Ultra-low-cost carriers have gotten a raw deal from the U.S. governments bailout. There's no good reason these airlines should be forced to fly so many flights when demand is near zero.
U.S. travelers spent much of the last decade complaining about discount airlines that charged low fares but bombarded consumers with fees. Now the U.S. government may be pushing at least two prominent ultra-low-cost-carriers — Frontier Airlines and Spirit Airlines — into financial purgatory, though perhaps not on purpose.
The CARES Act signed last month by President Trump includes up to $50 billion in grants and loans for U.S. passenger airlines, a group that includes not only full-service carriers, but also discount ones. But the legislation overwhelmingly favors larger airlines, and while the U.S. Department of Transportation had a chance to tweak requirements on grant money to help smaller carriers, it has not done so.
The biggest impediment is a requirement that airlines fly to most domestic markets they served before the Covid-19 pandemic suppressed travel demand. Congress did not want airlines to take billions in government subsidies and then quit providing air service for people who needed it.
Airlines understood the concerns, but expected the Department of Transportation would show leniency, allowing them temporarily to drop markets that don’t make sense in a climate where demand is down 90 percent or more.
This week, though, the Department of Transportation signaled it’ll be stingy with exceptions. On Thursday, in one of its first rulings, it denied all but one of Spirit’s exemption requests. That means if Spirit wants the money — and airline spokesman said it does — it will have to keep flying empty airplanes from smaller airports.
In a blog post on Friday, analyst Seth Miller criticized the government’s position, saying DOT’s requirements “exceed any rational view of minimum connectivity into the national airspace network,” adding, “it is a view that benefits the larger legacy carriers at the expense of newer airlines with more flexible schedules.”
Two other discount airlines — Allegiant Air and Sun County Airlines — also are suffering from the same issues.
Unfair to Discounters
For a giant global airline, the destination requirement is more annoyance than huge hindrance. At first, some asked if the government might force airlines to retain all routes served before the pandemic, but that’s not the case. As long as airlines keep one flight to each city, they’re in compliance.
Just look at how easy it is for United Airlines to retain to service to Salt Lake City, one of its smaller stations, and still satisfy the law. During good times, United flies from Salt Lake to six hubs, and most cities see multiple flights a day. United can cut all but one daily flight and comply, which why United can slash 90 percent of its schedule next next month, and take $5 billion in government aid.
But mathematically speaking, Frontier and Spirit cannot cut 90 percent of flying and still meet the law’s intent.
This is because both airlines are point-to-point carriers, eschewing giant hubs in favor of any nonstop routes where they can make money. Unlike United, which could have five-to-20 flights a day even at smaller stations, Frontier and Spirit may fly to a city only once per day, or even a couple of times a week.
Sacramento is one example for both airlines. Had demand stayed strong, Frontier was planning two flights to Sacramento, one to Denver and one to Las Vegas. By the government’s standards, it must retain at least one route, flying at least three days per week.
Spirit had planned to fly three daily trips this summer to Las Vegas from Sacramento. It also must keep one flight on at least three days each week, even if it flies empty.
Each airline has a lot of cities like Sacramento. Spirit asked to stop flying to 26 markets, but received just one exemption, with the DOT allowing it to suspend service to an airport in Puerto Rico that is essentially closed. (Not all of Spirit’s requests were at small stations; the airline also wanted to pull out of San Francisco and New York-area airports.)
Frontier asked for 35 exemptions, including Albany, New York, Fargo, North Dakota, Sioux Falls, South Dakota, Harlingen, Texas and Wichita, Kansas. As of early Friday afternoon, the DOT had not ruled on its requests, but given Spirit’s experience, Frontier likely will have to keep most service.
The service requirement is not the only place where ultra-low-cost-carriers may be getting raw deal. In good times, Spirit and Frontier saved money by using contractors at airports rather than its own employees. But the government law favors airlines that directly employ workers since the Treasury Department awards more grant money to airlines with higher payrolls, Spirit said in a filing.
“It bears emphasis that because the CARES Act grants are limited to airline employee wages and salaries, Spirit will not receive the same benefit from these grants as the larger carriers,” lawyers for the airline wrote in a filing earlier this month. “Instead, Spirit will have to pay for these services but will not receive any grant money to cover any part of that cost.”
Looking on the Bright Side
U.S. discount airlines are in trouble, but if they can get through to the other side, they could be the first beneficiaries of a recovery.
When demand comes back, it may return first in the domestic market. Some countries will probably ban overseas visitors for awhile, and even if countries accept them, Americans may not want to risk traveling abroad.
Both Spirit and Frontier are predominantly domestic airlines, with some flights to the Caribbean, Central America and South America. Each is positioned to capture this first part of the recovery, as Americans visit friends and relatives and go on vacation.
“There will be just a ton of pent-up demand,” said Jay Shabat, Skift Airline Weekly’s senior analyst. “After sitting at home for three months, people will be like, ‘I need to get the hell out of here.”‘
Those people can fly legacy airlines, too. But many economists now predict a recession, and with so many people out of work, more Americans may look for the cheapest option, rather than the most comfortable. In times of economic uncertainty, including the 2008-09 global recession, discount carriers usually perform better than full-service ones, as people trade down but don’t stop traveling.
A deep recession could also depress demand for business travel, as companies reduce budgets, even once it is safer to travel. Frontier and Spirit don’t carry many business travelers, so they would be insulated.
Fares could be very low, but that may not deter Frontier or Spirit. Their costs, on a per passenger basis, are less than half of a big airline’s, and with cheap fuel prices, they often can make a profit on a $30 ticket when the majors cannot.
Correction: This story was updated with more complete information about how many days per week Frontier and Spirit must fly to various markets.
Photo credit: A Frontier Airlines Airbus jet at a hangar in Denver. Frontier will have to keep most of its far-flung network under government guidelines. Frontier Airlines