CHICAGO (Reuters) -A slump in travel demand due to President Donald Trump’s trade war has left all US airlines reeling, but the pain is most acute at budget carriers.
Southwest (LUV), Frontier (ULCC) and JetBlue (JBLU) all saw sharp declines in their operating margins in the first quarter. In comparison, margins at Delta (DAL) and United Airlines (UAL) held up, despite faltering consumer demand.
As the odds of slower economic growth and higher inflation rise, the margin gap between budget and full-service airlines is expected to widen further. This will potentially mark a shift from previous downturns, when low-cost airlines led by Southwest outperformed the market.
Analysts say a surge in demand for premium travel and the growing value of customer loyalty programs have handed an advantage to full-service airlines.
Budget carriers, meanwhile, have been struggling to return to sustained profitability after the pandemic.
Domestic flight schedules for the current quarter reflect the changed industry landscape. Low-cost airlines are slashing capacity, or available seats, to protect their margins. In contrast, United and Delta have added flights and are taking bookings at lower fares.
Analysts and industry officials say full-service airlines are working on a two-pronged strategy – prevent the loss of customers due to a shortage of seats and steal customers from budget rivals.
“Much like how Southwest used to emerge stronger through downturns, this time we basically think it’s United’s turn, it’s Delta’s turn,” said Jamie Baker, an analyst with JPMorgan.
Demand for high-end travel has been booming, and Delta, United and Alaska Airlines (ALK) have made big investments to seize on it.
Premium revenue accounts for 41% of Delta’s passenger revenue, up from 35% in 2019.
With airlines generating more revenue from high-end leisure travelers, their reliance on business traffic has been reduced. United last month said the share of corporate travel in its passenger revenue is well below pre-pandemic levels.
Bolstering the outlook, Bank of America data shows spending and earnings of higher-income households are still growing.
“The premium orientation shift that’s happened in the industry … is going to be durable,” Alaska’s Chief Financial Officer Shane Tackett told Reuters.
Budget airlines have been trying to tap into the high-end travel market, but their investments and offerings pale in comparison with those of full-service rivals.
Low-cost carriers mainly rely on price-sensitive leisure customers and serve the U.S. domestic market. But consumer spending is weakest among lower-income households, and the United States is currently the softest travel market.
