Something strange is happening in the skies. 
Eight years ago, American low-cost carriers   were just printing money. Southwest, for example, 
pocketed 20 cents of every dollar they brought in   in operating profit. JetBlue, also 20, while 
Spirit 24, and Allegiant a colossal 30. These   are monumental profit margins for any industry, 
but especially for the airline industry. While   buoyed by rock-bottom fuel prices, the low-cost 
carriers still triumphed over the competition:   Delta’s operating margin peaked at only 19.6%, 
while United’s just 13.6%. At that time, everyone   was asking: how was it that the airlines charging 
the lowest fares were making the highest profits?  But today, eight years on, the incumbent 
legacy carriers have regained their supremacy,   and their low-cost counterparts are fighting 
for their survival. These four are down to   operating margins between 5.6% and -11.2%, while 
their legacy counterparts are back up to 8% and

10.9%—far closer to their 2015 or 2016 peaks. 
So, what happened between 2016 and today? Well,   of course, the most dramatic collapse in air 
passenger volumes in modern aviation history   due to the COVID pandemic, but finding a cause for 
budget airlines’ woes is not as simple as that.   Passenger volumes, at least in the US, have fully 
recovered, hit an all-time record in summer 2023,   and have every likelihood of doing so again in 
summer 2024. While COVID hurt low-cost carriers   just like any airline, they recovered, and then 
financial performance started to turn downward   once again, whereas their legacy counterparts 
recovered, and then continued to recover   further through today. So something strange is 
happening: people want to fly more than ever,   yet the budget airline business model in the US is 
collapsing without any obvious reason as to why.

But the airlines have to have a reason, at 
least one to give to investors. They’re public   companies, so the management team must paint 
a narrative explaining why they’re not making   money like they once did, and more importantly, 
why it’s not the executive team’s fault. Spirit,   for example, says “the competitive environment 
remains challenging due to the elevated capacity   in many of the markets we serve.” That’s 
to say: other airlines are flying too much.  Now, anecdotally, Spirit’s narrative of oversupply 
is grounded in truth. The post-COVID demand   recovery has been notably uneven between the 
industry’s two main customer segments—business   and leisure. Whereas more people are flying 
for vacation or to see family than ever,   increasingly digitized businesses are now less 
willing to fly their staff around the world for   meetings or conferences and the number of people 
traveling for work still has not reached pre-COVID

levels. Considering overall demand at records, 
that means leisure travel demand is hugely strong, so the legacy airlines that traditionally were 
more focused on serving business travelers have subtly recalibrated their networks to 
capture more leisure demand. Las Vegas, which is almost entirely a vacation destination, 
had 412,000 scheduled flights in 2023, which represents about a 10% jump compared to pre-COVID 
averages. New York’s JFK airport, meanwhile, a major business market, still saw slightly 
fewer flights in 2023 compared to pre-COVID. But at least in the case of Spirit, the 
numbers don’t wholeheartedly back up their claim of competition as the primary 
cause of their woes. On the one hand, Spirit’s load factors are down—whereas 84.7% 
of seats were filled in 2015, only 81.3% are today. That is partially the effect you’d expect 
if other airlines were dumping a lot of capacity.

into a market—there would be more overall seats, 
and therefore a smaller portion of them filled—but   passenger counts are not a fixed total—they vary 
depending on price as people decide whether to fly,   depending on how much it costs. So therefore, 
you’d expect that oversupply in a market would   also lead to lower revenue since airlines would 
lower fares in order to fill seats. But revenue   seems fine. In 2015, Spirit earned 10.08 cents 
per seat, per mile flown, and today that’s down   slightly to 9.63 after a high-water-mark of 10.44 
in 2022. While this difference is meaningful,   it just is not meaningful enough to explain 
a profit collapse of 24% margin to -7.5%.  But there’s another line in their reports 
with a far more significant change—CASM:   that’s cost per available seat-mile, or how much 
it costs the airline to operate a flight on a per

seat, per mile basis. Between 2015 and 2021, 
this fluctuated roughly around eight cents, with some marginal upward growth. But between 2021 
and 2022, the cost to transport a passenger a mile on Spirit exploded 45% higher to 11.67 cents.
This is the problem. After all, the true, technical, industry term for this grouping of 
airlines is low-cost carrier, and that “cost” refers not to the fares the public pays, but 
rather to how much the airlines themselves spend operating their flights. This often translates to 
lower fares for the public, but not always. So if a low-cost carrier loses their low operating 
cost, like Spirit clearly did, it no longer has a business model. So what happened?
Well, in Spirit’s case it’s actually pretty simple—fuel prices went up. In fact, they 
basically exploded in March 2022, and excluding

fuel from their operating cost, their cost per 
available seat mile actually declined marginally between 2021 and 2022. It’s a similar story for 
JetBlue—their cost minus fuel was just about flat. But not all airlines are in the same boat. 
Frontier’s cost per available seat mile excluding fuel still went up 17% between those two years. 
Allegiant’s 32.1%. Southwest’s a colossal 39%. So, while fuel cost increases might be a major 
explanation of the demise of the low-cost carrier model in the US, it’s far from everything.
When digging through those financial reports, beyond the complaints of rising fuel prices, 
airlines attribute their issues to one other key cause: irregular operations. Essentially: 
it’s gotten a lot harder to operate an airline on-time in the US, and when you can’t operate 
an airline on-time, you really can’t effectively

operate a low-cost carrier business model.
Prior to the pandemic, Spirit was regularly flying their aircraft around or even upward of 12 hours per day during the peak summer season—from before dawn until well into the evening, and sometimes even overnight, with the shortest possible ground time in between each flight. But these days, with plenty of demand and therefore reason to operate flights, Spirit still can’t get their daily aircraft utilization up to pre-COVID levels—it’s peaked at just 10.8 hours in 2023.
Why Spirit can’t operate as much as they used to is a little of everything. Severe weather in the US is more frequent, for example—whereas in 2000 an average of just one category four or five hurricane hit the US each year, today that average is up to over two. Spirit, and most US low-cost carriers, has a disproportionate number of its

routes to or from places like Florida—home to the 
kinds of beaches that leisure travelers seek out,   but also the geography that hurricanes 
are most likely to hit. So with hurricanes   and other severe weather more frequently 
preventing on-time operations, airlines need   more slack in the schedule to keep it on track.
Similarly, the FAA is experiencing a shortage of   air traffic controllers—since each individual is 
only able to handle a certain number of flights   at a given time, this creates delays as planes 
are prevented from taking off until there’s ATC   capacity. And this shortage has hit particularly 
hard also in Florida, meaning the impact has once   again been disproportionately felt by Spirit 
and other leisure-focused low-cost-carriers.  And the bad luck doesn’t stop there. You see, 
almost half of Spirit’s aircraft fleet is   composed of A320 NEOs specifically powered by 
Pratt and Whitney’s PW1100G engine. This is an

extremely advanced and efficient engine, which is 
why the airline acquired them in the first place,   but their manufacturer identified a potential 
flaw in some of the metal used in these   engines that could cause cracking in the turbine. 
Therefore, they’ve had to move up the timeline for   inspections on these engines, which initially 
took seven Spirit aircraft out of service,   and since then has kept an above-average number 
of the airline’s planes out of revenue service   compared to typical operations. While 
Spirit is the US low-cost operator that   relies most on this engine type, and therefore is 
experiencing the most hardship from its issues,   JetBlue and Frontier also use the PW1100G and 
therefore have also seen a revenue impact.  So with this combination of issues, airlines 
are just having to fly aircraft less to keep   operations on-time. Even with lower utilization, 
Spirit still has seen weaker on-time ratings.

over the past few years compared to pre-pandemic, 
which itself has costs—be it through compensation for canceled flights, costs of booking hotels 
for unexpected overnights, revenue loss through frustrated passengers avoiding flying the airline 
again, and more. So not only do they have to make less money by flying aircraft less, they also 
have to pay more for the impact of delays. These US low-cost carriers are all in an 
untenable state—something has to change to ensure their survival. And they each have some 
rather unique theories on how to do that. JetBlue, for example, is making some fairly drastic changes 
to their route map and schedules. In recent years, rather uniquely for a low-cost carrier, they’ve 
started long-haul flights to European destinations on narrow-body aircraft configured with a huge 
number of business-class seats. This service is going decently—reviewers are lauding its 
quality, flights are filling acceptably, and

they’re expanding to more and more destinations.
Bizarrely, though, they originally scheduled these routes as year-round, and had essentially the same seat capacity in the winter as in the summer, despite transatlantic demand in the winter being massively lower. Essentially every other transatlantic airline scales down service in the winter, so faced with increased economic pressure, JetBlue opted to start cutting certain routes down to summer-only. They’re then redistributing those aircraft to domestic routes—in particular, a few from Phoenix to the east coast, and then a New York to Vancouver and New York to San Juan route. This makes sense. One other key post-pandemic trend is that leisure travelers are now opting to pay for business class at a far higher rate than before—essentially, more people are willing to pay for luxury on vacation. Most low-cost carriers are in a tough position where they’re unable to capture this highly-profitable demand.

but while JetBlue still has most of its aircraft configured in an all-economy-class configuration, this sub-fleet of aircraft configured with business class for its longer-distance routes can be better used on domestic routes in the winter when transatlantic demand is low. In addition to this network recalibration, they’ve massively boosted service out of San Juan, Puerto Rico. This also seems smart. Puerto Rico is, of course, an American territory, but no major US airline has a hub there and so they only fly to San Juan from their mainland hubs, which works efficiently for bringing mainland tourists to Puerto Rico, but less well for the 3 million people actually living there. So JetBlue is increasingly turning San Juan into a major hub that does connect it to destinations in the mainland US, but also to destinations across Latin America like Cancun and Columbia—the places Spanish-speaking Puerto Ricans are more likely to go.

Frontier is making some even more dramatic changes: essentially, they’re bailing on the budget airline business model, at least from a passenger perspective. Out of nowhere in May 2024, they announced they were fundamentally changing their pricing model—no longer would they charge for seat assignments and carry-ons and change fees. Unlike essentially every budget airline, they’d now primarily sell bundled fares just like United, Delta, or American. From a passenger perspective, they’re now far more similar to the legacy carriers. They’ve also been subtly changing how things work behind-the-scenes. In the past, Frontier was massively operationally complex with random routes all across the country, which meant aircraft and crew would be scheduled on long, winding journeys spanning across multiple days to staff each flight—an aircraft and crew might fly from Salt Lake City to San Antonio to New Orleans to Cancun to St. Louis.

and since none of those destinations were 
Frontier hubs, with additional aircraft and crew, one delay on that sequence of journeys would lead 
to a delay on all the following flights without any easy opportunity to swap an aircraft or crew 
out to get the schedule back on track. Today, though, the airline has been opening new hubs—they 
now have thirteen across the US, and only 3.5% of flights don’t go through one of them. That means 
Frontier’s operations are now far simpler as many flights just operate as an out-and-back from 
a hub, and even if they don’t, the far higher proportion of flights hitting a hub mean there 
are far more opportunities to rectify a delay and prevent it from cascading onward to the following 
flights. A reduction in delays therefore allows the airline to improve its all-important aircraft 
utilization, which then, of course, reduces cost. Not all low-cost carriers have yet instituted such 
a dramatic series of changes, but it seems like

they’ll need to: the vultures are circling. 
Southwest, while technically operating in a niche between legacy business airlines and ultra-low cost carriers, has felt the same post-COVID squeeze as the rest of the cheap leisure airlines. At the end of the first quarter of 2024, the company announced a net loss of $231 million. For a company that went 11 years or 47 quarters without announcing a loss prior to the pandemic, the news was undeniably disappointing, something even CEO Bob Jordan was willing to concede. Now, some reasons for the company’s slow start to 2024 had little to do with what Southwest had control over at the present moment—principally the reputational damage done by the prior year’s wide-scale operational meltdown that led to over a week of disruption over the peak Christmas travel period, and the continued struggles with Boeing’s quality control of the 737-MAX. Still, Jordan articulated that he had a

plan—that Southwest would change. First, it’d stop operating out of Bellingham, Cozumel, Houston, and Syracuse, while also reducing capacity out of Atlanta and Chicago. While relatively minor airports in Bellingham, Cozumel, and Syracuse, it was the first time the company had entirely entirely dropped service to specific markets since 2019. The other changes: the company would slow hiring to cull about 2,000 employees and, most radically, it would begin looking into how the company seats and boards—potentially moving away from its no-assigned-seats model to offer perks for an upcharge. And these changes were on top of a few more tweaks Southwest had made in the month of March that actually helped turn the end of the quarter to a more manageable crisis. They flew less midweek, they reduced short-haul business market flights, they

ran fewer flights outside peak hours of the day.
But to some, this just wasn’t enough. In early June, Elliott Investment management bought a $1.9 billion dollar stake in the airline, and with roughly an 11% claim to its equity, they wanted to make more substantial moves. This sent shockwaves, because not only is Elliott massive, for the leadership of publicly-traded companies, it’s frightening, as Forbes called Paul Singer—Elliott’s founder—Wall Street’s most feared Activist investor. To incumbent CEOs and board members, the term activist investor is a bit of a euphemism. Usually the strategy is simple: the investor buys a significant minority share and begins work to boost the value of their shares by pressuring the company to change. Once they have a foot in the door, the fund can then lobby leadership or stakeholders to adopt their strategy, which can vary from altering simple business

approaches to fundamentally restructuring company leadership. In this particular case, however, Southwest had now been boarded by Elliott, a firm not known for having the lightest of touch. While limited on airline experience, Elliott is notorious for the ruthless restructuring of the high-profile companies it enters, from Barnes & Noble and Cabelas to AT&T, Athenahealth, and even the Italian soccer club AC Milan. And like the infamous firm has done with so many companies before, the activist investor started its tenure with Southwest by pushing to oust its leadership. In a slide deck published to its website that effectively acts as the company’s public playbook, Elliott pulled a quite specific quote by Herb Kelleher, Southwest’s founder, early on, then outlined its way forward: change up the board, freshen up the leadership. In the move’s wake, Bob Jordan announced he wouldn’t step down under the pressure. But pressure only continued to mount

after the company filed an 8-K form with the 
SEC, that the company’s revenue per available   seat mile, or RASM, was now expected to drop 4 
to 4.5%, rather than the 1.5-3.5% it had projected   earlier. Announcing an even steeper decline in 
a key indicator for an airline’s health has only   furthered Elliott’s case for radical change.
While the shakeup is still in its early stages,   and it's unclear whether Elliot will be successful 
in their mission, what is clear is that change is   coming for Southwest, and low-cost carriers like 
it—whether initiated internally or externally.   Much has been made of Elliott’s investment into 
the airline—experts have warned that the firm’s   focus on short-term gains may harm the company’s 
long-term future. Industry insiders have pointed   out that Elliott may fundamentally misunderstand 
what’s made Southwest Southwest for the past five

decades. But what all can seemingly agree on is 
that the company has been slow to change for too long. And in a current environment so unfriendly 
to low-cost and ultra-low-cost carriers, for those in C-suite positions, it’s time 
to adapt or start updating the resume. There is a genuine question to be asked as 
to whether the low-cost carrier business model is viable long-term in the US. It thrives in 
Europe, but Europe is far more densely populated, meaning people don’t tend to travel as physically 
far from home for vacation or business. The US is vast—cities are far, far apart—and the fundamental 
basis of the low-cost carrier business model is to find ways to optimize and reduce operating costs 
relative to the legacy carriers. Carriers can do this by minimizing time on the ground, flying to 
secondary airports, paying their employees less, packing in seats more densely, but what they can’t 
do is pay less for fuel. Fuel costs what fuel

costs, and so Spirit is paying just about as much as United to buy the fuel to fly from New York to LA. But with such a long, five-hour flight, that fuel cost represents a far higher proportion of overall costs, meaning the other costs, that they could minimize, represent a smaller portion. So today, in 2024, there’s a perfect storm of higher fuel costs meeting a collection of outside factors making it harder for low-cost carriers to optimize costs overall. Essentially, low-cost carriers just can’t be low-cost in the US anymore, and without that, well, what are they? As you can tell so well by this video, a ton of the job of running an airline is about looking at big sets of numbers and analyzing what they tell you about what’s happening in the real world. The skill is tremendously useful in day-to-day life since it allows you to make conclusions about

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Why Budget Airlines are Suddenly Failing

Wendover Productions is all about explaining how our world works. From travel, to economics, to geography, to marketing and more, every video will leave you with a little better understanding of our world. New videos go out every other Tuesday.