Will Budget Airlines Like Allegiant, Frontier and Spirit Gain Share in the Recovery?
U.S. budget carriers accelerated years worth of market share growth into a single pandemic year. Their collective share of passengers jumped several percentage points in 2020 as the returning leisure travelers fit nicely with their strategy of taking vacationers directly to popular holiday destinations.
The segment, which includes Allegiant Air, Frontier Airlines, Spirit Airlines, and Sun Country Airlines, has been one of the fastest growing and most profitable in the U.S. for years. And even though they — along with the rest of the industry — contracted dramatically when Covid-19 hit, discounters did not face the larger structural fall off in business and international travel that hamstrung their network competitors. This set up led raised the prospect of the ultra low-cost carrier (ULCC) set emerging from the crisis as a larger force in the U.S. market than before.
“There’s a lot of growth potential for [ultra low-cost carriers] coming out of this pandemic,” Allegiant Senior Vice President of Revenue and Planning Drew Wells told Airline Weekly in a recent interview.
The ULCC segment notched 2.5 points of share growth in 2020 when they carried 11.2 percent of all domestic travelers, U.S. Bureau of Transportation Statistics data via Cirium show. And in the first two months of 2021, they flew just over 13 percent of all travelers in the U.S.
Allegiant already has recovered to its 2019 capacity levels and plans to be roughly 20 percent larger at the end of December than it was two years earlier. This growth will see Allegiant add six new airports — including Jackson Hole, Wyo., Key West, Phoenix Sky Harbor and Spokane, Wash. — and dozens of new routes to its map this year.
Frontier plans to resume 2019 capacity levels this summer and grow from there. Spirit plans to recover 2019 capacity by year-end before growing by roughly 30 percent year-over-year in 2022. While Sun Country plans a slower capacity recovery in order to boost fares and hire new crews, the airline benefits from a dedicated-freighter business with Amazon that it launched in 2020.
But not everyone is sold on the conclusion that discounters will permanently gain share in the Covid-19 recovery.
“Downturns typically beget opportunity for the efficient and nimble,” wrote J.P. Morgan Analyst Jamie Baker in a report on Wednesday. “This turned out not to be the case, once the government stepped in with unprecedented generosity and loyalty programs rode to the liquidity rescue. What made this cycle different was that [network carriers] didn’t abandon the field and turn over meaningful share.”
Benefitting from the government largesse that will cover most labor expenses through September, carriers including American Airlines and United Airlines have made some interesting moves to capture new travelers. American has expanded dramatically in Austin and added a number of seasonal routes to Orlando, while United added a slew of seasonal point-to-point routes to Florida this past winter and plans another 26 non-hub routes to beach destinations this summer.
None of this worries Wells at Allegiant. Nor does the entrance of startups Avelo Airlines and Breeze Airways into the U.S. market. “The space is always going to be competitive,” he said. Asked about the varying strategies of Avelo and Breeze, he added that there is “room for some healthy differences of opinion.”
A few planes in a city here, a few in a city there. That has long been the strategy of discount juggernauts like Ryanair and Wizz Air in Europe. The former had 79 operational bases at the end of 2020, and the latter added 18 bases to its network during the year ending in March. These dispersed bases give discounters a greater presence — and chance to capture share — in local markets rather than just flying in.
In the U.S., however, ULCCs have followed a more centralized strategy. For example, the largest carrier in the segment, Spirit, only has seven crew bases. The airline still offers multiple nonstop flights from cities around the country but those additions are separated from the need for locally based aircraft and crews.
Allegiant is adopting a more European approach as it grows. Many of the carrier’s main bases — for example, Punta Gorda, Fla. — lack the space to park additional aircraft overnight, said Wells. This creates a need for new bases in larger destinations elsewhere in the country to facilitate continued growth. The strategy also improves aircraft utilization, he added.
The airline is a long way from reaching the size of either Ryanair or Wizz Air. Allegiant had 19 operational bases in February with two set to open later this year: Des Moines on July 1 and Austin on November 18. Plans for a base in Concord, N.C., near Charlotte that were unveiled just before the crisis remain on hold.
“There will be more bases to come” for summer 2022, said Wells. When asked what Allegiant looks for in a base, he said it wants cities with “a lot of future;” or put another way growth opportunities beyond just flights to the airline’s existing strongholds. For example in Des Moines, Allegiant will add new routes to Austin, Houston Hobby, Portland, Ore., and San Diego when its base there opens in July.
New local bases are also good for staff morale, said Allegiant Senior Vice President of Flight Crew Operations Tracy Tulle. Crews like them because of their smaller size, often greater scheduling flexibility and more opportunities to upgrade for first officers.
“The smaller bases are kind of like family-oriented companies,” she said.
Breeze is taking a similarly dispersed approach to operational bases. It plans for four such domiciles by the end of July: Charleston, S.C., New Orleans, Norfolk, Va., and Tampa. More bases are expected as the airline expands with the addition of new Airbus A220s that begin arriving in October.
Regardless of strategy, ULCCs are growing in the U.S. — and at faster rates than their network peers. Covid-19 did reset the industry but, while it allowed the likes of Allegiant to speed ahead with planned growth, it also enabled dramatic cost and efficiency improvements at all carriers. Delta Air Lines has shaved millions of dollars in expenses out of its business through aircraft retirements and staffing reductions that will allow it to achieve higher margins in 2023 on revenues comparable to 2019.
“The fact that the U.S. government was as strong with its support of the industry through the CARES Act kept the industry intact,” said Delta CEO Ed Bastian at a Bernstein investor conference on Thursday. “Change will happen. It’s just going to be delayed and I think that change [will be] the strong are going to get stronger.”Subscribe Now to Airline Weekly