Spirit Airlines helped pioneer ultra-cheap flying and soared. Then legacy airlines copied them, outmaneuvered them with loyalty programs, and the economy turned against their core customers.
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Turbulence For The Dollar General Airline
by Greg Rosalsky
About a month ago, Aran Darling booked a cheap red-eye flight from Los Angeles to New York for a work event.
Darling and his significant other, Izzy de la Meme, own a small business named Froot Stand. They buy avocados, tangerines, passion fruit, and other more exotic fruits I’ve never heard of — like “Finger Limes” — from growers around Ventura, California, where they live, and sell them around the country. A big client had invited him to a food event in Manhattan, and it offered a chance to network and grow their business.
Darling felt good about the flight he chose. But, as the days passed, he began seeing some alarming headlines. And he got worried.
The problem? The carrier he chose was… Spirit Airlines. Dun Dun Dunnnnnnnnn!
News reports were saying that Spirit, after filing for bankruptcy — for the second time in recent years — was experiencing serious financial turbulence and now might have to be grounded. Any day, it seemed, the airline could go into liquidation. As in sayonara, Spirit — and maybe all of its scheduled flights?
Darling anxiously checked online to see whether his flight was canceled. He called the carrier multiple times. He shared his dilemma with Froot Stand’s followers on Instagram, telling them he had a Spirit flight in 48 hours with a screenshot of foreboding headlines about the airline’s imminent demise.
On the day of Darling’s flight, it was a running joke with LAX staffers that Spirit was about to go under any minute.
“They would be like, ‘Who are you flying with?’” Darling says. “And I was like, ‘Spirit, gulp,’” They all chuckled.
Spirit isn’t exactly a beloved airline. In fact, consumer surveys over the years have suggested it’s one of the most — if not the most — hated airlines in the industry.
One reason is that the airline has gone all-in on a business model in which they strip any semblance of luxury from the flying experience in a quest to lower base fares. Other airlines have also adopted a similar strategy over the last couple decades, but Spirit was a pioneer and took this strategy to an extreme.
This strategy goes by a bunch of names: “unbundling,” “price partitioning,” “drip drip drip pricing,” or — if you want to be more old-fashioned and cynical — nickel and diming. Spirit charges a low base fare but then charges extra for perks that passengers used to take for granted as part of the flying experience, like bringing on a carry-on bag, checking luggage, getting food and drinks, being able to select your seat, and even getting a printed-out boarding pass.
“They’ve got this thing where like, if you wanna breathe, you gotta pay extra,” Darling says of Spirit. Still, he — like many other cost-conscious travelers — has grown accustomed to the no-frills model. He’s willing to sacrifice pampering and amenities for cheaper travel. And the reality that many consumers are like him has reshaped the entire airline industry over the last few decades.
For a time, Spirit’s business strategy of ultra low ticket prices — while replicating the feeling of riding on a crowded city bus in the air — was working. Despite consumer complaints about the airline, Spirit seemed to be jetting ahead of the legacy airlines. The headline of a Planet Money episode about Spirit in 2014 kind of says it all about this era: “The Fastest Growing, Least Popular Airline In America.”
For that episode, we spoke to the then-CEO of Spirit Airlines, the late Ben Baldanza, and he explained his business strategy with an analogy to retailers. While other airlines may try to be Nordstrom or Target, “We’re Dollar General,” Baldanza said. “And we like being Dollar General because we save people lots of money.”
These days something about the Dollar General airline strategy isn’t working. It’s not just Spirit. Other budget airlines are struggling too. In fact, the actual Dollar General itself has been struggling.
Obviously, high fuel prices in the wake of the conflict in Iran are an important part of the story of Spirit’s current woes. But, as we report in today’s Planet Money newsletter, the story of Spirit and other budget airline troubles is about more than just high fuel prices.
We called up a bunch of airline industry experts and economists, and they pointed to other important factors behind the descent of budget airlines. The short version: the big legacy airlines copied the budget airline playbook to win back customers — and outmaneuvered them by making their loyalty programs more enticing. One economist told us those loyalty programs have become a powerful — and even an anti-competitive — weapon against smaller carriers.
Meanwhile, Spirit and other budget airlines have been getting squeezed, both by higher costs and also a broader economic trend in which cash-strapped customers are having to cut back on spending.
It’s a trend that helps explain why the Dollar General of the skies — and the actual Dollar General — have both been losing altitude.
Justin Sullivan/Getty Images
The Revenge Of The Legacy Carriers
Back in the 2010s, budget airlines like Spirit and Frontier looked like they were gaining ground on legacy carriers like Delta and United.
But since then that dynamic has flipped, and it’s now the budget airlines that have oxygen masks dropping as they experience turbulence. Call it the revenge of the legacy carriers.
The story of this reversal begins a little over a decade ago, when Spirit and other budget airlines seemed to be winning — despite customer complaints — with a simple formula: strip flying down to its bare essentials and offer rock-bottom base fares.
Henry Harteveldt is an airline industry analyst with decades of experience. He says when he worked for one big airline, they tried to continue the old airline strategy of caring about creature comforts and treating the airline experience as more than just a flying Greyhound bus. But, “if one of our competitors cut their fares even by a dollar, we would lose those passengers to the other airline,” Harteveldt says. “So airlines compete vigorously on price.”
Seeing budget-conscious customers fly away from their nicer passenger experiences, legacy airlines were forced by the budget airlines to change course. And so they too started throwing creature comforts out the window for passengers not willing to pay for them. This way they could charge a lower headline ticket price on online search engines and compete with the scrappy airlines for price-sensitive customers. Around 2014, Delta and other legacy carriers began taking unbundling to the next level, and they introduced “ basic economy fares that allowed the airlines to compete even more aggressively with budget carriers on price,” Harteveldt says.
Basic economy mimics the bare-bones experience of budget airlines for their cheapest fares — offering joys like less legroom, no reclining seats, no seat selection, no free food or beverages, getting treated kind of like Jack in the movie Titanic.
Paul J. Richards/Getty Images
But the legacy airlines did more than just copy the strategy of budget airlines to appeal to budget-conscious travelers.
Severin Borenstein, an economist at the UC Berkeley Haas School of Business, says the large legacy carriers have leveraged their market dominance to soar above the smaller budget carriers. With bigger fleets and a sprawling network of flights around the globe, the big legacy carriers were able to devise more desirable loyalty programs. Think like co-branded credit cards, corporate partnerships, and enhanced frequent flyer programs.
With these loyalty programs, the airlines have enticed many flyers to stick with them and earn special rewards, perks, and status. Think early boarding, coveted seat selections, free baggage services, fancy lounges, and so on.
For Borenstein, these loyalty programs are a problem for a healthy, competitive market. Because they distort consumer shopping decisions and give unfair advantages to bigger players. Instead of simply competing on the cost and experience of going from point A to point B, there’s now all these weird incentives for consumers to spurn competitors and stay loyal to the big legacy carriers.
And, yeah, the budget carriers have also tried a similar strategy of creating loyalty programs. But Borenstein says they haven’t been able to match the big dogs. “ There are very few Spirit frequent flyer loyalists,” he says.
Meanwhile, the big legacy airlines — like Delta, American, and United — have huge numbers of frequent flyers and brand-affiliated credit card holders. These programs have become central to their business model.
For loyalty programs to work, Borenstein suggests, scale really matters. When an airline flies almost everywhere you want to go, the rewards you earn with them are easier to redeem, the perks apply on more routes, and, for many, the status feels worth chasing.
Borenstein says that the smaller, budget airlines — and, more broadly, new entrants — have found it hard to compete in the face of these loyalty programs. “And what that means is that they've had to partner up” with other airlines and try to make their loyalty programs more valuable and worth using, Borenstein says. “And partnering up is expensive for a small carrier. And in some cases such as Spirit, they have a hard time because other airlines don't want associations with them.” Ouch.
The legacy airlines’ strategies to beat back competition seem to be working. But the budget airlines still at least had their core market: highly price-sensitive flyers who often don’t fly enough to really care about loyalty programs.
But then the 2020s hit, and the cost of everything exploded. Even before the shipping troubles in the Strait of Hormuz and the destruction of energy infrastructure in the Middle East, there was the energy price shock following Russia’s invasion of Ukraine.
Also in the 2020s, after the pandemic, the labor market got super tight and the industry saw a wave of worker retirements and resignations and not enough new recruitment. The price of labor began spiking, especially for pilots. The legacy airlines generally pay their pilots and personnel more, and our sources suggested rising labor costs have been much more detrimental to the business model of the budget airlines.
The bread and butter of budget airlines is, of course, budget ticket prices. And, yeah, “when your costs go up, your fares have to go up,” Harteveldt says. “ And if your costs go up too much, you're less able to offer the dirt cheap fares that your customers expect you to offer.”
That was all happening on the supply side, the airlines themselves. Meanwhile, there’s also the demand side — and what’s been happening to their price-sensitive consumers.
When Budget Travelers Stop Flying
In recent years, richer Americans, benefiting from surging stock and other asset markets, have been spending freely — including on travel — while more price-sensitive travelers have pulled back.
High inflation, higher interest rates, a cooling labor market, and growing inequality have been reshaping American spending patterns, and it’s been hurting all sorts of businesses that cater to low- and middle-income Americans. For example, Dollar General has struggled as their core consumers spend less.
Brandon Bell/Getty Images
All of our sources agreed that something similar is affecting the budget airlines, including the self-proclaimed Dollar General of the skies.
“Budget airlines historically appealed to customers with limited income,” Harteveldt says. “ And in our research we have seen travelers who earn up to $150,000 a year saying they have cut back on their leisure travel. They are traveling less often. They are in some cases foregoing air travel because it's just too expensive for them and their families.”
For a large percentage of travelers, air travel is optional, Harteveldt says. “When your food is costing more, when your gas costs more, when your rent costs more, when your insurance costs more, you have to look for other ways to economize, and that's killing the budget airlines.”
Meanwhile, consumers with money — and often loyalty entanglements with legacy airlines — aren’t exactly rushing to fly with budget airlines, with their less than stellar reputations and no-sparkle, stripped-down flying experience.
The Future of Spirit
At the time of writing this, the Trump Administration is considering as much as a $500 million rescue program for Spirit Airlines, with the government potentially taking a large ownership stake in the company. It also floated the idea of trying to convince another airline to acquire them.
That would be a sharp reversal from just a few years ago, when the Department of Justice, under President Biden, fought to block Spirit from merging with JetBlue and won in federal court.
Some have blamed the Biden Administration for Spirit’s current predicament. Before discussions began about a bailout, The Washington Post Editorial Board ran a headline that was blunt about this: “The U.S. Government Killed Spirit Airlines.”
Our sources were divided on whether, in retrospect, blocking that Spirit-JetBlue deal was a good idea. Some argued that it would have prevented the current fiasco and ultimately benefited consumers and taxpayers.
Jan Brueckner, an emeritus professor of economics at University of California Irvine, says, “Spirit was just entering a period of financial difficulties. And it would've benefited by teaming up with a stronger and bigger carrier like JetBlue.”
But Borenstein is skeptical whether a merger was the answer to Jet Blue and Spirit’s woes. More broadly, he argues that consolidation in the industry has been detrimental to consumers. “I've seen the antitrust enforcement through the entire deregulated life of this industry. If anything, I think it has not been aggressive enough,” Borenstein says.
What’s pretty clear though is that losing Spirit Airlines would be bad news for consumers. “On the routes where you have low cost or ultra low cost competition, the fares are lower,” Brueckner says.
And, yeah, the budget carriers have forced the legacy carriers into providing cheaper seats with their basic economy fares. But, Brueckner says, “if Spirit’s gone, they might raise their basic economy fares.”
That would obviously be bad news, even if you’re not particularly fond of flying on Spirit.
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