Ultra-worried?: Is the ultra-LCC business model running into trouble?

It was an earnings call so uncomfortable that anyone who listened or participated still recalls it well.

“Is this really all you’ve got?” asked Jamie Baker, a Wall Street analyst. “I mean, in other businesses that I can think of, when there’s a company standing out like this, you sort of expect, you know, a really major overhaul….

“You just don’t sound all that fired up.”

The year was 2010. The airline was American, having just reported a first-quarter loss of a half-billion dollars. The carnage was emblematic of legacy carrier struggles in the face of established LCCs, yes, but also a new crop of what would come to be called “ultra-LCCs” beginning to take the industry by storm. That same quarter seven years ago, a young ULCC called Spirit turned heads with a 12% operating margin, second best among all U.S. carriers. The lone airline with better results? Another ULCC called Allegiant. Before long, Frontier would adopt the ULCC model too and transform itself from a stumbling bankruptcy survivor to a profit champion. Could anyone or anything stop the ULCC revolution?

For the first time ever in 2017, it’s starting to look like the answer might be yes.

Last quarter, American— building on bankruptcy restructuring, a mega-merger and a change in management— reported one of its best-ever results, headlined by a 16% operating margin. Spirit, by contrast, while still topping American with a 19% figure, was now the one triggering Wall Street frustration. “Have you guys thought of really taking an introspective hard look at, like, who you are and what needs to be done in this environment?” asked one analyst, Hunter Keay. Others echoed the concern.

Is the ULCC model losing its luster?

This sudden reassessment was one of the hottest topics to emerge from second-quarter earnings season. Are significantly greater-than-average y/y margin declines for Spirit and Allegiant, and Frontier’s recent decision to postpone its IPO, an ominous sign? Can Scott Kirby at United, determined to hammer Spirit and Frontier with ultraaggressive price matching, accomplish his goal? His attacks, after all, didn’t accelerate (according to Spirit) until late in the second quarter, raising prospects for even more uncomfortable financial results for Spirit..

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