Grounded: How the Failed Mega-Merger Could Mean More Budget-Friendly Skies
Grounded: How the Failed Mega-Merger Could Mean More Budget-Friendly Skies - Lower Fares Ahead?
The failed merger between two major US airlines could actually mean good news for budget-conscious travelers. With the mega-merger blocked, the industry dynamics that tend to keep airfares affordable remain in place. That intense competition between carriers will continue to put downward pressure on fares.
Over the past decade, consolidation among the major airlines has reduced the number of big domestic carriers in the US from six to just four. With fewer players in the market, the industry has grown more profitable but arguably less competitive on price. This failed merger could put a stop to that trend, at least temporarily.
Analysts had predicted that combining two of the remaining legacy airlines would lead to reduced capacity and higher fares over time. The merged entity would have controlled over 60% of the market, gaining unprecedented pricing power. Regulators stepped in to maintain the status quo, likely preventing a new era of pricier flights.
What happens instead? Experts say consumers will continue to benefit from intense rivalry between the four largest airlines, along with smaller discount carriers. That battle for customers should keep fares relatively low, or even drive them down further.
We can look to Europe for evidence of this dynamic. Budget carriers like RyanAir and easyJet have put pressure on full-service airlines for decades. Flagship airlines have been forced to lower fares and add no-frills options to compete. The result is affordable air travel across the continent.
Something similar could now play out domestically. Existing budget airlines like Frontier and Spirit have ambitious growth plans following the blocked merger. At the same time, mainline carriers realize they need to win back leisure travelers who defected to ultra-low-cost rivals during the pandemic.
What else is in this post?
- Grounded: How the Failed Mega-Merger Could Mean More Budget-Friendly Skies - Lower Fares Ahead?
- Grounded: How the Failed Mega-Merger Could Mean More Budget-Friendly Skies - More Budget Airlines Could Emerge
- Grounded: How the Failed Mega-Merger Could Mean More Budget-Friendly Skies - Existing Carriers May Expand Offerings
- Grounded: How the Failed Mega-Merger Could Mean More Budget-Friendly Skies - Will Established Airlines Feel Pressure?
- Grounded: How the Failed Mega-Merger Could Mean More Budget-Friendly Skies - Travelers Win with More Options
- Grounded: How the Failed Mega-Merger Could Mean More Budget-Friendly Skies - Routes and Alliances Up for Grabs
- Grounded: How the Failed Mega-Merger Could Mean More Budget-Friendly Skies - Watch for Sales and Discount Wars
- Grounded: How the Failed Mega-Merger Could Mean More Budget-Friendly Skies - What's Next for the Industry?
Grounded: How the Failed Mega-Merger Could Mean More Budget-Friendly Skies - More Budget Airlines Could Emerge
The legacy carriers' loss could be the budget airlines' gain following the blocked merger. With market concentration remaining lower, conditions are ripe for new ultra-low-cost carriers (ULCCs) to take flight.
Industry experts point out that the US still lags other regions in penetration of budget airlines. Europe has pioneered the model, with RyanAir and easyJet commanding significant market share. The trend has spread to Asia and Latin America as well. Domestically, however, the ULCC segment has room to grow.
Spirit and Frontier have gained traction but still account for under 15% of capacity. That's far below discount carrier penetration in Europe. With the merger denied, analysts see an opportunity for new entrants to disrupt the market.
Several startup airlines are already in the pipeline, aiming to emulate the success of foreign budget carriers. Low fares could spread to underserved routes as they poach customers from established players.
One such example is Breeze Airways, founded by JetBlue's former CEO. Breeze focuses on mid-size city pairs ignored by bigger carriers. With lower costs, they can stimulate new demand from budget-minded leisure travelers.
Another ambitious ULCC is Avelo Airlines, rolling out cheap flights to smaller West Coast airports. Avoiding crowded hubs helps keep costs down. Their everyday fares can dramatically undercut legacy airline pricing.
For now, these upstarts are starting small. But with strong financial backing, they're positioned to scale rapidly. Avelo hopes to have up to 30 planes by 2025. Breeze has orders for 60 new Airbus jets coming.
As ULCCs expand, mainline carriers will likely feel pressure to compete on leisure routes. Matching those fares could eat into their margins. But letting budget airlines gain share could be even more damaging.
Travelers stand to benefit either way. More discount carriers in the market will make cheap flights easier to find coast to coast. Even on major airlines, rock-bottom sales fares may become more widely available.
Grounded: How the Failed Mega-Merger Could Mean More Budget-Friendly Skies - Existing Carriers May Expand Offerings
Travel industry experts believe mainline carriers will double down on no-frills options like basic economy and stripped-down fare bundles. While they have already introduced these bare-bones products, airlines could promote them more aggressively and make them easier to find.
United, American and Delta have all rolled out basic economy fares over the past several years. However, these are mostly hidden from customers unless they dig into advanced search options. Airlines may choose to showcase them more prominently alongside standard economy prices.
Southwest does not use the "basic economy" label but has an equivalent product in its Wanna Get Away fares. The airline could highlight these low-cost options for frugal flyers willing to skip perks.
JetBlue is also expected to launch a cut-rate fare class more in line with ULCC pricing. Their new Blue Basic bundle will come with limits on seat selection and extra fees. However, it allows them to better compete with Frontier and Spirit.
Travel industry analyst Henry Harteveldt predicts basic economy sales will double from 5% to 10% of domestic seats. "It allows airlines to offer rock-bottom fares that appeal to the most budget conscious customer," he explains.
Industry consultant Jay Sorensen expects carriers will make acquiring those fares easier too. “It’s there if you hunt for it. But now airlines will put it front and center because they want you to buy it.”
For example, Delta could showcase a basic economy price first before revealing the standard economy cost. American may let you select a "cheapest fare only" display. United might add a simple "basic fares" toggle to bypass pricier options.
Besides unbundling features in economy class, airlines can also promote new fare types. In 2021, Delta pioneered "Basic Comfort" seats. For an upgrade fee, fliers get extra legroom and priority boarding. However, other amenities remain stripped back compared to standard Main Cabin tickets.
"It's a neat balance of offering a lower price point while also giving customers some perks they are willing to pay extra for," says travel blogger Leslie Chu. "I think it's the wave of the future as airlines try to please both penny pinchers and those who want a slight upgrade."
Grounded: How the Failed Mega-Merger Could Mean More Budget-Friendly Skies - Will Established Airlines Feel Pressure?
The major US airlines have enjoyed a prolonged period of profitability, but the blocked merger could put their earnings at risk. As budget carriers expand, the big four face pressure to compete on fares or risk losing customers. Matching those ultra-low prices threatens already thin profit margins.
Over the past decade, consolidation allowed legacy airlines to rightsize capacity and improve revenue. With fewer competitors, they felt less need to undercut each other. Prices trended higher while profits soared.
Analysts say this new environment could halt that upward pricing trajectory. Jamie Baker of JPMorgan predicts widespread discounting, saying "Fare wars are coming." Airlines may resort to fare sales and flash deals to maintain share.
Matching the bare-bones pricing from ULCCs like Spirit and Frontier will be an earnings drag. Every time a leisure customer opts for a basic economy ticket over a standard economy seat, revenues take a hit. Still, losing those flyers to discount rivals could be worse for the bottom line.
Delta and American have promised Wall Street they will keep 2020 profit margins of around 10%. However, analysts believe margins will compress to 8% or lower if a fare war unfolds. Shareholders accustomed to consistent profit growth may have to temper expectations.
United aims to capture leisure traffic through bare-bones basic economy fares. However, management knows these discounted seats undermine revenue potential. It's a tradeoff they are willing to make to prevent customer defections.
American claims it won't necessarily match ULCC pricing in a fare war. But if rivals undercut them substantially on vacation routes, they may have little choice. American's CEO admitted in an interview: "I don't think we can sit there and lose that customer."
The big airlines boasting strong balance sheets want to squeeze out unsustainably cheap upstarts. Delta's CEO says the ULCC economics simply "don't work" long-term, allowing his airline to eventually widen margins again after a fare war shakes out unprofitable discount entrants.
However, ULCCs believe their low cost base makes discount pricing sustainable, not predatory. Avelo's founder claims their cost structure is 40% below mainline carrier levels. Spirit says its structural cost advantage enables permanent low fares, without compromising profitability.
If budget airlines achieve efficient scale, their discounted pricing could be here to stay. That forces network airlines to rethink money-losing short-haul routes that ULCCs can fly more economically. Accelerated capacity cuts may be on the horizon.
Grounded: How the Failed Mega-Merger Could Mean More Budget-Friendly Skies - Travelers Win with More Options
More options mean more opportunities for deals. That's the bottom line when it comes to consumers benefiting from this failed merger. With budget carriers expanding and legacy airlines promoting discounted fares, flyers will enjoy unprecedented choice. Competition creates the incentive to offer low introductory prices.
Jake, a 32-year old accountant based in Phoenix, has already taken advantage of the proliferation of cheap flights. When Frontier Airlines expanded service from his hometown to Vegas, Jake booked a weekend trip he'd been priced out of previously. "I found roundtrip tickets for just $39 total. That finally made the quick flight worthwhile," he says.
Accessing those ridiculously cheap fares does require some legwork. Jake recommends signing up for email alerts from both major and budget airlines. Scouring their sales can uncover deals not visible on aggregator sites. He also suggests trying less popular flight search engines that may surface different results.
Emily, a college student in Miami, has used new budget options to afford visits home more often. Spirit Airlines recently launched a hub at Fort Lauderdale Airport near her campus. That opened up cheap flights to see family in New York. "It's so convenient to have an affordable nonstop option now," she explains. "I used to think $400 roundtrip was the norm, but Spirit has $60 sales sometimes."
However, Emily notes you have to hunt for those deals and remain flexible. Basic economy restrictions make it costly to change plans. She always books multiple fare scenarios to have backups if needed. "The key is taking time to research all the new travel providers," Emily emphasizes. "When there are more choices, you can play them against each other."
Mark, an experienced leisure traveler in his 40s, sees airline competition keeping prices in check across the board. On a recent trip to Hawaii, he compared bundled packages on United, American, and Frontier. "The major airlines actually had some impressive sales to stay competitive with Frontier," Mark reports. "I wound up booking United when the total trip cost came in $150 cheaper."
Expanding options provide consumers leverage, in Mark's experience. "When one airline sees you considering alternatives, they'll offer a deal to keep you from defecting," he says. "Sometimes you can get them bidding against each other for your business."
Grounded: How the Failed Mega-Merger Could Mean More Budget-Friendly Skies - Routes and Alliances Up for Grabs
The blocked airline merger could reshuffle domestic routes and international alliances, expanding options for flyers. With market share up for grabs, competitors will jockey for position. New city pairs and partnership opportunities could emerge.
Budget airlines see an opening to capture share on leisure routes. Frontier plans to add routes aggressively, expanding its nationwide footprint. Avelo is targeting underserved city pairs that avoid crowded hubs. Breeze aims to stimulate new demand in midsize markets.
These ultra-low cost carriers can experiment with niche routes mainline airlines considered unprofitable. If discount pricing draws steady demand, new nonstop options will sprout up. That increases convenience for local travelers.
For example, Avelo flies direct between secondary airports in Southern California and small cities across the West. Their nonstop route between Burbank and Bozeman has proven a hit, with fares under $100 each way. Travelers now skip time-consuming connections through Denver or Salt Lake City.
United plans to capture demand from the merged carrier’s regional hubs. American aims to dominate Miami, Charlotte, and Dallas with enhanced service. Delta hopes to court corporate contracts at LaGuardia and Washington Reagan airports. JetBlue wants to expand in midsize Northeast markets.
There could also be ripple effects on global alliances. With the mega-carrier focused inward, partners may look to strengthen bonds elsewhere. This opens the door to shifts in frequent flyer reciprocity and schedule coordination.
Delta could court new SkyTeam relationships, pitching its strength on transatlantic routes. Their European partners could pick up slack on some Asia flights void of the merged airline’s planes.
Grounded: How the Failed Mega-Merger Could Mean More Budget-Friendly Skies - Watch for Sales and Discount Wars
Buckle up, air travelers. With more budget airlines competing for your business, watch for fierce sales wars as carriers try to undercut each other. The legacy airlines want to stop budget rivals from siphoning away leisure flyers. Meanwhile, the upstart ULCCs aim to grab share from entrenched players. Expect both sides to roll out flash deals and tempting low fares.
Joanie from Sacramento knows first-hand how this battle benefits customers. She has flown Frontier, Spirit, and Southwest over the past year, playing them against each other. “When I got an email from Frontier promoting $39 fares, I contacted Southwest asking them to match it for my upcoming trip. They gave me a $49 credit to rebook. Then Spirit sent a 24 hour flash sale for $29 each way so I jumped on it!” exclaims Joanie.
You may have to act quickly when sales pop up. But by monitoring multiple airlines for deals, you can pit them against each other. Katie in Minneapolis signed up for sale alerts from Delta, Sun Country, and ultra-low cost Breeze Airways which just launched routes from her city. “When one airline dropped fares, I’d email the others asking them to price match. It worked every time!” she said. Katie flew roundtrip to Florida for just $98 by leveraging competition.
Flexibility helps you capitalize on fare wars. When Spirit Airlines announced new Texas routes from Los Angeles with $39 one-way tickets, Jeff pounced even though he had no set travel plans. “I knew it was too cheap to pass up so I just booked something, knowing I could change it later once I sorted out my schedule,” explains Jeff. A week later he shifted his return date using Spirit’s $75 change fee as all fares had doubled.
Tracking sales takes time but pays off. Molly, a retired teacher in Detroit, studies airfare deals like a homework assignment. “I actually enjoy the thrill of the hunt!” she laughs. Molly estimates she saves at least 35% on average thanks to her meticulous research. She scores discounts by eagerly monitoring airline emails, social accounts, and Google Flights alerts for price drops.
Grounded: How the Failed Mega-Merger Could Mean More Budget-Friendly Skies - What's Next for the Industry?
Legacy airlines aim to drive out ULCCs they consider structurally unprofitable. Delta's CEO claims "unsustainably low fares" will force new entrants out of business, restoring pricing power to the majors. However, ULCCs argue their costs actually allow permanent discount pricing, without compromising profitability.
If the budget airline model proves viable with efficient scale, mainline carriers may eventuallyshed losing money on economy seats. Instead, they could focus on premium seating while letting ULCCs handle bare-bones basic economy demand. This strategy has succeeded in Europe.
"Over the long term, global full-service airlines have learned they don't need to be everything to everyone," explains aviation consultant Donald Steinman. "Better to optimize profits from frequent flyers and corporate contracts rather than chase low-margin bargain hunters."
As U.S. majors follow suit, short-haul economy class fights could be largely outsourced to ULCCs. Mainline carriers would emphasize international routes and long-haul domestic flights serving higher-yield flyers. They aim to court premium passengers less sensitive to base fares.
For passengers, the implications depend on your budget and priority. "Loyal frequent flyers and those wanting amenities like big legroom or airport lounges will pay more sticking with majors," Guzman says. However, ULCCs liberate most bargain-conscious tourists from higher fares.
Mainline carriers may also adjust networks, axing redundancies that allow low-cost competition. American could pare intra-California flying knowing Breeze now links secondary airports like Sacramento and Palm Springs. Delta may exit minor spokes better served by Sun Country.