Problems piling up for budget airlines like Spirit, prepare to pay more

• Spirit Airlines is considering filing for bankruptcy protection, The Wall Street Journal reported.
• Its struggles point to the broader problems facing budget airlines as labor and fuel costs rise.
• Low-cost carriers are changing their business models to cope with skyrocketing profitability.

In another sign of the problems facing budget airlines, The Wall Street Journal reported that Spirit Airlines is considering filing for bankruptcy protection.

Shrinking profits for the lowest-cost carriers could lead to higher fares and charges for passengers as airlines try to cope with increased fuel and labor costs.

The introduction of premium seating options and axing routes spells the end of budget airlines as we know them.

Declining revenue caused Spirit to post a net loss of $192 million in the second quarter. Its struggles intensified after a planned merger with JetBlue was called off in March.

The airline’s shares fell about 25 percent on Friday, leaving it worth less than $200 million.

When asked for comment on the Journal’s report, Spirit referred to CEO Ted Christie’s words on an August earnings call. He said the airline was engaged in “productive” conversations with bondholders’ advisers.

Filing for Chapter 11 bankruptcy would allow Spirit to restructure its assets. The ultra-low-cost carrier has already tried several methods to try to stop the bleeding, such as introducing premium seating options and cutting routes.

According to data from Cirium, Spirit has reduced the number of seats scheduled to fly between August and September by 18%. This month, its schedule is a tenth smaller than last October.

Neil Glynn, of research and analysis firm AIR Control Tower, said in a report on Friday that these developments highlight the challenges facing the weakest airline business models in the wake of rising costs in the industry.

Glynn also pointed out that the increase in labor costs “has not been absorbed by the quality of its network”.

Fewer routes could see passengers face higher ticket prices from other airlines due to reduced competition.

Higher prices, fewer routes and no hot meals

Budget airlines could raise prices, especially since they lack business and first class cabins, which are very profitable for mainline carriers.

Airlines like Spirit rely on filling as many seats as possible and keeping their planes flying as much as possible to compensate for cheap tickets.

Ancillary revenue, from add-ons such as baggage fees or on-board drinks, is also a staple. However, Spirit warned in July that it was earning less than expected from this revenue stream.

Many other budget operators have shaken up their operations as they face shrinking profits, raising questions about the nature of their business models.

In February, Frontier Airlines announced a new “BizFare” package with benefits including priority boarding, a free carry-on bag and premium seat assignments. Its pre-tax income fell 63% in the second quarter of 2024 compared to the same period last year.

Most notably, Southwest Airlines announced in July that it would drop its open-seat policy and let customers pay for extra legroom as it faces pressure from activist investor Elliott Management. It reported a profit of $367 million in the second quarter, but that was still a 46 percent drop from the same period last year.

Starting this quarter, low-cost carrier JetBlue has dropped hot meals for economy passengers on its transatlantic flights. A spokesperson told BI that this is “part of our effort to ensure we can continue to provide a great experience at JetBlue’s competitive fares.” Its second-quarter profits fell 82% from the same period in 2023.

United CEO Scott Kirby said “The Air Show” podcast in June, according to which he believes low-cost carriers are “going out of business” because their business model is flawed and “customers hate it.”