Are Budget Airlines Facing Extinction?

0:05For years, budget airlines have reminded customers of an important lesson. You get what you pay for. The tray tables are made for amps, so tiny. You have to pay for water. I thought that was complimentary. No, nothing's complimentary on a budget airline. The seats are so uncomfy, like zero padding. They oversold their flights and then they pick random people to like bump off the flight. So I was one of those random people. And the plane was boiling. But people who want to travel cheap have flocked to budget airlines because the price is so right. So sort of the peak of the budget airline era, which was maybe 10, 12 years ago, this seemed like it was going to be the dominant business model.

0:49That's our colleague Alison Sider. She covers the airline industry. Budget airlines were growing really quickly, expanding into major airline hubs and taking a lot of passengers. And the big airlines felt they needed to find a way to compete. I mean, it seemed like this was going to be like a real challenge to the bigger airlines.

1:12But budget airlines haven't lived up to that challenge. And lately, they're a dying breed. Spirit Airlines went under earlier this year. Formerly beloved Southwest is facing headwinds. Now, Frontier is trying to turn around its business before it's too late. What happened to the budget airline? I mean, the business model is really facing, you know, in some ways existential challenges. For the last several years, these airlines that were once sort of the fastest growing, most competitive, most disruptive, now they're kind of on the back foot and they're having trouble competing with the legacy airlines.

1:51I think the future for budget travel is a little bit uncertain. Welcome to The Journal, our show about money, business, and power. I'm Jessica Mendoza. It's Tuesday, September 15th.

2:10Coming up on the show, are budget airlines facing extinction?

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3:14One of the last major budget airlines in the U.S. is Frontier. It's based in Denver And its planes are recognizable Painted white with forest green lettering With a different animal on every plane's tail In the 2010s, Frontier went all in on the budget airline model Frontier Airlines is one of these low-cost airlines Their ticker symbol is actually ULCC, ultra-low-cost carrier Like, that's how much they sort of wanted to embody that business model Own that identity Yes, Spirit was sort of maybe the best known It had the bright yellow planes and a lot of the, like, swagger and personality. And Frontier really had a very similar business model.

3:56It kind of shares some common roots with Spirit. You know, not to speak ill of the dead here, but Spirit was the butt of a lot of jokes on social. What's Frontier's reputation like? I mean, yeah, in general, the budget airlines, like you said, are, like, often fodder for late-night comedy. Like, maybe Frontier wasn't as notorious as Spirit on that front. But Frontier actually has had like a pretty rough operation over the years. You know, just not the most reliable, like often kind of towards the bottom of the list for on-time performance or cancellations or bumping or kind of what have you. I flew Frontier Airlines so you don't have to.

4:33Like, really, don't. Word to everything. Word to my mother. I will never a day in my f***ing life book Frontier Airlines. My Frontier Review? Only book if you're brave and desperate. is sometimes in life you get what you pay for, and sometimes you get screwed.

4:54Frontier has said that it has made strides in improving its operation and reducing the number of canceled flights. So, you know, and then plus, it is just, it was sort of by design a more bare-bones experience. You're not going to have a meal, like you're going to be paying for any sort of extras that you want. And, you know, it's certainly just not a luxurious experience. Right. What you buy is typically just like the base ticket, your seat, and then anything else is extra. Yes, exactly. And for years, that model worked for Frontier. Then in 2022, the airline decided it was time to expand. And it offered to buy Spirit Airlines and create a mega budget airline.

5:38Frontier sort of always wanted to do a merger with Spirit. I mean, they both kind of had a national presence, but their root networks were complementary, like Spirit, maybe more prevalent, you know, it was based in Florida, maybe more prevalent in the east frontier, a little bit more in the west. Sure. That they could join forces and they would be, you know, an even bigger force to be reckoned with that could really challenge. You know, the airline industry is dominated by four big airlines, you know, Delta, United, American and Southwest. And that together they could be even more aggressive competitors.

6:11With their powers combined. To those four. Yes. But before Frontier could close on Spirit, another suitor stepped up. JetBlue. And JetBlue brought more money to the table. This offer comes less than two months after Frontier Airlines already made its own bid to buy Spirit for$2.9 billion. Spirit wound up going with JetBlue. But a federal judge killed the deal, citing antitrust concerns. We are looking at a decision in the JetBlue Spirit merger case, and it is against JetBlue and Spirit merging. The DOJ victorious judge has decided this merger will not go through. By the way, we made four episodes about this failed merger.

6:55So check out the links in our description for more. In the end, no one ended up with Spirit. The airline filed for multiple bankruptcies. And earlier this year, it shut down for good. The end of Spirit created an opening for Frontier to take over the budget airline market. And the company says it has benefited from Spirit's demise. But Frontier has also had to face some turbulence. First, in the economy, where things like inflation and higher costs for jet fuel have made it harder for Frontier to operate at the low prices its customers expect. And the other reason? In the years since Frontier tried to buy Spirit, the appetite for budget travel has waned.

7:39Things really changed for the budget business model. You started seeing a lot of these changes in customer behavior, increases in competition. That all starts to come to a head, and the budget airline business model is more challenged. And that's because today, more consumers just want a better traveling experience, even if it means paying more. The kind of hot trend in the airline industry is premium. Premiumization, they call it. That's next.

8:26We'll be right back.

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9:09One of the biggest threats to budget airlines in recent years is major airlines. Delta, American, and United have all started offering cheaper options for flyers. Like Basic Economy, a no-frills cabin that's cheaper than other parts of the plane. The bigger airlines got more sophisticated about competing with these budget guys. They develop basic economy as a reaction, as a way to sort of say, OK, we're not going to cut our prices on every flight or every seat on the flight. We're just going to have a couple of seats that we offer at a comparably cheap price and comparably bare bones service. So, you know, you might not get an advanced seat assignment like there's different policies.

9:52But, you know, it's a little bit more like you're flying the budget airline, but you're still on the big airline. A lot of consumers like that because you get the routes and reliability of a major airline, but at cheaper prices. And it might not be as cheap as a budget airline, but having different options has helped these bigger airlines target a wider range of customers. I mean, the bet right now that most airlines are making is that people want the more lux experience and that they are willing to pay for it. Delta kind of pioneered this 15 years ago. And their bet was like, if we have the best product, like the most reliable operation, people want a nice experience.

10:28They want to be on time. They want a nice seat. They want good service, especially, you know, business travelers and companies that really can afford to shell out. And that has been really successful. Another way that major airlines keep consumers coming back is through loyalty programs. They can use these credit cards, these co-branded credit cards, really to kind of keep people loyal so that maybe they're not even looking at what the prices are on every other airline. Where, you know, if someone wants to earn their miles, like, they might be willing to pay$100 extra because they want to amass points and earn status.

11:08This makes it more difficult for a budget airline like Frontier to compete. It doesn't offer as wide a range of flight options, and its loyalty program isn't as robust. This means that Frontier has had to make some changes to its business model. It now offers bundle options that include a ticket, bags, and seat selection. Soon, it'll even offer first class and Wi-Fi on board. In other words, it's starting to sound like a regular airline. Allison spoke with Frontier's CEO, Jimmy Dempsey, about his plans to turn the company around. You're sort of like the last budget airline in some ways, or the last big one that kind of has that nationwide reach.

11:51What is the future of the model, I guess? I mean, look, I think we've got a really good future ahead of us. then go adapt to the environment we're in. And customers are seeking more premium products. And we're adapting to that. I mean, there's a couple of things Frontier is doing, and some of them are very basic, like improving the operation. Great. You know, being more reliable. And that's sort of like the central thing that supports everything else, that like, you know, investing in their loyalty program and their credit card, you know, that's more attractive if you have a reliable operation and you're not always late or always canceling the flight.

12:32Or not having enough flights to back up in case things don't go right. Yes. Based on what he said, who are the customers that Frontier is actually trying to capture here? You know, I mean, I think they believe there is still, I mean, they say their model is still working. There is still a customer who wants a bargain and they still offer that. You know, fuel prices are high. Everyone has to pay for fuel. Everyone's paying higher costs. Inflation has sort of run through the whole industry. but they still do offer lower prices than other airlines. And, you know, there's still a market for that. And they say they're still kind of growing the pool of customers that people who wouldn't otherwise be able to fly, you know, they can still offer them something.

13:12So we continue to offer very low fares across the industry for people to step into. And then we're adding that with premium products in order to improve the overall revenue base of the airline. But we think that we've got the right balance coming over the next year as we introduce some of these premium problems. They're still kind of targeting that group of people who maybe wouldn't pay for the more premium experience. Yeah, but they are also sort of saying, you know, if you can or want to pay for a premium experience. We'll have those too. Right. We also have something for you. It's not going to be miserable.

13:51You know, you can get sort of like luxury on a budget or, you know, a poor man's business class. Still, Frontier faces an uphill battle. One of its main competitors, Southwest, started as the ultimate budget airline. But it's since had a head start on transitioning to that premium first business model. I mean, Southwest was a budget pioneer. They sort of brought budget flying to the U.S. in a lot of ways. Their operation was really simple. Every plane is the same. Every seat is the same. And that was like a real benefit for them for their operation for a long time. But they started missing out on revenue because they just didn't have these things to offer people.

14:28So Southwest is also sort of grappling with how to address this like premium demand trend. And whether it's like a flash in the pan or whether something they really need to like pivot their business model to embrace. And they have sort of decided, yes, we need to pivot our business model and embrace this. And yet we've also been hearing a lot about an affordability crisis in the U.S., right? So do you think this consumer willingness to pay for more expensive flight tickets or to pay for all the premium experiences can or will last? Like, are we in a moment where consumers might actually be poised to turn back to the budget experience if they want to travel by plane?

15:08I mean, I think that's been sort of the big question hanging over this premium trend for years. And that's sort of why some airlines like Southwest sort of hesitated about, you know, how far to take this because, you know, for so long, it seemed like you really just can't lose by just being the cheapest in the airline industry. And I think the question is, is that a fundamental change to the business? And some airlines, I think, would say yes, it is. Or is this a moment in the economy that could revert, you know, next time we're in a recession? I think that is still a little bit of a question.

15:49but airlines are realizing that the price sensitive customer is maybe not as reliable a customer and the people who can afford to continue spending on travel even when the economy wobbles who are going to continue swiping their credit card you know the affluent customer is sort of the better customer and the industry is sort of reshaping itself to serve that person What could that mean for budget airlines? Does that mean that they could just, like, keep hanging on for a while? Like, will Frontier still be around by the time, you know, consumer behavior shifts again? I mean, I think there's a feeling that there probably is room for at least one big budget airline.

16:31And, you know, with Spirit gone, it seems like that will be Frontier, you know, that it kind of, like, has taken on the mantle. It has a lot that it's trying to do to sort of return to profitability, you know, sort of get itself back on track. So I think, you know, Frontier seems to be finding its footing, but it might not look the same as it once did.

17:10That's all for today, Tuesday, September 15th. The Journal is a co-production of Spotify and The Wall Street Journal. If you like our show, follow us on Spotify or wherever you get your podcasts. We're out every weekday afternoon. Thanks for listening. See you tomorrow.

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