Are the heydays of large ultra-low cost carriers in the US market over?

The market is less than impressed with the financial performance of the two airlines

For Spirit, it was the eighth consecutive quarter of losses.

Meanwhile, a year ago (2022), Frontier's share price was USD13.00, and now it has sunk to approximately USD4.00, as of 15-Nov-2023.

Spirit's stock price of nearly USD10.00 is driven by the airline's potential merger with JetBlue.

If a judge sides with the US Department of Justice in current litigation to block the deal, Spirit's fate is highly questionable. In recent testimony the airline's CEO Ted Christie said: "I don't have an estimate as to when we intend to return to profitability".

Ft Lauderdale-based Spirit is also contending with a significant portion of its Airbus A320neo fleet being grounded, due to issues with geared turbofan engines powering those aircraft. The airline expects to have an average of 26 aircraft grounded in 2024.

Do large US ULCCs have the ability to reverse their fortunes?

Perhaps the larger question is if this is just a one-off event, or have fundamental shifts occurred in the market? It depends on whom you ask.

United Airlines has been vocal in its belief that the viability of the ultra-low cost model is limited. The airline has highlighted that cost convergence among US airlines, air traffic constraints, and supply chain issues are driving some of the margin inversion in the industry. The larger US airlines posted positive margins in 3Q2023, whereas Frontier and Spirit both had a negative margin performance.

Additionally, United is no longer spilling traffic, said its CFO Michael Leskinen in Sep-2023, noting that the airline was flying to where it has customers and where it knows demand exist. And while the performance of its premium products remains strong, United's revenue from Basic Economy in 3Q2023 jumped 50% year-over-year.

United has also concluded, "market saturation of the low-cost business model in certain regions is creating very low marginal RASM [revenue per available seat mile] for some of our competitors, in fact, many of our competitors have marginal revenues that are negative", according to the company's Chief Commercial Officer, Andrew Nocella.

Frontier has cited weak demand trends, particularly in off-peak periods, that have pressured its financial performance. The airline is working quickly to cut its costs and shift its network to an out-and-back model to combat US air traffic control constraints.

Not surprisingly, Frontier remains steadfast in its belief that the ultra-low cost model is not in jeopardy.

"We're going to control the things that we can control, and that's going to deliver profitability", said the airline's CEO, Barry Biffle. "And we believe that low cost will win."

US demand patterns are normalising - which airlines are positioned to thrive?

Against the backdrop of challenges that US ULCCs face is the reality that demand in the market is shifting back to more typical patterns, and all airlines are going to adapt to off-peak softness.

The smaller ultra-low cost carriers Allegiant Air and Sun Country Airlines have specifically built their models to manage off-peak demand. Sun Country transports leisure passengers from its home base of Minneapolis-St Paul when and where they want to go, while building up other revenue streams - cargo and charter operations.

Allegiant has always minimised its off-peak flying and flexed up during higher demand periods, said the company's CEO, Maurice Gallagher.

Both of those airlines also have modest growth profiles. Mr Gallagher stressed that other low cost airlines had grown at a much faster pace, "...adding aircraft almost three times faster per year than we have."

Sun Country's fleet strategy is to take up used Boeing 737s opportunistically and as a result, it carries no aircraft debt.

Frontier and Spirit have a combined order book of approximately 340 aircraft. Frontier has 213 narrowbodies on order and Sprit's order book comprises 127 aircraft. The aircraft on order by those operators implies significant growth at a time when those airlines are struggling financially and there is some discussion that passenger preference is pivoting away from the ultra-low cost model.

At the moment it is tough to envisage those airlines engaging in profitable growth - given the headwinds they will face in the near future. Frontier is planning mid-teens capacity growth for 2024, in what Mr Biffle described as places that are underserved.

Frontier has no plans to exit markets it has deemed as saturated. The airline's growth is not a problem, "...it's the uneven deployment of capacity into a lot of our core market in Las Vegas and certain Florida markets", that has caused revenue degradation, Mr Biffle said.

He believes the lopsided deployment of capacity will smooth out: "You're not going to have these wild swings of up 20% one city versus down 15% in others. I think that's going to rebalance and that's going to be significantly beneficial to Frontier in absolute and on a relative basis," Mr Biffle said.

Scrutiny of large US ULCCs will continue well into 2024

As the US market settles into what could be considered more predictable demand patterns, what remains unpredictable is the fate of its two largest ultra-low cost airlines.

If Spirit and JetBlue emerge from the trial to block their merger as the victors, Frontier will be the only ULCC of scale in the US.

But if a judge sides with the US government, then both those airlines will find themselves battling constraints that show no signs of disappearing in the near future.

For now, the only certainty is that the scrutiny of Frontier and Spirit will continue, as investors and observers attempt to determine what role they will play in the US market in 2024 and beyond.