Why budget airlines stopped winning

No American carrier is allowed to win. Domestic market share in 2023: Delta 18%, American 17%, Southwest 17%, United 16%, Alaska 6%, JetBlue 5%, Spirit 5%, Frontier 4% — and any deal that would take one past 20% is automatically blocked by the Justice Department.

Underneath the cap it is a pure volume business. Gross revenue tracks fleet size almost exactly: Delta at $58B on 1,273 planes, United $54B on 945, American $53B on 965, Southwest $26B on 817, down to Spirit at $5B on 205 and Frontier at $4B on 136. More planes, more seats, more trips, more money.

The two costs that matter are outside anyone's control. Fuel takes 21% to 31% of revenue — Spirit highest at 31%, Delta lowest at 21% — and labor another 25% to 40%, with Southwest at 40% and American at 34%. Scale barely helps on fuel, and unionized pilots, attendants and mechanics renegotiate upward every few years.

The DOJ cap is national. It has never been enforced airport by airport, and that omission is the entire competitive structure of American aviation. United holds 67% of Washington Dulles, 59% of Newark, 44% of San Francisco, 41% of Houston, 38% of Denver and 30% of Chicago.

Delta's fortresses are stronger still: 73% of Atlanta, 69% of New York, 58% of Minneapolis, 58% of Salt Lake City and 57% of Detroit. In a fortress the carrier sets the price, because there is no route to your destination that does not go through it.

American's are 70% of Charlotte, 69% of Dallas–Fort Worth, 62% of Philadelphia, 57% of Miami and 33% of Phoenix. To break any of these you would need the same gates at the same times, the same routes at the same frequency, and billions to undercut on price while flying half-empty aircraft. Nobody has that.

Only a handful of valuable airports have no dominant legacy carrier. At Los Angeles, Boston, San Diego, Tampa and Austin the three legacy carriers together hold only 37% to 50% — split roughly evenly, none of them above 24%. These are the airports where a fight is even possible.

Spirit's go-to-market was a formula: find any city pair with over 200 passengers a day and sell 25% cheaper than the going rate. It priced at the absolute bottom — $81, $75, $79, $80, $65 and $55 average airfare from 2011 to 2016, against $270 to $252 at United across the same years.

The fares were the loss leader; the fees were the business. Spirit charges for booking online, for printing a boarding pass at the airport, for a carry-on — which also means fewer staff, faster departures, lighter planes and less fuel. Non-ticket revenue eventually passed airfare. Frontier ran the identical playbook in different cities, and by 2023 total passenger spend between the two differs by a couple of dollars: $121.58 against $118.77.

They also never got big. Combined domestic market share of the two ultra-low-cost carriers went 1% and 2% in 2010 to 5% and 4% in 2023, peaking at 6% for Spirit in 2020 and falling back. A decade of the best margins in the industry bought them under a tenth of the market between them.

Southwest was the one that scaled, and the reason is not the one every business school gives. Free checked bags was a genuinely contrarian bet — throwing away high-margin ancillary revenue, adding labor, adding weight, adding fuel, during a recession with record fuel prices — and it worked as a growth accelerant. But Southwest was the first low-cost carrier ever. By the time Spirit and Frontier arrived it already held the first or second largest share at Las Vegas, Phoenix, Baltimore, Denver, Dallas and Chicago.

For a decade the low-cost carriers simply beat the legacy carriers. Average operating margins from 2009 to 2019: Spirit 16%, Frontier 13%, Southwest 10%, JetBlue 8% — against Delta 9%, United 4% and American 2%. The market agreed: average P/E of 15 at Spirit and JetBlue, 12 at Southwest and 11 at Alaska, against 13 at Delta, 8 at United and 5 at American.

The new regimes copied Apple instead. In 2016 Apple split the iPhone into three tiers for the first time — the $399 SE, the $649 6s and the $749 6s Plus — because it owned the top of a commoditized market and needed the bottom. The legacy carriers lifted that structure directly into the economy cabin, and by 2018 Basic Economy, Economy and Premium Economy were on every domestic flight.

The moat eroded on schedule. Spirit's operating margin ran 14%, 13%, 17%, 18%, 24%, 19%, 15%, 8%, 14% across 2011–2019 while Southwest's climbed the other way — 2%, 4%, 7%, 10%, 18%, 17%, 15%, 14%, 13%. The peak for the ultra-low-cost model was 2015, one year before the Basic Economy decision was made.

COVID finished the reversal. Delta went −91%, 1%, 4%, 10% across 2020–2023 while Spirit went −27%, −12%, −12%, −9% — never getting back above water. In 2023 the ranking is Delta 10%, United 8%, American 5%, Alaska 4%, Southwest 1%, JetBlue −2%, Spirit −7%.

They could afford it because ancillary revenue is now a legacy strength, not a low-cost one. 2023 fees: Delta $7.9B, American $5.9B, United $4.1B, against Frontier $2.9B, Spirit $2.2B, Southwest $0.9B and JetBlue $0.6B. The airlines that invented nickel-and-diming are being out-earned at it by the airlines they were nickel-and-diming against.