The Sudden Downfall of Budget Airlines: Unveiling the Mystery

Something strange is happening in the skies. Eight years ago, American low-cost carriers were reaping massive profits. For instance, Southwest Airlines pocketed 20 cents of every dollar in operating profit, JetBlue also garnered 20 cents, Spirit Airlines managed 24 cents, and Allegiant Air a staggering 30 cents. These figures were monumental, particularly for the airline industry. Despite rock-bottom fuel prices, the low-cost carriers triumphed over their competition with Delta Airlines peaking at a 19.6% operating margin and United Airlines at 13.6%.

Back then, everyone questioned how airlines offering the lowest fares were achieving the highest profits. Fast forward to today, and the tables have turned. Legacy carriers have regained their supremacy, while low-cost counterparts are now struggling for survival. The four major budget airlines have seen their operating margins plummet to between 5.6% and -11.2%, while legacy carriers are closer to their 2015 or 2016 peaks with operating margins between 8% and 10.9%.

So, what transpired between 2016 and today? The most dramatic collapse in air passenger volumes in modern aviation history, due to the COVID-19 pandemic, is a significant factor. However, pinpointing the exact cause of budget airlines' woes is not straightforward. Passenger volumes in the US have fully recovered, hitting an all-time record in summer 2023, with expectations of repeating this in summer 2024.

While COVID-19 hurt low-cost carriers just like any other airline, they initially recovered. Yet, their financial performance started to decline once again, whereas legacy counterparts continued to improve. This anomaly suggests that something mysterious is unfolding: Despite an increasing demand for air travel, the budget airline business model in the US is faltering without any clear reason.

Public companies must provide explanations to their investors, and thus, the management teams of these airlines are tasked with painting a coherent narrative.

For an in-depth analysis of why budget airlines are suddenly failing, watch the full video on Wendover Productions. Explore the complexities of this intriguing issue and uncover the hidden factors impacting the aviation industry. To try everything Brilliant has to offer for free for a full 30 days, visit https://brilliant.org/wendover.

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