Surveying the US mainline passenger airline landscape

by Aaron Karp
Nov 08, 2017

Consolidation has whittled the US passenger airline business into 11 mainline carriers. Broadly speaking, I think we can place these airlines in four distinct groups…

Global full service—American Airlines, Delta Air Lines, United Airlines: These carriers have similar ambitions: to serve both the US domestic market and the world, and to provide access to the air transport system to everyone from price-conscious passengers to high-end international business flyers. Their fleets are large and diverse. All three are experiencing expense hikes that have come on the heels of several years of stellar profits; in particular, labor costs are rising. But consistent profitability, for so long elusive for each of the these carriers and their merger partners (US Airways, Northwest Airlines and Continental Airlines, respectively), now appears to be the new norm. “Consolidation has been unambiguously great for the US market,” Delta CEO Ed Bastian recently said. “The quality of the businesses we’re running today is unlike ever before.”

ULCCs—Allegiant Air, Frontier Airlines, Spirit Airlines, Sun Country Airlines: Former Allegiant COO Jude Bricker assumed the CEO role at Minneapolis/St. Paul-based Sun Country in July and is moving to shape the carrier, which has long specialized in vacation flying between the US midwest and Mexico, Costa Rica and the Caribbean, into a fee-heavy ULCC. With four airlines embracing the ULCC model, there is now a full-fledged ULCC sector in the US. Spirit was the first in 2007 and for years was largely ignored by the rest of the mainline US industry. No more. ULCCs are the fastest growers in the US and are a big reason for the market’s persistently sluggish fare environment. US airlines are hard-pressed on the fare front as they contend with a “very, very price-sensitive flying public,” Airlines for America (A4A) chief economist John Heimlich said, noting the nine publicly traded US airlines’ yield rose just 0.6% year-over-year (YOY) for the year’s first three quarters even as the general US inflation rate increased 2.1% YOY during the first nine months of 2017. US airlines are “really lagging on prices,” Heimlich said. (Frontier and Sun Country are privately held.)

In-between specialists—Alaska Airlines (which now includes Virgin America), Hawaiian Airlines, JetBlue Airways: These three airlines have distinct strengths. Alaska has great brand recognition in the US northwest and is now tapping into Virgin America’s California trademark. “Our basic idea is that if you live anywhere on the west coast of the United States, we want to be able to take care of 100% of your travel needs,” Alaska CEO Brad Tilden told me earlier this year. Hawaiian chief commercial officer Peter Ingram once explained to me that Hawaiian is a “destination carrier,” adding, “What we’re about is serving Hawaii, serving all the travel needs of people visiting [Hawaii] … We’ve really turned that into a defining description of what we are as an airline that is distinct from those standard models that you see elsewhere.” JetBlue focuses on moving passengers between the northeast US and Florida and the Caribbean, and flying passengers across the country—for which it has developed the signature “Mint” transcontinental product offered on Airbus A321s featuring 16 lie-flat Mint seats. “Mint demonstrates that there is clearly a customer segment looking for a higher quality offering at a lower price,” CEO Robin Hayes said recently, noting that this month Mint flying will, for the first time, account for the majority of JetBlue’s transcontinental capacity. Alaska and JetBlue are fighting over what Alaska CFO Brandon Pedersen calls “the ‘bleisure’ market,” which he characterizes as “higher-end leisure passengers and maybe business passengers, but not global business customers, and we think that market in the US is worth $25 billion [a year].”

Southwest Airlines: The Dallas-based carrier, the world’s original LCC, is in a category by itself. It is the most prolific carrier of domestic passengers in the US and now has a budding near-international business. Profitable for 44 straight years, it sticks to a number of fundamentals that make it impossible to lump in with any other carrier: all economy-class aircraft with no variation, no seat assignments, no checked bag or flight change fees and a fleet of only Boeing 737s, of which it will operate 707 by the end of this year (including 14 737 MAX 8s). It is truly a singular carrier.

In surveying the landscape sketched above, it’s important to remember that the three global full service carriers and Southwest control 80%-85% of the US market, with the ULCCs and the in-between specialists fighting over about 15%-20% of the pie. That market-share makeup is unlikely to change significantly and therefore the 11 mainline airlines now appear to be fairly firmly set from a business-model perspective for the foreseeable future. Perhaps Southwest’s biggest strength has long been that it knew what it was as an airline and, just as importantly, what it wasn’t. One of the undervalued explanations of the current era of record US airline profitability is that, certainly helped by consolidation, every mainline US passenger airline is now pretty clearly defined.

Aaron Karp

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