Is This the End of Low-Cost Airlines in the U.S.?

This Week’s Focus: The Future of American Low-Cost Airlines

This holiday season brings significant disruption in the U.S. airline industry, sparking the question: Is the low-cost airline model still viable?

In this week’s article, we examine the pressures low-cost carriers face, from rising costs to operational complexities, and how their limited margins leave little room for error. We also explore how some firms innovate to survive while others face the turbulence of obsolescence in an increasingly challenging market.

With Spirit Airlines filing for bankruptcy under Chapter 11 and Frontier and Southwest pivoting toward premium travel, the U.S. airline industry faces a seismic shift amid the holiday season.

An important question that rises is whether the low-cost airline model in the U.S. is nearing its end.

In today’s article we explore the financial, operational, and competitive dynamics that shape this market and how some firms take steps to adapt in hopes to survive while others are resistant to change and risk becoming obsolete.

The Complexity of Running an Airline: Why the Skies are So Difficult to Navigate

In general, airlines are profitable:

Specifically:

“Net profits are expected to reach $30.5 billion in 2024 (3.1% net profit margin). That will be an improvement on 2023 net profits which are estimated to be $27.4 billion (3.0% net profit margin). It is also an improvement on the $25.7 billion (2.7% net profit margin) forecast for 2024 profits that IATA released in December 2023.”

With this in mind, it may be surprising to read American Airlines’ CEO Robert Isom’s recent description of the operational headwinds the airline industry is facing:

“‘It’s never been harder to operate an airline,’ citing a plethora of issues. Isom said new variables have prompted his airline to build additional buffers into its systems. He said air traffic control challenges and supply chain woes are among the biggest issues.’And so, whether it’s air traffic control … that’s very different,’ Isom said. ‘That to fly from Chicago to New York, it’s 30 minutes longer than it was 20 years ago.’”

From air traffic control delays to supply chain disruptions in aircraft manufacturing, these challenges disproportionately impact budget carriers, which lack the financial resilience that larger airlines enjoy.

For example, Spirit’s inability to resolve engine maintenance issues with Pratt & Whitney forced it to ground dozens of jets, creating cascading schedule disruptions. In contrast, legacy carriers can absorb such shocks more effectively through diversified fleets and deeper pockets.

The airline industry operates at the intersection of extreme complexity, razor-thin margins, and volatile external factors. Despite the perceived straightforwardness of operation—moving passengers from one location to another—the reality is that airlines contend with operational, financial, and logistical challenges unparalleled in most other sectors.

A Deeper Dive into Airline Economics

Let’s dissect the layers of this complexity and the structural factors that make the airline business uniquely difficult:

1. Fuel Costs: The Dominant Expense

Fuel remains the largest single expense for airlines, often constituting 30–40% of their operating costs. The price volatility adds an unpredictable dimension to this expense.

Fuel costs are not just high but also highly sensitive to external shocks, such as geopolitical instability or fluctuations in crude oil prices. Airlines mitigate this risk by investing in fuel-efficient aircraft or using hedging strategies, but these solutions are far from foolproof. It is estimated that for a hypothetical flight with a fully booked plane of 100 passengers, fuel costs alone required the fares of 29 passengers to break even.

2. Labor: The Second Largest Cost

Crew member salaries account for approximately 20% of ticket revenues. Airlines must not only pay competitive wages but also comply with stringent regulatory requirements on rest periods and working hours. This necessitates a larger-than-expected workforce to account for downtime, exacerbating costs.

Labor disputes and strikes, such as the Southwest Airlines pilot strike in 2023 (which was ultimately abated), further complicate operations, leading to widespread flight cancellations and delays. Unlike other industries, airlines cannot easily outsource or automate critical roles such as pilots and maintenance technicians. This makes such disruptions particularly impactful on their operations.

3. Aircraft Leasing and Ownership

Acquiring and maintaining a fleet of planes is another enormous financial burden. Airlines often lease rather than purchase aircraft to spread costs, yet this still represents a major outlay. Approximately 16% of ticket revenues go toward fleet ownership costs, with high-interest rates and depreciation adding to the financial strain.

The demand for modern, fuel-efficient planes compounds these expenses. Carriers must decide whether to invest in new aircraft—requiring significant upfront capital—or maintain older models, which incur higher maintenance and fuel costs. For low-cost airlines operating on tighter margins, these trade-offs can be existential.

4. Maintenance, Repairs, and Overhauls: A Relentless Cycle

Aircraft require intensive maintenance to ensure safety and compliance with aviation regulations. Scheduled maintenance occurs every few months, while major overhauls are needed every two to three years. Spare parts, repairs, and auxiliary equipment failures (e.g., baggage carriers, gangways) are perpetual costs, accounting for roughly 11% of ticket revenues.

These maintenance schedules cannot be compromised, regardless of financial pressures, as any lapse could lead to catastrophic outcomes. Airlines face additional challenges from unexpected issues, such as the grounding of Airbus jets in 2024 due to Pratt & Whitney engine recalls, which disproportionately affected low-cost carriers like Spirit.

5. Miscellaneous Costs: The Hidden Burdens

Beyond the headline expenses of fuel, labor, and aircraft, a plethora of smaller but equally significant costs chip away at an airline’s profitability. Taxes, duties, terminal fees, and airport services collectively consume 14% of ticket revenues. Miscellaneous costs—ranging from lost luggage insurance to in-flight catering—account for another 9%.

Low-cost airlines minimize these expenses by adopting cost-saving measures, such as using buses instead of gangways for boarding or leasing terminals farther away from the main airport hubs. However, these savings come at the expense of passenger experience, often alienating travelers and limiting revenue potential.

In addition, and unlike other industries, airlines must contend with variables that are entirely out of their control:

Weather and climate: Wind speed, storms, and other meteorological factors frequently disrupt schedules, adding costs in the form of delays, cancellations, and rerouting.

Geopolitical Events: International airlines are particularly vulnerable to geopolitical tensions, which can restrict airspace or lead to sudden demand shocks.

Regulatory Changes: Compliance with evolving safety standards, environmental regulations, and consumer protection laws imposes additional costs.

Despite high ticket prices, airlines operate on razor-thin margins. As evident from the image below (from a few years ago), for a fully booked flight, the profit margin corresponds to the value of a single ticket—2-3% of total revenue.

This means that even minor disruptions can erase profits, forcing airlines to rely heavily on ancillary revenue streams or dynamic pricing to remain viable.

For low-cost carriers, which face all the same pressures as legacy airlines but lack the financial flexibility to absorb shocks, this can be devastating, so they rely on minimizing costs at every turn—unbundling services, leasing secondary terminal spaces, and utilizing a single aircraft type. While these strategies reduce expenses, they also limit their ability to respond to market changes or to differentiate.

They also depend on maintaining high load factors (the percentage of available seating capacity that is filled with passengers) as even a slight dip can push these carriers into unprofitability, as illustrated by Spirit’s bankruptcy.

It’s always been difficult to run an airline, and this difficulty is becoming more intense. But running a low-cost airline in the U.S. seems almost impossible.

The Evolution of Frontier and Southwest: Lessons in Adaptation

Nevertheless, some low-cost airlines have managed to evolve, reopening a path to revenue growth.

Frontier Airlines and Southwest Airlines, both prominent players in the U.S. low-cost airline space, have charted markedly different paths in their evolution compared to Spirit Airlines. Both carriers have faced immense pressures to adapt to changing market dynamics, and their strategies highlight the importance of timing, flexibility, and a willingness to evolve. Spirit Airlines’ inability to navigate these challenges, on the other hand, demonstrates how a rigid adherence to an outdated model can lead to failure.

Frontier Airlines: The Slow Pivot to Premium

Frontier Airlines has long positioned itself as a quintessential ultra-low-cost carrier (ULCC), relying on unbundled fares and high ancillary revenues to maintain profitability. However, the post-pandemic era exposed vulnerabilities in this model, particularly as consumer preferences shifted toward premium travel options, and as a response, Frontier took several steps to follow in that same direction:

Introducing Premium Offerings: In 2024, Frontier began offering first-class seating on select routes, transforming its cabin configuration to appeal to higher-paying customers. By removing standard economy rows and introducing a two-by-two configuration with more legroom, Frontier aimed to balance its low-cost roots with a growing demand for comfort.

Loyalty Program Revamp: Frontier revamped its loyalty program to offer perks like complimentary upgrades and companion tickets for higher-tier members. This initiative, designed to attract frequent flyers, signaled a shift from focusing purely on price-sensitive travelers to courting more affluent customers.

Bundled Fare Options: Frontier reorganized its fare structure into bundles, allowing passengers to pay for enhanced experiences, such as priority boarding and free checked bags, alongside basic economy options.

But why did it take so long?

Frontier’s delayed evolution stemmed from the inherent risks of deviating from its low-cost model. Investments in premium seating and enhancements of loyalty programs require upfront capital and could alienate its core customer base. Additionally, Frontier operated in a fiercely competitive space where even minor missteps could jeopardize its market share. The leadership likely viewed the pandemic recovery as a pivotal moment to test these changes without completely overhauling its low-cost identity.

Southwest Airlines: Tradition Meets Transformation

Southwest Airlines has historically resisted the industry trend of stratifying service levels into distinct premium and economy classes. Its egalitarian approach—offering low fares, free checked bags, and open seating—earned it a loyal customer base and decades of profitability. However, by 2024, this strategy began showing signs of strain.

Southwest took different steps to adapt to market shifts:

Assigned Seating and Extra-Legroom Seats: In a major departure from its 50-year tradition of open seating, Southwest announced plans to introduce assigned seating by mid-2025. This change, accompanied by new extra-legroom options, aims to attract higher-paying business travelers and reduce boarding inefficiencies.

Red Eye Flights and Utilization Gains: Southwest also introduced redeye flights, maximizing aircraft utilization during off-peak hours. This operational shift aligns with its focus on improving efficiency without deviating too far from its core model.

Premium Economy Features: While Southwest hasn’t adopted full-scale premium cabins, its "extra legroom" offerings allow it to compete in the premium economy segment without alienating budget-conscious customers.

And again, why did it take so long?

Southwest’s resistance to change was rooted in its historic success. For nearly five decades, their simple, low-cost model delivered consistent profits—even during downturns that crippled competitors. However, the evolving market and increased competition from legacy carriers offering basic economy fares forced Southwest to reconsider their approach. Elliott Management’s activist pressure also played a role, demanding operational changes to regain its competitive edge.

Spirit Airlines’ Failure to Evolve

Spirit Airlines, once the largest U.S. budget carrier, exemplifies the challenges of the low-cost model in the current market. Since 2020, Spirit has reported over $2.5 billion in losses, driven by declining fares, increased labor costs, and growing competition. While Frontier and Southwest slowly adapted to changing market dynamics, Spirit Airlines struggled to pivot, leading to its bankruptcy, which revealed certain structural weaknesses. The main factors that contributed to its inability to evolve are:

Over-Reliance on Ancillary Fees: Spirit’s model depended on ancillary fees for over 50% of its revenue. This reliance left it vulnerable to regulatory scrutiny and alienated customers, especially as competitors like Delta and United introduced transparent pricing models.

Failure to Differentiate: Spirit attempted to introduce premium offerings, such as bundled fares and larger “Big Front Seats,” but these changes lacked the scale or sophistication of Frontier’s or Southwest’s initiatives. The airline neither fully embraced premium travel nor remained committed to its ULCC roots, leaving it stuck in a strategic limbo.

Operational Inefficiencies: Spirit’s planes, which averaged 12.3 flight hours daily in 2019, spent two additional hours on the ground by 2023. This underutilization compounded its cost challenges, making its low-cost model less viable.

Market Perception: Unlike Southwest, which maintained a strong brand reputation even during turbulent times, Spirit faced a pervasive stigma as the airline of last resort. This negative perception limited its ability to attract premium customers, even when it attempted to enhance its offerings.

The divergent paths of Frontier, Southwest, and Spirit illustrate the critical importance of strategic agility even in a very slow and highly regulated industry such as commercial aviation. While Frontier and Southwest took time to adapt, their deliberate approaches allowed them to test changes without alienating core customers. Spirit, on the other hand, hesitated to make bold moves. The recent changes in Spirit’s strategy, such as bundled fares and premium seating, failed to reverse its fortunes. Instead, these decisions diluted its low-cost brand identity without attracting sufficient premium travelers.

For budget airlines, the lessons are clear: evolve with the market, balance cost control with value creation, and never underestimate the importance of brand perception (believe me, as an operations professor, it was hard to write this last sentence). As the industry continues to shift, the ability to innovate while staying true to one’s core identity will determine who soars—and who stalls.

Dynamic Pricing and Willingness to Pay for Premium Economy

From our analysis, you may have noticed that one of the actions airlines take refers to pricing.

One critical challenge for low-cost carriers is inefficiency in pricing.

A recent paper “Price Discrimination in International Airline Markets” by Aryal, Murry, and Williams explores how airlines set different prices for the same flight to maximize profits and how these strategies affect both efficiency in seat allocation and fairness among passengers. Airlines often adjust prices over time (e.g., early vs. last-minute bookings) and across seating options (economy vs. first-class), to match what different passengers are willing to pay.

The study found that current airline pricing strategies work reasonably well (from the airlines’ point of view), capturing about 77% of the potential benefits of perfectly efficient seat allocation (economists like to use the term “welfare”).

However, they leave room for improvement because of challenges in understanding how much each passenger values a seat. For example, oftentimes, airlines offer several low-priced seats early on, which may result in losing income from limited availability of seats for passengers willing to pay more closer to the departure date.

A key finding is that most of the inefficiencies (87%) come from airlines not having perfect information about how much passengers are willing to pay, while only 13% comes from uncertainties about overall demand for a flight. This lack of information means airlines can’t always match seats to the passengers who value them the most.

The study also examines how pricing differently for business and leisure travelers could improve overall outcomes. While this approach could lead to better overall seat allocation, it would likely benefit leisure travelers and airlines at the expense of people traveling for business, highlighting the trade-offs in fairness.

The paper’s findings suggest that airlines can improve their strategies by using more sophisticated tools to segment customers and adjust prices accordingly. These ideas align with industry trends, where carriers like Delta and United excel by appealing to both premium and budget-conscious travelers with well-targeted offerings.

But this was exactly the Achilles’ heel of budget airlines. They can only dynamically price within a segment. With limited premium options and bundles, they were leaving money on the table.

Low-Cost Airlines in Europe and How They Thrive

The resilience of low-cost airlines in Europe offers a stark contrast to the U.S. market.

European budget carriers benefit from higher population densities and shorter average flight distances, allowing for quicker turnarounds and higher aircraft utilization rates.

It’s evident from the data below from 2022, how Ryanair (the equivalent of Frontier with a splash of Southwest), is ahead of European legacy airlines like Lufthansa (LHG) and British (IAG):

The main factors that contribute to this success are:

Density of Airports and Secondary Hubs: Europe's high population density and extensive rail networks allow low-cost carriers to operate from secondary airports while still offering convenient access to major cities. For example, Ryanair leverages airports like London Stansted and Milan Bergamo, which have lower operating costs yet provide easy connectivity to urban centers.

Regulatory and Insurance Environments: European regulators have fostered a competitive environment that supports low-cost models. Additionally, the continent’s dense network of airports reduces reliance on large hubs, spreading operational risk.

Cultural Acceptance of Low-Cost Travel: In Europe, low-cost airlines like Ryanair and easyJet have normalized budget travel across income groups. Unlike in the U.S., where budget carriers face a stigma, Europeans embrace low-cost options for domestic and international trips alike.

Scale Economies in Key Markets: Low-cost carriers in Europe benefit from high-density routes and strong brand recognition. Their operational efficiencies—single aircraft models, quick turnarounds, and unbundled services—allow them to maintain profitability even on low-margin routes.

Conclusion: The Future of Low-Cost Airlines

Running an airline is akin to balancing a house of cards in a wind tunnel. The myriad costs, external pressures, and operational complexities create an environment where survival requires constant adaptation and innovation. Low-cost carriers, with their narrower margins and limited buffers, face an especially precarious existence in this turbulent industry.

While legacy airlines navigate these challenges with diversified revenue streams and premium offerings, the low-cost model’s reliance on bare-bones operations leaves little room for error. For budget airlines in the U.S., the “madness” of the skies may soon prove unsustainable.

Furthermore, their insistence of limited bundling and lack of premium options reduced one of the only levers airlines have to extract “value” from customers.

Spirit Airlines may have given us countless memes and budget travel horror stories, but its downfall signals more than the end of legroom misery. It’s a reminder that while you can nickel-and-dime your way to survival, you can’t do it forever without offering passengers something to actually love—like snacks. Or dignity.

So, is this the end of low-cost airlines in the U.S.? Maybe. Or perhaps they’re just evolving into a slightly more expensive, still-despised (but marginally more tolerable) version of themselves. After all, what’s more American than a comeback story?

Until then, I hope you’re all enjoying this holiday season.

May your tickets be cheap, your flights on time, and your baggage fees under $50!