Spirit Airlines, Allegiant Air, face cost pressure in 2016; reduced fuel costs drove stellar 2015

A guiding principle for ultra-low cost carriers (ULCCs) is delivering a unit cost performance excluding fuel of USD6 cents or lower. Both of the publicly traded US ULCCs easily met that criterion in 2015, and based on calculations from the CAPA CASK database, Allegiant Air and Spirit Airlines posted sub-USD6 cents unit costs including fuel for 2015.

Maintaining cost discipline is paramount in any operating environment, but especially in the US domestic market where most airlines, including ULCCs, are having a tough time gaining pricing traction. Spirit and Allegiant both have some cost challenges looming in 2016 but are obviously attempting to keep their costs below the USD6 cent benchmark. Spirit expects to post a flat unit cost performance excluding fuel for 2016, even with the ratification of new flight attendant contract, but faces some maintenance headwinds throughout the year. Spirit is working to accomplish improved operations and generate more positive customer sentiment on a cost-neutral basis.

Allegiant is also facing cost pressure from the first batch of heavy maintenance on its Airbus narrowbody fleet, and from labour productivity challenges. However, over the long term Allegiant's decision to accelerate the retirement of its MD-80s and move to a single fleet of Airbus narrowbodies should create some cost tailwinds in the medium term.