Full-service airlines in the United States are gaining a stronger edge over their budget counterparts as travel patterns shift, driven by changing economic conditions and customer preferences. While domestic demand continues to weaken, especially among price-sensitive travelers, airlines like Delta, United, and Alaska Airlines have found new momentum through premium travel offerings and expanded international services.
In the first quarter, low-cost carriers such as Southwest, Frontier, and JetBlue experienced sharp declines in operating margins. On the other hand, Delta and United managed to maintain healthier margins despite overall softer consumer demand. This contrast highlights a growing divide between budget airlines and full-service carriers, one that analysts believe may become more pronounced if economic growth slows and inflation rises.
Premium Travel Demand Supports Revenue Growth
Travelers have shown strong interest in premium services, and full-service airlines have adapted quickly to meet that demand. Delta, United, and Alaska Airlines have each made large investments in high-end products to attract more affluent travelers. As a result, Delta reported that premium revenue now accounts for 41 percent of its total passenger revenue, a notable increase from 35 percent in 2019.
Delta President Glen Hauenstein noted, “It’s one thing to be able to produce a premium seat, it’s another to get customer loyalty.” Airlines have been successful at generating loyalty through frequent flyer programs tied to credit card partnerships, which have grown into a major source of revenue. Delta received nearly one-fifth of its passenger revenue in the March quarter from its partnership with American Express.
In contrast, low-cost airlines have had difficulty competing in this area. Their attempts to enter the premium market have not matched the scale or quality of offerings from full-service carriers. Most budget airlines remain focused on domestic routes and price-sensitive travelers, a group facing more financial pressure in the current economy.
Low-Cost Airlines Cut Capacity to Protect Margins
Domestic schedules for the current quarter reflect a shift in strategy among low-cost airlines. They have begun cutting capacity by reducing available seats in an attempt to protect their margins. Meanwhile, full-service carriers are adding flights and selling more seats, often at lower fares, to attract customers.
Analysts believe the difference in strategy signals a broader change in the market. “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 at JPMorgan.
The current economic environment has impacted lower-income travelers the most. Data from Bank of America indicates that higher-income households are still spending and earning at steady levels, which helps sustain demand for premium travel. Alaska Airlines’ Chief Financial Officer Shane Tackett told Reuters, “The premium orientation shift that’s happened in the industry … is going to be durable.”
With less reliance on business travel, which has not fully recovered since the pandemic, Delta and United have turned to long-haul international routes. These routes remain in high demand and have helped shield them from losses in the domestic market. A shortage of wide-body aircraft has supported stronger fares on these flights.
United expects growth in second-quarter revenue per available seat mile across all international regions, suggesting that pricing strength continues abroad. The reach of their international networks and premium products has also made their loyalty programs more attractive, contributing billions in quarterly revenue from credit-card partnerships.
Challenges Continue for Budget Airlines
Southwest, once known for outperforming during economic downturns, now faces weaker earnings. Rising operating expenses have pushed the airline to reconsider some of its long-standing policies. Recently, Southwest removed its no-bag-fee policy, a move that disappointed some loyal customers. Ben Thomas, a Dallas-based marketing executive, said, “This change has the potential to make travel way more expensive.”
Despite the backlash, Southwest said it has not seen evidence of passengers switching to other airlines. Other low-cost carriers are in similar situations. Spirit Airlines recently exited bankruptcy, while Frontier has only reported a positive operating margin once in the last five years.
Still, some low-cost airline leaders remain confident. Frontier CEO Barry Biffle dismissed the suggestion that full-service carriers would dominate the market. He blamed the challenges on an oversupply of domestic seats and argued that an economic recession would shift travelers toward budget carriers again. “It’s not a business model story,” Biffle told Reuters. “It’s your concentration of geography.”
Full-service carriers continue to gain ground by focusing on premium experiences and long-haul routes, while budget airlines try to manage costs and stay competitive in a changing market.
