By Jack Hough
Picture an excessively mobile middle-class family that does almost nothing but drive, traveling from New York City to Los Angeles and back again each week. Its gasoline bill, instead of taking up a typical 5% of its budget, might come in over 30%. That's about what it takes to keep an airline fueled under normal circumstances.
Now consider that the price of jet fuel has outpaced gasoline this year, more than doubling. Spirit Airlines recently succumbed. Remaining airlines are scrambling to raise prices.
Domestic airfares are already up 36% this year, according to data from Kayak. That means pricier summer trips for vacationers who haven't yet booked, with longer-term implications for the airline industry and its investors. The future of the ultralow-cost carrier, a breed of cramped flier that dominates in Europe, is in question in America. At the same time, the strongest airlines -- including Delta Air Lines, United Airlines Holdings, and some of the rest now doing their best impressions of these two -- could benefit from present turmoil and generate healthy stock returns for years.
From Low-Cost to Blue Chips
Surging fuel prices alone didn't kill Spirit. Accessories to the act included labor shortages, engine problems, a financially squeezed customer base, and competition from basic economy fares at the big players.
Spirit's market share, having fallen for years, will now likely flow to Frontier Group Holdings and JetBlue Airways. Both of these are nonetheless expected to burn cash this year and next, as they have since the start of the Covid-19 pandemic in 2020. Both are moving beyond their low-cost roots. Frontier is adding First Seats, a roomier two-by-two configuration in the first two rows. JetBlue already has a lie-flat layout called Mint on certain cross-country and trans-Atlantic flights, and on other flights it will now add more traditional first-class seating, which the industry has nicknamed Junior Mint.
This is where Delta leads -- paid premium seats on domestic flights, one of the industry's three biggest moneymakers. It is quickly expanding in the second one, international flying. And it cleans up in the third, loyalty revenue, including from credit cards, retail partners, and lounge memberships. This high-margin, nonflying income doesn't burn fuel, go on strike, or suffer weather disruptions. United, meanwhile, leads in international flights and is growing from a strong position in domestic premium and loyalty.
These two could be described with words that Wall Street isn't used to seeing together: blue-chip airlines. Each is projected to generate close to $2 billion in free cash this year, a fraction of what they're capable of, but pretty good for a bad year.
Playing From Behind
American Airlines Group is trying to catch up. It's adding new planes with lie-flat seats on select routes, and expanding a credit-card partnership with Citigroup. But progress could be slow and expensive, not least because of a decadelong backlog for new aircraft, and an on-time service rate that typically lags behind those of Delta and United.
Southwest Airlines isn't going first class -- yet. But it has left behind its all-inclusive, low-cost model. Since last year, it has added baggage fees and ended a half-century of open seating, charging more for extra legroom and preferred locations. The extra income could turn free-cash-flow positive for the first time in years, but it will be a close call now that fuel prices have spiked.
Alaska Air Group is suddenly a top five U.S. player after its 2024 buyout of Hawaiian Airlines, although there's a steep size drop after American, Delta, United, and Southwest. The Hawaiian deal brings a key trans-Pacific hub, more long-haul flights with premium seats and airport lounges, and a consolidated loyalty program, which moves Alaska from a cheap West Coast flier to a more traditional carrier, if not quite a global one.
None of this means a permanent end to cheap flights. "You don't have to have an [ultralow-cost carrier] to have a low fare," says Daniel McKenzie, an airline analyst at Seaport Global Partners. "All you need to have is three to five airlines sitting on top of each other in a market that they all love and they all want to own." But the brashest experiments in cut-rate flying might subside for years, given shortages of pilots, airport slots, and just about everything else they depend upon.
The European Model
There's an Irish airline executive named Michael O'Leary who so loves upcharges and cost-cutting that, over the years, he has floated selling standing-room flights, charging overweight passengers more, and installing coin-operated restrooms. None of these were implemented, but the buzz they generated drew attention to his cause. In just over 30 years of running Ryanair Holdings, O'Leary has transformed it from a small, money-losing competitor to Aer Lingus to the largest airline in Europe by passenger count, and one whose profit margins dwarf those of flag carriers like Deutsche Lufthansa and Air France-KLM.
Ryanair has done this by posting extremely low base fares and charging for everything it can -- including checked bags, all but the smallest carry-ons, seat selection, and food and drinks. Today this type of airline is known as a ULCC, or ultralow-cost carrier. "Ultra" and even "low" are subjective, and airlines sometimes adjust their business models, so there can be disagreement over which are true ULCCs, but not in Ryanair's case -- and maybe not in Frontier's, given that it has taken ULCC as its ticker symbol.
Before transforming Ryanair, O'Leary made a careful study of Southwest and its no-frills, high-efficiency model, featuring a single aircraft type, point-to-point flying instead of hub-and-spoke, and quick plane turnarounds between flights. He then brought Southwest's model to Ireland in a much more extreme form, even a hard-edged one: Whereas Southwest took the ticker symbol LUV and built a reputation for customer service with personality, Ryanair charged even for customer-service calls and ticket printing. So, then: Why can't this American business model tweaked for Europe work in America?
It did, at first. Spirit -- once a charter airline turned small, scheduled carrier -- took a private-equity buyout, transformed into a Ryanair-style ULCC, and went public in 2011, pricing shares at $12 each. They topped $80 a few years later. But major airlines, after experimenting with fun, cheap, leisure brands like Delta's Song and United's Ted, and folding them, launched stripped-down, basic economy fares. These were designed to compete with ULCCs while filling planes with candidates for loyalty programs.
After Covid, and the surge in "revenge travel" that followed, Spirit's labor costs jumped as pilots, after many years of concessions, found themselves with bargaining power amid a pilot shortage. Airport renovation projects drove landing fees higher. Leisure travel became more price-sensitive, as middle-class consumers got hit harder by inflation than wealthy ones. And with corporate travel slow to recover, major airlines competed harder for leisure. A Pratt & Whitney engine problem grounded 20% of Spirit's planes at one point. A failed merger with Frontier, and a disallowed buyout from JetBlue, distracted from operations. After two bankruptcies, and a failed attempt to secure another government bailout, Spirit shut down.
In hindsight, Spirit couldn't get costs low enough. Airlines measure capacity using something called an available seat mile, which is one mile flown by one seat, with or without buttocks. Ryanair's cost per available seat mile has historically been about six cents including fuel, and among the lowest globally. Spirit got down to around 11 cents, and struggled to stay there after Covid. Some of the differences seem unavoidable. Ryanair flies shorter flights among different countries, allowing it to pack seats tighter and source labor where it is relatively cheap. And it uses more small airports, which offer low fees and marketing support to lure traffic, and can turn planes around quickly.
"We expect [Delta, United, and American] to continue outperforming the ULCCs given many of [the] advantages are structural," wrote TD Securities in an investor note this past week. "Capacity cuts by the ULCCs should result in a more rational domestic pricing environment, which in turn should help buoy full-service margins."
Turbulent History
Cash incinerators. Fixed-cost disasters with wings. If you want to make a small fortune in airlines, they say, start with a large one. The industry has long been a Wall Street punchline, and deservedly so. Just count the bankruptcy filings: United in 2002; Delta in 2005; American in 2011; US Airways, twice, before merging into American. No wonder Warren Buffett wrote in a 2007 letter to shareholders that a "farsighted capitalist" at Kitty Hawk would have done successors a favor by "shooting Orville down."
This year, the group is understandably trailing the S&P 500. But over the past three years, Delta and United have nonetheless returned 123% apiece, versus 85% for the index. Is that a fluke, or a sign of where things are headed after fuel costs subside? Perhaps the latter -- and with one or two others shining, too. Delta, trading at 13.6 times this year's humbled earnings forecast, has a credible path to doubling earnings per share over the next three years. The same goes for United, at 10.9 times earnings, and Southwest, at 16.6 times earnings.
American gains the most from Spirit's exit on an absolute basis, and Frontier and JetBlue are large relative beneficiaries, but these are risky bets. American is heavily indebted and not expected to turn a profit this year. For those who believe that its turnaround effort will be at least reasonably successful, it trades at just 3.3 times the consensus earnings estimate for three years from now, or less than half the price of Delta.
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May 08, 2026 01:00 ET (05:00 GMT)
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