty program revenues and credit card tie-ins, speaks volumes about the competitive environment. With the major carriers having tens of millions of loyalty members, and the smaller carriers having much smaller numbers, the opportunities for additional revenue generation are somewhat limited, particularly for regional operators or carriers that don’t serve all markets. You won’t find a lot of Alaska Airlines frequent flyers in the eastern half of the country for that west-coast focused (but expanding) airline.

Today, the competitiveness in the industry requires pricing airfares lower than costs, but using ancillary tie-ins to make money. The ULCC carriers introduced the a la carte model to the industry, such as charging for bags and seat assignments. Elements of that model have carried over to the majors. But the major difference between airline revenue generation today is the combination of operating revenues and the ancillary revenues generated by loyalty programs. In this regard, Delta and United lead the industry, as shown in this analysis by The Economist.

The Bottom Line

It isn’t that a low cost model doesn’t work. In a commodity market, low cost producers can and do win. But the trick is to de-commoditize the market and avoid becoming an ultra low revenue carrier. That’s the new challenge for upstart and innovative carriers. Whether lower utilization and not flying on Tuesday like Allegiant, flying to non-competitive markets like Breeze, or re-focusing on product and business travelers like Southwest and JetBlue, standing still is not an option in today’s industry.

With the war in Iran dramatically increasing costs, a key element will be how quickly a carrier can recoup the increase given their booking horizon and competitive fare increases. Of course, in that situation, those with financial strength and stronger balance sheets can withstand the periodic industry shocks like the fuel cost and potential fuel availability crisis on the horizon.

The ULCC model, in itself, is not the problem. The problem is when ULCC carriers become ULRCs, ultra low revenue carriers. Will the variety of product changes we are seeing work? The jury is out, and becoming more complicated with the current high fuel cost environment that will likely remain through 2026. Stay tuned.

Views: 0

About The Author