By Rajesh Kumar Singh
CHICAGO (Reuters) - The decline in travel demand due to President Donald Trump's trade war has brought interest to all U.S. airlines, but the pain is the worst for budget carriers.
Southwest, Border and JetBlue all fell in operating margins in the first quarter. By contrast, despite consumer demand faltering, margins for Delta and United Airlines continue.
With slow economic growth and rising inflation, the margin gap between budget and full-service airlines is expected to widen further. This will likely be compared to previous downturns when low-cost airlines outperformed the market at Southwest.
Analysts say the surge in demand for advanced travel and the growing customer loyalty program has brought advantages to full-service airlines.
Meanwhile, budget operators have been working to restore continued profitability after the pandemic.
The domestic flight schedule for the quarter reflects changes in the industry. Low-cost airlines are cutting capacity or available seats to protect their edges. By contrast, Manchester United and Delta have added flights and are booking at lower fares.
Analysts and industry officials say the full-service airline is developing a two-pronged strategy – preventing customer losses due to seat shortages and stealing customers from budget competitors.
"Just like the way Southwest gets stronger in a downturn, this time we basically think it's the turn, it's the Delta turn," said JPMorgan analyst Jamie Baker.
Demand for high-end travel has been booming, with Delta, Manchester United and Alaska Airlines already investing heavily to capture it.
Premium revenue accounts for 41% of DELTA passenger revenue, up from 35% in 2019.
As airlines gain more revenue from high-end leisure travelers, their reliance on commercial transportation has decreased. Manchester United said last month that the share of corporate travel in its passenger revenue is much lower than pre-pandemic levels.
Strengthening outlook, Bank of America data shows that spending and income for high-income households is still growing.
“The high-level shift in the industry will be lasting,” Alaska Chief Financial Officer Shane Tackett told Reuters.
Callback for discretionary travel
Low-cost airlines have been trying to take advantage of the high-end travel market, but their investments and products are pale compared to their full-service competitors.
Low-cost operators rely primarily on price-sensitive leisure customers and serve the domestic U.S. market. However, among low-income households, consumers spend the weakest, and the United States is currently the softest travel market.
Airlines mainly lose money in the domestic market. However, Manchester United and Delta tend to have a strong demand for long-distance international flights to protect their profit margins.
Industry officials say a shortage of wide-body aircraft may support fares. Manchester United's second-quarter revenue (agents for agent pricing power) forecast growth in seat miles in all international markets.
The massive international network and premium products also help traditional aviation attract more high-value travelers to its loyalty credit card program, earning billions of dollars in quarterly revenue.
The more customers spend, the more miles they make, and the more banks that issue credit cards pay airlines. The Delta received American Express compensation in the March quarter is equivalent to one-fifth of its passenger revenue.
“It’s one thing to be able to generate senior seats, it’s another thing to gain customer loyalty,” said Delta president Glen Hauenstein.
Budget airline profit struggle
During the declines in 2001 and 2008, Southwest's brand loyalty helped it defy broader industry trends and result in profits. The airline is now working on tackling dull revenue.
The operation of operating expenses has fueled pressure to find new sources of revenue, forcing the company to abandon some unique passenger-friendly policies.
Ben Thomas, 34, the Dallas marketing director, said he is considering abandoning the Southwest and flying with the Americans as the company cancels its bagless policy.
"This change has the potential to make travel more expensive," Thomas said.
Southwest recently said there is no evidence that customers have chosen competitors after recent policy changes.
Other budget operators are also funk. Spirit is just withdrawing from bankruptcy. Frontier has released only one positive operating profit over the past five years.
Still, Frontier CEO Barry Biffle outperforms the advice of low-cost carriers for full-service airlines.
Biffle attributes to the post-popular trouble of low-cost airlines to the oversupply of domestic seats. He argued that the recession would hammer company travel and force customers to trade, damage heritage airlines and drive budget carriers’ business.
"This is not the story of a business model," he told Reuters. "This is your geographical concentration."
(Reported by Rod Rod Nickel's Rajesh Kumar Singhediting)