Air travel costs have been on a roller coaster since 2020. After “revenge travel” drove ticket prices to record highs in the post-pandemic rebound, airlines rapidly expanded their routes and seat capacity. But as travel demand cooled and fares plummeted, carriers had to rethink their strategies.
The shifting dynamics in air travel prices have sparked an unexpected trend: budget airlines are moving upmarket. As legacy carriers expand both their luxury and basic offerings, low-cost airlines are increasingly targeting mid-tier passengers with premium services, a strategy that could reshape competition in an industry still finding its post-pandemic footing.
The so-called “capacity crisis” triggered a major pivot for players in the air travel space. For larger, legacy carriers like United Airlines (UAL+2.20%) and American Airlines (AAL+0.31%), this meant hedging their bets by pursuing cost-conscious flyers while also targeting significantly less cost-conscious ones. United is renovating its lounge at Dulles International Airport into a 40,000-square-foot luxury outpost.
In any industry, “you have to have some have-nots,” said David Neeleman, founder and CEO of Breeze Airways, an airline that focuses on regional domestic travel, in an interview with Quartz. “They have a segmented structure where they can benefit from everyone.”
Though American Airlines stumbled earlier this year while trying to reconfigure its relationship with business-class flyers, it still keeps its eyes open to all potential passengers.
“The airline industry is in the midst of a positive transformation,” American CEO Robert Isom said on a company earnings call in October. “A de-commoditization where customers are choosing United based on the wide selection of products from premium international seats to flexible travel for domestic business travelers and Basic Economy for our price-sensitive customers.”
However, a certain segment of airlines, low-cost carriers, used to make their primary revenues not from tickets but from selling everything else that comes with a flight. They get people onto their planes with the cheapest fares and charge them ancillary fees for everything from selecting a seat to snacks and drinks.
“Now you’re seeing the people, the have-nots, who are not doing as well,” Neeleman said. “They’re trying to emulate what the big guys are doing with a premium product.”
Perhaps the most abrupt shift along those lines comes from Frontier Airlines (ULCC+4.38%). The company, which made 64% of its passenger revenue from ancillary fees last year, so thoroughly embodies the ultra-low-cost carrier business model that its stock ticker is “ULCC.” Earlier this month, the airline announced that it would be introducing first-class flights, a major departure.
Before he worked at Breeze, Neeleman was the founder and former CEO of JetBlue Airways (JBLU-3.45%). JetBlue and Spirit Airways tried to bridge the high-low gap through a merger, but that effort was unsuccessful. Last year, the Justice Department sued to block their $3.8 billion deal on an antitrust basis. This January, a judge agreed and stopped the tie-up in its tracks. For a few weeks, the two companies reviewed their options, but in March, they called it quits and abandoned the merger.
In the meantime, since they stopped trying to join forces, both carriers have unveiled initiatives that aim to attract passengers seeking higher-end flying experiences. JetBlue announced in September that it will open its first airport lounge in 2025 at New York City’s John F. Kennedy International Airport. It will also expand its “Mint” class, which on other airlines would be called first class, to more of its domestic network. Previously, it was mostly an option only on international and cross-country flights.
Spirit, on the other hand, has filed for bankruptcy protection and is in the process of a reorganization. But before that happened, it was also trying to upgrade its flights by debuting larger “Go Big” seats on its planes. It might seem counter-intuitive to think that a company that charges for pretzels on board might be trying to compete with a company that offers first-class passengers in-flight Shake Shack, but it’s important to remember that they’re not.
The likes of Spirit aren’t trying to peel off first-class passengers from the likes of Delta (DAL+1.55%). Instead, they’re going after the low-hanging fruit segments of the legacy carriers. As airlines cut capacity, they’ve been bidding up fares — ticket prices are rising faster than rent these days. A more expensive flying experience will likely trigger another transformation, one emanating from customers instead of companies.
United, for instance, offers a Basic Economy class that is essentially an in-house budget carrier experience. Flyers in this class get a ticket and little else, needing to pay for things like carry-on bags and seat selection. Industry analysts say the key battleground is between United’s Basic Economy and Frontier’s premium offerings, where carriers compete for value-minded passengers.
“There’s a segment of the population, about 25%, that will always want an upgraded experience,” Neeleman said. Budget airlines are hoping to be the ones to give it to them.
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