Podcast: Why Did U.S. Airlines Endure A Financially Difficult Summer?

Listen in as Aviation Week editors discuss what was behind a disappointing second quarter and why U.S. airlines are changing their product offerings.

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Rush Transcript

Karen Walker:

Hello, everyone, and thank you for joining us for Window Seat, our Aviation Week Air Transport podcast. I'm ATW and Aviation Week Network Air Transport editor-in-chief Karen Walker, and I'm delighted to welcome you on board. Joining me today are my colleagues, ATW and Routes senior editor Aaron Karp, and Aviation Week Air Transport senior editor Americas Christine Boynton. And today, we're going to talk about what's happening with the US airlines, both the legacy majors and the low-cost carriers. So I'm going to get straight into this. Aaron, let's start with you. I think the top line here is that it hasn't really been a very good sum up financially for the US airlines, regardless of which business model they're in. You've been analyzing the second quarter results, in particular. Give us a summary, please.

Aaron Karp:

Sure. I think one thing to say is that there are more passengers traveling through US airports this summer than ever before. The TSA is constantly breaking daily screening records. They screened 3 million passengers in a single day over the July 4th holiday weekend, and so the demand is strong, the demand is there. However, airline executives across the board believe that there is too much capacity put into the market in the first half of this year, and so that sounds a bit strange, but it seems like they're having trouble figuring out how to chase all that demand. Route maps are changing a little bit where you're having more smaller markets connected to big hubs and to leisure markets, and I think airlines are trying to sort out how to set capacity on these different routes—and are struggling.

And so they all said that the ticket pricing was problematic, there was a real cap on it. That surprised them all. And what you saw happen is American and Southwest both saw net earnings drop 46% year over year in the second quarter. Delta—which, of course, suffered the CrowdStrike meltdown in July, which is expected to cost them around $500 million in the third quarter—they had already reported a 29% year-over-year drop in second quarter net income. And Delta CEO Ed Bastian called what happened with CrowdStrike "a wake-up call," and I think that generally applies to the US airlines who were in this post-pandemic honeymoon period where travelers were rushing back, where there was lots of demand, where the planes were full. And the planes are still full, but there's too many seats on a lot of routes, and that's driving down ticket prices. And it means, while there's a modest increase in revenue for the carriers, it's not keeping up with cost and there's a supply-demand imbalance.

And so I think that's where we stand, is that all of the US airlines are realizing, the majors and the LCCs, that the environment is changing and they really have to adjust to that environment. And the one other thing I would add is costs are just going up, and this is particularly true of labor cost—as you had, coming out of the pandemic, a huge need for staff at airlines—and unions have taken advantage of that with leverage to get more compensation. So I think a rocky summer for the US airlines financially, no question.

Karen Walker:

Absolutely. Nicely said, Aaron. Last year, there was a lot of concern about disruptions. Air traffic control disruptions, weather, other things. We've seen much less of that, with the exception of the Delta issue, but it's almost like the airlines have returned back to the old problems. Costs are too high, overcapacity, and the net result [is] yields drop.

Christine, I'd like to turn to you, because in particular ... Again, you're monitoring all of this, but you've been giving quite a long look at what's happening at Southwest Airlines. I mean, we call it one of the majors. One of the US majors, which it is, but of course, we all know that it began on a very different path from everybody else when it started as the original low-cost carrier. Now it's saying that big changes are coming. Can you tell us a little bit about that, please?

Christine Boynton:

Yeah, sure. So Southwest, like you're saying, has been a real change-driver for our industry. It's been a very iconic part of the industry, but in recent years, they're running up against some challenges that are now leading to a real evolution of the brand. So they're running up against one of the big factors, [which] is changing consumer expectations. So in late July, they've announced these changes. First of all, there'll be no more open seating, right? That's been a huge part of the brand, it's one of the things you know you can expect from Southwest. That's going away. They'll also begin offering premium legroom on one-third of their seats, and they're getting ready to launch red-eye flying next year. That's something else they haven't done yet.

Karen Walker:

Christine, can I just interrupt you there? To be clear, when you say they're offering premium legroom, that's for an extra fee, isn't it? They will be paid—

Christine Boynton:

For an extra fee.

Karen Walker:

Yeah, that's very similar to what the other airlines do, yes?

Christine Boynton:

Yes, they'll be segmenting the cabin. We don't know yet the timing on that. They're saying potentially 2025, but that's very different, not something that we've seen from Southwest yet. But again, they're reacting to those consumer preferences, people are looking for an ability to upgrade. So they're making these changes, really, after careful study, and one of the things that I find really interesting is that, based on their research, they're saying 80% of their current customers and 86% of potential customers would now prefer that assigned seat compared to several years ago, where that preference, they're saying, was more 50/50. So essentially, they're trying to aim at the customer not only just today, but the customer that they're expecting to see in five years and in 10 years.

Karen Walker:

Aaron, I'd like to switch back to you. I know that you fly regularly with Southwest Airlines, and I think you recently did fly with them again. Have you noticed any differences? I know we're still very early–they're really mostly just announcing some of the changes coming—but did you notice any changes?

Aaron Karp:

Yes, I flew them earlier this month on a family vacation, and one thing that struck me is that, when you used to fly on Southwest, the flight attendants were more casually dressed, often in shorts and a short-sleeve shirt, and there was always a lot of joking over the loudspeaker that it was one of their signatures. And one thing I noticed now is the flight attendants are very formally dressed, looking like the other majors: United, American, and Delta. There's very little joking over the loudspeaker, and honestly, the one thing that did feel different was the non-assigned seating. And that was a big deal for me, because I was traveling with a group of six family members, and so we didn't have to worry about the fact that we could all sit in one row. And it struck me that that's one thing that Southwest will be giving up, is that [for] families—and my family preferred to fly Southwest in this occasion, because we knew we could all sit together without any stress or any problem.

One thing you used to see a lot of on Southwest, particularly if you went to someplace like Las Vegas, is you'd have a group of 20 people that had all gotten together, decided to take a vacation, and they could all sit in one section on the aircraft. As Christine said, they're hearing from the vast majority of their customers that they don't want that anymore. With that going away, it will be even more similar to the other majors, and for years, if you listen to their earnings calls, the financial analysts have been saying, "Well, you've got to make these changes because the other airlines have, and eventually, you're going to need to do this," and I think they've come around to that. So I think the non-assigned seating is definitely a change, it will change the feel, and I think continue to change the feel as they transition into, as you said, a more standard major rather than what they were in the past, really the original low-cost carrier that set the model that LCCs all over the world are following now.

But they've become so big and have such a big part of the US market that I think they feel and are coming to realize they have to operate more like those majors with ... Well, I'm sure one thing they'll be thinking about, as they roll out the unassigned seating, is how to balance that, how to still feel unique compared to the majors.

Karen Walker:

Yes, because some other major changes, big changes have happened already from that original model—things like they do now operate internationally. Yes, it's the Caribbean, Mexico, so it's really like an extension of the Americas market, but they were only truly US mainland. And so there was that, that came through when they merged with AirTran, of course. And now Hawaii is a big market for them, as well. Yes, it's US, but it's a different market. They are saying, for now, they're very adamant that one change they're not going to make, that the other airlines all do, is charge extra for your checked or even roll-on bag, that they will continue with that Southwest policy of your bag is included in the price of your tickets. So it will be interesting.

Christine, I'd like to come to you about ... Aaron just mentioned the low-cost carriers, the others, the Spirits and the Frontiers of this world. What does all this mean to them? How are they doing right now? We've had all that drama with Spirit, JetBlue, the deal got killed, basically, by the government. So how are they doing and what does this all mean to them? Because they're changing, too, aren't they? They're changing their business models.

Christine Boynton:

Sure, yeah. There's been some really interesting changes there. So their margins have looked pretty different post-COVID—this was a category that grew rapidly, and [was] very successful and profitable. And now they're facing rising costs. A lot of the pilot contracts that were negotiated last year were record-breaking, we're now seeing that happen with flight attendant groups, and then the changing consumer preferences, to come back to that. Spirit and Frontier, in 2024 so far, have announced some really interesting changes. They have new fare categories, where some of the options like baggage and premium seating are being bundled, so you have more options. They've both announced a seating upgrade of sorts, where they're blocking the middle seat in some of the front rows to give you additional room. Waiving certain change in [cancellation] fees, so they're starting to make moves into the premium space as best they can.

And Frontier has been saying that what they're ... They're actually calling it "The New Frontier." And what they're saying is that these changes, which I think they began rolling out in early 2024, maybe March, but they're already performing exceptionally well, and they're saying that the positive reception of this premium product has, quote, "far exceeded our expectations." So they're seeing some success with these changes already.

Karen Walker:

So, they're putting a good spin on this, but I'm just curious here—Aaron, I'm going to come back to you on this one. It just does seem to me that where we're going now is that, across the whole board, [it] doesn't matter whether it's a major, a low-cost, or maybe one of the niche carriers. Some of the new people, like Breeze and Sun Country—Sun Country's not so new, but you know what I mean, it's like a niche carrier—they're all going to be offering a similar product in many ways. And a lot of it will be the extras you can have, but you'll pay for them, which I think doesn't that make it smaller and smaller? The availability of what's there for the people who really don't want to pay any extra, who were very happy with Southwest, because ... sorry, well, Southwest and Spirit, very happy to stick with the absolute basics and that got them safely to their destination. What does this all mean, when everybody's offering the same?

And isn't that something of a failure for the US Department of Transportation and DOJ policies, where they've been really hammering at the legacies and saying, "We're going to teach you to behave and tell you how you're going to operate your baggage policies," and all the rest of it? But if the result is that everybody does the same, isn't that a failure, Aaron?

Aaron Karp:

Part of this is that the majors started offering this basic economy package, and that means you sit on the back of the plane, you have the least legroom, you're not able to check a bag, et cetera, et cetera, but in many cases, going on Delta in the basic economy feels to people like a better product than, say, going on a basic ULCC. And so there's now actually direct competition for seats between the ULCCs and the majors on offering the same price. One adjustment you're talking about—Frontier—is they've launched this UpFront Plus offering in which you're guaranteed a window seat or an aisle seat on the first two rows, and there's no middle seat, so you have a seat next to you, and that's their answer right now to having premium seating. I think you're right, it's hard to figure out how they're going to distinguish themselves.

I know one thing, that Frontier's cost per available seat mile was still under 9 cents in the ... It was 8.98 cents in the second quarter, and that's much below Southwest, who's just about 15 cents, and American, which is about 17 cents. So they still have that cost advantage. The other thing I thought was interesting is, yesterday, they announced a bunch of routes, and what comes out of it is, in the second quarter, Frontier's stage links were 13% less than they were a year ago, and their average flight is now under 900 miles, where it was above 1,000 miles a year ago. And I think that they're looking at the route map and trying to really figure out where they can compete, and a lot of the routes they're announcing now are standard routes like Atlanta to Dulles. They're not competing with, say, the Breezes and the Avelos on those kinds of routes, and maybe they feel like this is a direct competition with the majors and they can get a lower cost.

You mentioned the DOJ and them blocking the Spirit-JetBlue Airways merger, and one of the main criticisms of DOJ there is, and the judge ... The judge basically said in this decision, "This will save the LCC market," but in truth, Spirit is such a weak carrier right now, they're struggling so much right now, that really, you're left with a pretty weak LCC sector. I think Frontier feels like they have an opportunity here with Spirit's troubles. But yes, because the JetBlue merger was blocked, yes, you still have Spirit, but it's a much weaker Spirit. The golden era from about 2007 to about 2015, '16, '17, where the ULCCs were really holding their own, they were making money, they were pressing the majors, and the majors have reacted with their own basic economy product and basically saying, "You can have the major experience without the cost, if you're willing to sit on the back of the plane," and that sort of thing.

So I think it's a real challenge. The ULCCs have to figure out how they fit in this market, and is it going to more premium products? And if you're offering premium products, that's a long way from the very basic model that Spirit and Frontier had been running.

Karen Walker:

Yeah. Christine, that raises, I think, an interesting question, that customer experience expectations—everybody's talking about, "It's changed, people's expectations have changed." And post-COVID, they've got more money, more discretionary budget, and they're opting for a better travel experience. What's your thought? Is that a long-term permanent change, because that seems to be what these airlines are all banking on. Or, as we've seen so often in this industry, is it just a flash in the pan, and, as soon as everybody's changed their strategy, it goes back to normal? What do you think?

Christine Boynton:

Yeah. I mean, it's such an interesting question. I do think a lot of times, like you're saying, these things are cyclical. I do think there will always be demand for the lowest fare, I think that segment of customers will always exist, but I can also see this expectation for better experience, for knowing you can have more. I can see that being something potentially more permanent. And it does remind me of something JetBlue's president, Marty St. George, said this summer. "This shift is actually something they can track back to the early-twenty teens, and since then," he said. They've seen, really, what is a persistent move of more and more customers buying up. Hard to say in this industry. You never know, I guess, but it does seem to be something that could be around for a while.

Karen Walker:

And if there's one thing we know about this industry it is that it's always hard to say what's going to happen. Never be certain in your forecasts. I have one last question that I'd like each of you to just ... Your opinion, please. With all of this going on, with the way this summer has gone, which has certainly been disappointing for many, if not most of the airlines, at least financially, is this a good or bad time for the Alaska-Hawaiian merger? Because that's the next big move that's going to be happening in this industry. Is this a good or a bad time?

Aaron Karp:

They seem to have moved past the biggest hurdle, which is the Department of Justice said they're not going to challenge the merger, at least at this point. But that's interesting; it will create a bigger airline. Alaska will get the long-haul international flights that they don't have, Hawaiian will get the mainland domestic market that they don't have. So I think it is an interesting merger. They're going to both keep their separate brands, I believe. It does seem like it will shake up the market some, and because the mergers have been blocked until now, nothing has really shaken up the market, aside from the pandemic. But that merger, I think, will shake up the market. It will create a new carrier that has both a domestic presence and a long-haul international presence, and with those carriers having their own brands that they try and distinguish from the majors. So I think it will be something to watch and something that will definitely change up the US domestic market.

Karen Walker:

And Christine, what are your thoughts on that?

Christine Boynton:

Yeah, I mean, it is a much different proposal than JetBlue and Spirit. They have less overlap, but there's a commitment, like Aaron says, to maintain both brands. It was a little bit surprising, I think, given ... The deals are different, but given the DOJ's reaction, they didn't contest the proposed combination, they also didn't announce any conditions. I mean, it was a very quiet end to an antitrust review period that had been extended multiple times. They'd asked for more information, they'd bumped the date out again and again, so I guess it appears to be a good time. It'll be Alaska's second merger in less than a decade, and they'll stay the fifth-largest airline, but obviously, they'll look quite different, so it'll be really interesting to see what happens from here.

Karen Walker:

Interesting. I mean, they are two good airlines and very interesting airlines. Alaska's got that global reach now through oneworld, becoming a oneworld partner has really extended their network. It's an interesting prospect getting those two carriers together. I can't help but wonder whether the DOT and DOJ in particular, when they saw what happened ultimately with the JetBlue-Spirit collapse, whether there wasn't a little bit of concern, like, "We could end up losing more carriers if we don't let these airlines work it out for themselves." But yeah, it's going to be interesting, as it always is in this industry.

Aaron, Christine, thank you so much for joining me, and thank you for the conversation. Really appreciate it. And also, a big thanks to our producers, Guy Ferneyhough and Cory Hitt. And of course, a huge thank you to our listeners for following Window Seat. Make sure you don't miss us each week by subscribing to the Window Seat podcast on Apple Podcasts or wherever you like to listen. With that, thank you very much. This is Karen Walker signing out. Until next time, thank you.