Frontier Swaps to A321neo as ULCC Business Models Change |

News last week that Frontier, a ULCC, is returning 13 A320neos early and taking on ten A321neos to maintain existing capacity. This move is indicative of two elements. First, the ultra-low-cost carrier business model remains quite challenging, and second, larger aircraft offer opportunities for additional premium seating and revenue that move away from the traditional ULCC model, which is evolving. Replacing a relatively young fleet of A320S with A321S means Frontier has recognized that market changes require it to redouble its focus on overall economics, not simply on achieving the lowest possible costs. The changeover to the A321 can provide similar capacity with fewer frequencies without moving to a more expensive wide-body operation that would likely result in more capacity than demand. [caption id="attachment_197171" align="aligncenter" width="640"] image: Airbus[/caption] The ULCC Business Model is Challenging Frontier competes with United and Southwest at its major hub, Denver. United, as a full-service carrier, earns significantly higher yields through its premium traffic in First and Economy Plus classes that Frontier cannot easily match. Although premium seating is now available, comparable amenities such as lounges and Star Alliance loyalty membership cannot easily be matched. In short, United can take the same A321neo aircraft as Frontier and earn significantly more revenue on a flight, even while matching Frontier’s fares in Basic Economy. Spirit Airlines, now defunct, discovered the difficulty of ultra-low-cost business models in a highly competitive environment, and Frontier is now feeling some of the same pressures. United has much higher passenger preference and revenues than Frontier or Southwest in its Denver market. Even Southwest is moving away from the low-cost model to enhance revenue, including a recently announced lounge program co-branded with its loyalty-program credit card partner, Chase. Southwest is considering additional customer service enhancements to begin bridging the revenue gap between Delta and United and the rest of the domestic industry. JetBlue, which began as an LCC, is introducing first-class service across its network next year to enhance revenue and capture a share of the growing premium-class market. The A321neo Offers Frontier Industry-Leading Economics The A321neo offers expanded seat capacity compared with the A320neo and 737 MAX 8, positioning the aircraft for lower seat-mile costs. For a low-cost carrier, having the lowest costs is critical to success, since yields are generally lower than those of full-service carriers. The A321neo makes strong sense for LCCs as it provides the lowest seat-mile costs in the industry, and is the model of choice for several ULCCs, along with the MAX 8-200 in high-density configurations for ULCCs using the 737 MAX. But their high-density configuration doesn’t leave room for two-class seating, whereas the A321 can offer similar capacity with differentiated services thanks to its larger cabin while still retaining low seat-mile costs. In today’s market, the A321is now the optimal size, as demonstrated by a backlog of 5,677 orders as of July 31st, the largest of any aircraft model. While the forthcoming 737 MAX 10 will also be a larger and more cost-effective model for 737 MAX operators, the A321 has a large lead in orders, deliveries, and backlog in the single-aisle market. [caption id="attachment_197169" align="aligncenter" width="640"] image: Airbus[/caption] The Bottom Line It is hard to win as a low-cost carrier without the lowest costs. Frontier, Breeze, and Allegiant in the US have very different strategies and cost profiles. But the fact remains that to generate cash, revenues must exceed costs, and having the lowest costs when revenues are lower is critical. And that's where the most fuel-efficient aircraft comes in: the A321neo. Frontier’s swap of one fuel-efficient model, the A320, for the larger A321 speaks volumes about how important cost minimization is to a ULCC. But after that, there is nowhere else to go to lower costs, so the focus must shift to revenues. That’s where multiple class interiors come in - but selling ULCC customers on premium travel and premium travelers on a ULCC are not easy transitions. The onus for ULCCs is to move from simply low cost to low costs with higher revenue generation. The jury remains out as to whether this will work. On the surface, Frontier’s move smacks of desperation to lower costs, but beneath the surface, the opportunity for premium services and revenue enhancements is driving changes in ULCC strategies. If it works, wonderful. If it doesn’t, the ULCC may quickly become a dinosaur in an evolving US domestic air travel market.

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