By Rajesh Kumar Singh and Doyinsola Oladipo CHICAGO/NEW YORK (Reuters) -Spirit Airlines' financial troubles reveal that going upscale is not a panacea for the challenges facing low-cost carriers, which are grappling with mounting operating costs, changing customer preferences and stiff competition from the Big Three U.S. airlines. After emerging from bankruptcy protection in March, Spirit tried to rebrand itself and focus on more affluent travelers to turn its business around. But within six months, the Florida-based airline filed for bankruptcy again, underscoring the limits of a strategy that is being replicated across the low-cost sector with similarly mixed results. A post-pandemic runup in wages, aircraft lease costs and other operating expenses has eroded the cost advantage that low-cost airlines once relied on. At the same time, inflation has hit their core customer base harder, while the Big Three – Delta, United, and American – have deployed larger aircraft and expanded basic economy offerings to compete directly for price-sensitive travelers. The result is a squeeze from both ends: rising costs and shrinking market share. MARGINS UNDER PRESSURE Spirit's strategic shift was aimed at tapping in to rising demand for premium travel and building a high-margin revenue stream to offset rising costs. Frontier Airlines, its closest peer, has followed suit by adding first-class-style seating and expanding loyalty perks. Breeze Airways, founded by JetBlue veteran David Neeleman, also offers bundled amenities and larger seats at lower prices than legacy carriers. But Spirit's quarterly revenue fell 20% amid a sharp drop in passenger volume, while non-fuel operating costs surged. The airline posted a $246 million loss in the June quarter. Frontier lost $70 million. Spirit's operating expenses in the June quarter totaled 118% of revenue, up from 84% in 2019. Frontier's expenses hit 108%, a 24-percentage-point jump from before the pandemic. Full-service carriers are also facing cost pressures, but their diversified revenue streams have helped shield margins and outperform the broader industry. Neeleman, CEO of Breeze Airways, attributed the troubles at budget airlines to a direct competition with the legacy airlines. In an interview, he said smaller carriers like Breeze and Allegiant have been making money as they mostly operate on nonstop routes with no competition. BIG THREE MUSCLE IN Delta, United and American have used higher-capacity aircraft on domestic routes to compete more effectively for budget-conscious travelers. Their basic economy fares, once seen as a niche offering, now account for a growing share of ticket sales. United's basic economy made up 15% of domestic sales last year, up 2 points from 2023. Its chief commercial officer, Andrew Nocella, has called the basic economy offering a "home run" for the airline. "The proliferation of basic economy was the thing that really hurt," Neeleman told Reuters. At a congressional hearing last month, Frontier CEO Barry Biffle accused legacy carriers of using loyalty programs to subsidize basic economy fares and urged lawmakers to remove barriers that prevent budget airlines from competing on equal footing. "Too many gates are locked, and too many doors are closed," he said. PREMIUM PIVOT RUINS LOW-COST SIMPLICITY Spirit's tiered fare model now includes priority boarding, complimentary snacks and drinks, streaming Wi-Fi, and free checked bags – features once unthinkable for a carrier known for bare-bones service. Frontier has similarly upgraded its offerings and streamlined customer service. But analysts say the shift adds operational complexity and dilutes the simplicity that made low-cost carriers viable. Their premium offerings also pale in comparison with those of legacy airlines. "Have you seen anywhere an example of an airline that has sought to reposition itself up in the value chain and succeeded in surviving?" said John Grant, senior analyst at travel consultancy OAG. Spirit and Frontier declined requests for interviews for this story. BRAND PERCEPTION STILL A DRAG Discount airlines also face a complex branding challenge when courting high-value travelers as they have built a reputation for "nickel-and-diming" customers. Spirit and Frontier ranked last in J.D. Power's customer satisfaction survey this year. A U.S. Senate report found both the airlines paid $26 million in incentives to staff between 2022 and 2023 to enforce bag policies. "The only reason why people are buying them is because they're basically coupon-clipping," said Michael Taylor, senior managing director at J.D. Power. Both carriers have taken steps to soften their image. Spirit and Frontier have eliminated standard change and cancellation fees on many fares. Frontier has extended flight credit validity, streamlined boarding, and reinstated live phone support for elite loyalty members. Still, some travelers remain unconvinced. Lesly Simmons, a San Francisco-based tech marketing professional, said she paid twice for a checked bag on a Frontier flight and never received a refund. "I couldn't imagine why I would turn away from an established airline that has treated me quite well over the years to an airline that hasn't," said Simmons, who frequently flies with United. (Reporting by Rajesh Kumar Singh in Chicago and Doyinsola Oladipo in New York; Editing by Joe Brock and Matthew Lewis)
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