Are Budget Airlines Facing Extinction?

0:00For years, budget airlines have reminded customers of an important lesson. You get what you pay for. The trade tables are made for ants so tiny. You have to pay for water. I thought there was complimentary. No. Nothing's complimentary on a budget airline. This is so uncumpy, like zero padding. They overshoot their flights and then they pick random people to 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 is maybe 10, 12 years ago, this seemed like it was going to be the dominant business model. That'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.

1:04I mean, it seemed like this was going to be like a real challenge to the bigger airlines. But budget airlines haven't lived up to that challenge. And lately, they're 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. I 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, our budget airlines facing extinction. This episode is presented by Intuit Credit Karma. Relaxation doesn't always look like spa days or fluffy pillows. Sometimes it's simpler than that. It's when those pesky tasks you don't have time for, like hunting down your credit card perks are handled for you. Like how card optimizer from Intuit Credit Karma brings your card details together in one simple place. So tracking rewards and redeeming benefits is actually easy. You deserve less, and more, ah, Intuit Credit Karma. Download the app to get started. This episode is brought to you by Indeed. The right hire can make or break your company, especially if you're a small business. And relying on luck to find that person isn't really the best strategy. But you know what is using Indeed's sponsor jobs. You can use it to boost your job post to make sure it reaches more people with the right talents, certification, location and more.

3:12Sponsored jobs posted directly on Indeed are 95% more likely to report a hire than non-sponsored jobs. Spend less time searching and more time actually interviewing candidates who check all your boxes. Less stress, less time, more results. When you need the right person to cut through the chaos, this is a job for Indeed Sponsored jobs. And listeners of this show will get a $75 sponsor job credit to help get your job the premium status it deserves at Indeed.com slash podcast. Disco to Indeed.com slash podcast right now and support the show by saying you heard about Indeed here. Indeed.com slash podcast terms and conditions apply. Hiring now, then this is a job for Indeed Sponsored jobs. One of the last major budget airlines in the US is Frontier. It's based in Denver and its planes are recognizable, painted white with forestry lettering with a different animal on every plane's tail. In the 2010s, Frontier went all in on the budget airline model.

4:16Frontier airlines is one of these low-cost airlines. Their ticker symbol is actually ULCC ultra-low-cost carrier. That's how much they wanted to embody that business model. Own that identity. Yes. Spirits was the best known. It had the bright yellow planes and a lot of the swagger and personality. Frontier really had a very similar business model. It kind of shares some common roots with spirits. 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? In general, the budget airlines, like you said, are often fodder for late-night comedy. Maybe Frontier wasn't as notorious as Spirit on that front. But Frontier actually has had a pretty rough operation over the years. 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 to your hefty, like, really.

5:16Don't worry about everything. I will never a day in my **** live book Frontier Airlines. My Frontier Review? Only book if you're brave and desperate. If sometimes in life you get what you pay for. And sometimes you get screwed. Frontier has said that it has made strides in improving its operation and reducing the number of cancelled flights. So, you know, and then plus it is just, it was sort of by design a more bare-bones experience. Not going to have a meal like you're going to be paying for any sort of extras that you want. You know, just certainly just not all 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.

6:20For a year I sort of always wanted to do a merger with Spirit. I mean, they both kind of had a national presence, but their route networks were complimentary like Spirit. Maybe more prevalence, you know, is based in Florida. Maybe more prevalence in the east, Frontier a little bit more in the west. Sure. That they could join forces and they would be, you know, any 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. With their powers combined. To those four. Yes. But before Frontier could close on Spirit, another suitor stepped up. Jet Blue. And Jet Blue brought more money to the table. Is that 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 Jet Blue. But a federal judge killed the deal, citing Ampid trust concerns. We are looking at a decision in the Jet Blue Spirit merger case and it is against Jet Blue and Spirit merging the deal with the company.

7:26Jet Blue and Spirit merging the deal. J. Victoria's judge has decided this merger will not go through. By the way, we made four episodes about this failed merger. So check out the links in our description for more. In the end, no one ended up with Spirit. The airline filed for multiple bankruptcy 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. Things really changed for the budget business model. You started seeing a lot of these changes in customer behavior increases in competition.

8:33That 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. This message is brought to you by Apple Card. With Apple Card, you earn unlimited daily cashback on everyday purchases, like groceries, merch, or tickets to the game. Plus, it can be used anywhere MasterCard is accepted. No matter your team, no matter where you shop, Apple Card is here to help you tackle game day. Apply in the wallet app on your iPhone today. Subject to credit approval. Apple Card is issued by Goldman Sachs Bank USA Salt Lake City Branch, terms and more at AppleCard.com. This episode of the journal is brought to you by Harvey, an AI platform designed for legal and professional services.

9:38Built and tested by lawyers, Harvey is trusted by more than 75% of the AMLA 100. The platform dramatically reduces time spent on research, drafting, and document review. Without sacrificing quality, all while meeting the highest industry standards for security and compliance. Harvey, AI, tailored for law, visit harvy.ai to learn more and request a demo. One 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. It's a way to say, okay, we're not going to cut our prices on every flight or every seat on the flight.

10:38We're just going to have a couple of seats that we offer at a comparably cheap price and comparably bare-bones service. So you might not get an advanced seat assignment, like there's different policies, but 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 a cheaper price is. 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 lex experience and that they are willing to pay for it. Delta pioneered this 15 years ago and there was like, if we have the best product, like the most reliable operation, people want a nice experience. They want to be on time. They want a nice seat. They want good service, especially business travelers and companies that really can afford to shell out. And that has been really successful.

11:38Another way that major airlines keep consumers coming back is through loyalty programs. They can use these credit cards, these co-granted 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 a mass points and a status. This 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.

12:40You're sort of like the last budget airline in some ways or the last big one that kind of has that nationwide reach. What is the future of the model, I guess? I mean, though, I think we've got a really good future ahead of us, then we go to the top to the environment, Burian. And customers are seeking more premium products. And where do you talk to it from that? There's a couple of things Frontier is doing and some of them are very basic, like improving the operation. Great. Being more reliable. That's the central thing that supports everything else that, like, investing in their loyalty program and their credit card, that's more attractive if you have a reliable operation and you're not always late. They're always canceling the flight. Or 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? I think they believe there is still...

13:40I mean, they say their model is still working. There is still a customer who wants a bargain and they still offer that. Fuel prices are high. Everyone has to pay for fuel. Everyone's paying higher costs. Inflation is sort of run through the whole industry. But they still do offer lower prices than other airlines. And they're still a market for that. And they say they're still kind of growing the pool of customers to people who wouldn't otherwise be able to fly. They can still offer them something. So we can change it all for very low fares and 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. We think that we've got the right balance of people over the next year as we introduce some of these premium products. There's 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 two.

14:45Right. We also have something for you. It's not going to be miserable. You know, you can get sort of like luxury on a budget or a poor man's business class. Still, Frontier Face isn't 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. Main Southwest was a budget pioneer. They sort of brought budget flying to the US 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. So 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 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 US, right?

15:48So do you think this consumer willingness to pay from 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? I 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 how far to take this. Because 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? In some airlines, I think would say yes it is. Or is this a moment in the economy that could revert next time we're in a recession? I think that is still a little bit of a question. But airlines are realizing that the price sensitive customers may be not as reliable a customer.

16:53And 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 can 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. And, you know, with Spirit Gone, it seems like that will be a frontier. You know, that it kind of like has taken on the mantle. It has a lot that is 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.

18:07That'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 week day afternoon. Thanks for listening. See you tomorrow. Follow us on Spotify or wherever you get your podcasts. Make your move. Order on the Sweet Green app.

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