How bleak is the future for low-cost airlines?
For decades, budget carriers successfully offered travelers no-frills, cheap flights. But that scrappy business model is now eroding as costs soar and passengers opt for more comfortable seats and spacious upgrades.
The business, it seems, can't even merge itself out of its tailspin.
Earlier this week, Spirit Airlines (SAVEQ) once again rejected an acquisition proposal from Frontier (ULCC), valued at $2.16 billion. The offer was similar to the one Frontier presented earlier this month. Spirit countered, but its offer was rejected.
Frontier's first takeover bid in 2022, for $2.9 billion in cash and stock, was foiled by a $3.8 billion offer from rival JetBlue (JBLU). Spirit filed for bankruptcy in November after a federal judge sided with the Justice Department to block its tie-up with JetBlue.
The low-cost carrier model works by offering cheaper seats than traditional airlines to domestic and near-US destinations while charging fees for items like checked bags, seating selection, and snacks or drinks. Often, the airlines will use secondary airports with lower landing fees, such as Long Beach Airport in Los Angeles instead of LAX.
But between increased competition from traditional carriers in domestic routes and rising labor and maintenance costs, the low-cost model has slowly unraveled.
For example, amid activist investor pressure last year, Southwest (LUV) announced it would end its decades-long practice of open seating as part of a new strategy to grow revenue. Meanwhile, in January, Frontier also announced it would start offering seat upgrades and first-class seating by late 2025.
"That ultra-cost model is gone because they don't have ultra-low costs," aviation consultant Mike Boyd, president of Boyd Group International, told Yahoo Finance.
"The model," he added, "is evaporating."
The prospects for the industry are not encouraging for investors. JetBlue stock tumbled recently after the airline's 2025 outlook disappointed Wall Street. JetBlue cited higher costs and lower-than-expected revenue in its fourth quarter results.
And late last month Southwest CEO Bob Jordan said the airline was "experiencing above-normal unit cost inflation, most notably in market-driven wage rates, airport costs, and healthcare." Jordan referenced a $500 million cost reduction target for 2027 unveiled at the company's Investor Day last quarter, saying, "We will be relentless in pursuing cost takeout."
The cost woes are reflected in stock prices: The ultra-low-cost carriers have, for the most part, underperformed the broader airline market.
Over the past 12 months, for instance, United Airlines (UAL) stock is up more than 140%, while Delta (DAL) has gained 60% and American (AAL) increased 7%. Among the low-cost carriers, Frontier is up about 15%, JetBlue is down 5%, and Southwest is down 10%.
The bargain airlines have also been hit hard over the past year as travelers have opted for more international trips, and overcapacity in the domestic market has made it hard to raise prices in order to offset rising costs.
"Fuel costs cut into profit margins. Labor shortages increase personnel expenses. Also, competition is growing on regional routes," said Dean Rotchin, CEO and founder of BlackJet, a private aircraft firm.
Low-cost airline execs have some solutions beyond cost-cutting.
As a workaround, carriers have tried to expand into different markets. But they've seen mixed results, according to Boyd. The consultant points out that Frontier, for instance, is up against stiff competition from the majors (United, Delta, and American).
"You can't put one flight a day between Charlotte and Atlanta and Boston and think it's going to work when Delta has 12," he said. "They have very little market presence in those markets, very little customer identify."
To be sure, there are always bargain-hunting consumers who will jump at cheap fares.
But is it enough?
Dan Bubb, a former pilot and aviation historian at the UNLV Honors College, doesn't think so.
"There is a market there. It’s just that you have to be very well capitalized in order to be able to sustain it," he said.
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As far as British oil giant BP (BP) is concerned, the catastrophic oil spill that tainted Louisiana’s shores more than a decade ago didn’t take place in the Gulf of Mexico.
It took place in the Gulf of America.
The company is one of several that have embraced President Trump’s official recasting of the more than 400-year-old name. One of Trump’s first acts in office was to sign an executive order renaming the 620,000-square-mile international body of water, which is bounded by the U.S., Mexico and Cuba, as the “Gulf of America.”
On its website and in recent filings, BP refers dozens of times to its drilling operations in the Gulf of America, as well as to the 2010 “Gulf of America oil spill.” Chevron (CVX) and Shell (SHEL) have followed suit, as have Google (GOOG), Microsoft (MSFT) and Apple (AAPL), whose maps now feature Trump’s preferred name for U.S. users.
“We’re calling it Gulf of America,” Chevron (CVX) Chief Executive Mike Wirth said in a Jan. 31 conference call with analysts. “That’s the position of the U.S. government now.”
The move speaks to the extraordinary sway Trump holds over some of the largest American corporations. Many business leaders—who for months have worked to ingratiate themselves with the new White House—have been quick to abide by his edicts.
Even before Trump pushed to end diversity, equity and inclusion—or DEI—programs in the federal government, companies including Meta (META) and McDonald’s (MCD) scaled back their DEI efforts. Companies are also reconsidering climate-change efforts and settling lawsuits from Trump.
Trump’s executive order renaming the Gulf of Mexico applies to federal publications and communications, not internationally, and private entities are free to stick with the original name. But by adopting the president’s preferred designation, they are signaling a willingness to play along to get along, corporate strategists said.
“All these companies are very attuned and playing the long-term Washington lobbying game,” said Allen Adamson, a branding expert and co-founder of marketing firm Metaforce.
A spokesperson for BP said that it made the name change to maintain alignment and consistency with the official position of the U.S. government. Chevron said it follows U.S. policy on geographic names.
Google (GOOG) has said it has a longstanding practice of applying name changes when they have been updated in official government sources. Apple (AAPL) didn’t respond to a request for comment. A Microsoft (MSFT) spokesperson said that in accordance with established product policies, it is updating Bing Maps to reflect the change.
Consultants for oil producers, many of which operate in the Gulf, say some companies are trying to appease and avoid upsetting their pro-fossil-fuel ally in the Oval Office. Why quibble over a name, the consultants said, when they want the Trump administration to open more federal waters to drilling?
In a conference call last month, Chevron’s Wirth said he expects the Gulf—which he began calling the Gulf of America the day after Trump said he would rename it—to keep pumping oil and gas for years. “There’s a lot of running room out there,” with enough for expansions at existing platforms and new projects, he said.
The oil industry is lobbying the administration to quickly create a new five-year leasing plan that would offer oil companies more auctions of acreage in federal waters.
Some oil companies haven’t made the switch. Exxon Mobil (XOM), Halliburton (HAL) and Murphy Oil (MUR) all called it the Gulf of Mexico in recent conference calls and regulatory filings, before the official change by the U.S. Board on Geographic Names. The board ensures uniform geographic usage throughout the federal government.
Trump’s renaming decision has been criticized and mocked at home and abroad. Seventy percent of respondents in a Reuters/Ipsos poll last month said they opposed the move.
But companies such as Apple, Google and Microsoft have strong incentives to make the change, corporate strategists said. The tech giants have much to gain—or lose—from Trump’s decisions as the country’s leader, on everything from antitrust policy to deregulation on A.I.
It is unclear whether nonfederal entities will be required to adopt the new epithet, but at least some are likely to follow federal guidance, especially those bordering the Gulf, experts said. Some have proactively started using the new name, including the state of Florida, which used it in an executive order, and Port Fourchon, a major Louisiana seaport, which refers to the new moniker on its website.
Failing to honor Trump’s preference carries risks. On Tuesday, a reporter with the Associated Press was barred from a White House event after the news agency said it would keep calling the gulf by its original name, the AP said.
“Limiting our access to the Oval Office based on the content of AP’s speech not only severely impedes the public’s access to independent news, it plainly violates the First Amendment,” the AP said.
The Wall Street Journal has said it would generally stick with the internationally familiar name Gulf of Mexico for now—while acknowledging, as pertinent, the name Gulf of America.
The huge expanse of water has been identified on maps as the Gulf of Mexico since at least the mid-16th century, and is of cultural significance to not just the U.S. but also Cuba and Mexico.
After Trump’s announcement, Mexico’s nationalist President Claudia Sheinbaum jokingly suggested that an area encompassing Mexico and most of the U.S. be called “America Mexicana.” She said the gulf is internationally recognized as the Gulf of Mexico.
It is unclear if Italian explorer Amerigo Vespucci, for whom America is named, ever sailed directly through the Gulf of Mexico. In his voyages to the new world starting in the late 1400s, Vespucci sailed to Venezuela and Brazil, as well as other parts of South America and the Caribbean.
Some Gulf Coast residents and businesses said they welcomed the change.
“The waters we fish in are in the United States,” said Anthony Theriot, a 49-year-old fisherman in Cameron, La., who voted for Trump. “I always wondered why they called it that anyway,” he said of the Gulf of Mexico.
source: finance.yahoo.com
