The recent suggestion from Wizz Air chief executive Jozsef Varadi that short-haul air travel “is a cost game, not a revenue game” has pertinence beyond that airline’s European and Middle East markets.
It is certainly a talking point in the USA, where the current earnings season has been another tough one for many low-cost carriers, in a trend that gained momentum during the second half of 2023.
It was easier to be relaxed about rising costs in 2022 when the post-Covid demand recovery was in full swing and capacity still had ground to make up, supporting high yields in the US domestic market in particular.
But in 2023, it became clear that after the US sector’s relatively speedy emergence from the pandemic, demand was moderating in short-haul markets, exacerbated by the lingering impact of high inflation on the spending power of those likely to use budget carriers for their travel.
That has brought rising costs into sharp focus over the past few months.
Indeed, United Airlines chief executive Scott Kirby reckons a “cost convergence” is occurring, where rising pilot salaries, for example, are having a bigger impact on low-cost carriers than on legacy network airlines such as his own. That is bringing their cost bases closer together, in Kirby’s view, supporting the higher fares needed for United, but not always its budget rivals, to turn a profit.
Keen to find profitable foundations again, some of those low-cost carriers are reacting to the challenges by moderating growth plans in US short-haul markets that, in contrast to many short-haul markets around the world, are often at or above 2019 capacity already.
Frontier Airlines, for example, said on 6 February as it reported a full-year net loss of $11 million that it would cut a third of its passenger capacity to a pair of its core leisure destinations – Las Vegas and Orlando – by the US summer period.
“One of the largest challenges many low-cost and ultra-low-cost carriers faced in 2023 was the industry’s oversupply of capacity in leisure markets, with Las Vegas and Orlando being two significant examples,” chief executive Barry Biffle said during the airline’s recent earnings call.
Frontier recorded a 20% year-on-year increase in the cost of salaries, benefits and wages during the fourth quarter, it notes.
Southwest Airlines was profitable for the full year in 2023, but said while reporting its fourth-quarter earnings that it would slow both expansion and hiring to “improve efficiencies” as it seeks to offset the rising costs that pushed it into the red in that quarter.
Elsewhere, reporting a fourth-quarter and full-year loss on 30 January, JetBlue Airways said it would defer some aircraft deliveries over the next couple of years as it takes “aggressive action to get back to profitability”.
While dynamics differ across airlines and markets, the experience of the US airline sector could be a guide for other regions in the post-Covid landscape, showing what might happen when the moderation of the post-pandemic travel boom meets capacity rising above 2019 levels, laying bare the challenge of structurally higher costs.