Airfares on average are among their lowest in years, but as airline losses mount, how long can the discounts last?
Fare wars are beneficial to air travelers. However, as discounting continues to sweep the industry, airlines are becoming concerned, with many reporting losses for the third quarter of this year.
According to data from the U.S. Bureau of Labor Statistics, fares nationwide fell by 13% in September compared to September 2022. They were down 6.5% since September 2019, months before the COVID-19 pandemic.
While consumers who have been stung by sharply higher prices are relieved to have a reprieve, airline executives have begun to revise their plans for the coming year in response to slippages in demand and persistently high fuel costs.
According to data from the United States Department of Transportation, the first quarter of the year saw an industrywide net loss of $1.2 billion among 26 scheduled airlines, followed by a net profit of $5.5 billion in the second quarter. However, as the third quarter reporting period progresses, the results for carriers checking in thus far have been mostly losses or lower profits, with Delta reporting a large profit while American reported a sizable loss.
Spirit Airlines, based in South Florida, announced a reduction in its growth plans after reporting a net loss of $157.6 million. JetBlue Airways of New York, which wants to buy Spirit, lost $153 million in the third quarter and expects another loss in the fourth.
Southwest Airlines, which reported a 30% decrease in profit in the third quarter of last year, announced changes to its route system beginning in June 2024. The majority of its nonstop international flights from Fort Lauderdale-Hollywood International Airport will be relocated to Orlando.
While no airline is expected to go bankrupt, the industry landscape is changing as larger carriers begin to make life difficult for low-cost budget carriers, according to analysts.
Budget carriers under pressure
“At least for the time being, none of the budget airlines are in danger of going bankrupt,” said Henry Harteveldt of Atmosphere Research Group, a San Francisco-based advisory firm. “They all have cash balances and assets they can leverage to raise additional cash if necessary.”
“However, it’s very clear that larger airlines are starting to leverage their basic economy fare products more than they have in the past to compete for the customer base,” he went on to say. “And that is going to make life more difficult for the budget airlines.”
“Southwest has been very aggressive so far this fall in offering a number of fare sales sometimes with flights starting as low as $29,” Harteveldt said in a statement.
Furthermore, infrequent travelers who are “brand agnostic” are investigating amenities provided by larger airlines as alternatives to fee-based onboard services provided by discount carriers.
“The airline industry is brutal when it comes to price-based competition,” Harteveldt said in a statement. “Our research shows that 15% of passengers are loyal to one airline or alliance, while 85% make their airline purchasing decisions on a trip-by-trip basis.” Many of them have multiple airline loyalty cards.”
A takeover hangs in the balance
The Biden Administration’s antitrust lawsuit, which seeks to halt JetBlue’s $3.8 billion takeover of Spirit, looms in the background. The US Justice Department, along with several Northeast states and the District of Columbia, argue that the takeover would raise consumer prices because Spirit would cease to exist once the deal is completed.
Last Tuesday, the case went to trial in federal court in Boston.
A government victory would likely derail JetBlue’s expansion plans, which the carrier claims are necessary for it to grow and offset the industry’s so-called “Big Four” dominance by American, Delta, Southwest, and United. A defeat would also likely put an end to JetBlue’s plans to expand across Florida.
South Florida’s three international airports are well-served by low-cost carriers ranging from Spirit and JetBlue to Allegiant and Sun Country. At Fort Lauderdale-Hollywood International, relative newcomers Avelo and Flair have entered the picture, giving consumers access to cities that were previously unavailable.
Allegiant Air, the flagship of a travel company based in Las Vegas, Nevada, is hoping for a JetBlue court victory in Boston.
JetBlue agreed to transfer to Allegiant all Spirit holdings at Boston Logan International Airport and Newark Liberty International Airport in a September deal designed to alleviate government concerns that JetBlue’s takeover of Spirit would raise consumer prices. JetBlue would also hand over up to five gates and related ground facilities at Fort Lauderdale-Hollywood International Airport “to promote ultra-low-cost carrier growth,” according to the airlines.
The transaction followed another by JetBlue in which Spirit’s stake in New York’s LaGuardia Airport was transferred to Denver-based Frontier.
Both transactions would require approval from local airport authorities, the FAA, and the DOT after JetBlue’s acquisition of Spirit in the first half of 2024.
In theory, the agreements would transfer discounted flight services from Fort Lauderdale to two other airlines, Frontier and Allegiant.
Allegiant, which, like Frontier, lost money in the third quarter, is sticking to its strategy of offering unbundled fares at a low base price.
“Affordable fares are the foundation of Allegiant’s business model, and consumers can continue to expect industry-low fares across our network,” the company told the South Florida Sun Sentinel in a statement.
In the meantime, will fares continue to fall across the industry?
“There is still a lot of uncertainty,” said Harteveldt. “What happens if the government shuts down?” What if there are more strikes or if they are resolved? American and United are in talks with the unions that represent flight attendants.”
Higher labor costs and, possibly, higher fares are likely outcomes.
