ROB SCHMITZ, HOST:
Budget airlines are known for cutting costs everywhere they can and charging for even the smallest extras beyond the bare minimum. All of that is done to deliver cheap fares to customers. But the way people are traveling has changed, and these smaller airlines are having a hard time keeping up. That includes Spirit Airlines, which filed for bankruptcy last week. To learn what this all means for travelers, Tom Fitzgerald joins me now. He's the lead airlines analyst at TD Cowen. Hey, Tom.
TOM FITZGERALD: Hey. Thanks so much for having me, Rob.
SCHMITZ: Thanks for being here. Why are discount airlines struggling?
FITZGERALD: Well, at a very simple level, it's - there's been significant cost inflation across the whole industry, and especially for labor and maintenance. And that's pressured their ability to offer very low fares.
SCHMITZ: And this is impacting these discount airlines, which really operate with a very tight margin.
FITZGERALD: Exactly, yeah. They try to keep their base fares low to stimulate traffic volumes, and then make it up on the back end by charging for ancillary fees like seat selections or checked bags or drinks on board. You know, they try to keep their costs low in order to have the base fares low, so this really challenges that.
SCHMITZ: Now, United Airlines CEO Scott Kirby recently declared that low-cost carriers are using a, quote, "fundamentally flawed business model." Would you agree with that?
FITZGERALD: Well, I think what I'd say is that it's been a very challenged business model in the post-COVID environment. You know, it's really predicated on really high rates of capacity growth and really high utilization of the aircraft, so you can spread your cost over as wide of a base as possible. But both of those things, growing at very elevated rates and utilizing your planes for more hours in the day - that's been harder to do post-COVID.
SCHMITZ: So a plane on the ground equals a loss of money for these airlines.
FITZGERALD: Exactly, yeah. You know, usually, they'd like to try to fly them maybe, like, 12, 13 hours a day, and now it's been closer in the 11-ish range. And that adds up, you know, across a fleet of hundreds of planes over, you know, every day of the year.
SCHMITZ: Now, I have a bigger question about this. I'm based in Europe, where Spain has just fined five budget airlines - including Ryanair and EasyJet - around $200 million for what it called abusive practices like charging for hand luggage. Now, to label these types of nickel-and-diming measures abusive gets at, I think, a general frustration about these low-cost carriers. How much does this perception of them hurt them in the long run, I'm wondering?
FITZGERALD: We've seen a lot of evidence of the consumer having a higher propensity and a higher desire to splurge a little bit more, to have a more comfortable and less stressful travel a day. So that's a challenging narrative. And we've also seen Spirit and Frontier, this past year, bundle their options again and start to have more. You know, Spirit has the Go Big option. And Frontier has UpFront Plus, where you're getting a little more bang for your buck than you normally would expect with those airlines.
SCHMITZ: Interesting. So we're seeing more premium offerings from these low-cost carriers. Does that mirror what's happening, I think, just nationwide? Are people just making more money and therefore have a little more money to spend on an airline ticket?
FITZGERALD: Yeah. I would agree with that. You know, there was a big boom in spending on goods in the early days of the pandemic, but as that's waned and the economy's hung in there, people are still just spending their money. And maybe they're upset about their grocery prices. But we haven't seen a slowdown in the desire to travel, and we expect another good year in '25.
SCHMITZ: So if more budget airlines go out of business, how would this impact just the general public, and customers who are looking for lower-cost prices on their airline tickets?
FITZGERALD: I think it'll be tough, right? I mean, all else equal, Economics 101, you'd expect - if there's a lot of supply coming out of the market, you'd expect that to at least put a higher floor on pricing. There's evidence that at least in '25 and '26, you're going to see very tight supply, even just with everything we know right now, just given, you know, Southwest's slowing growth, American, probably slower growth. JetBlue's very constrained. Frontier slowed their growth rate. That's just going to be the theme of the decade - tight supply, and globally, but especially in the United States.
SCHMITZ: That's Tom Fitzgerald, lead airlines analyst at TD Cowen. Thanks, Tom.
FITZGERALD: Thanks so much.
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