Spirit's troubles expose limits of premium plan for low-cost carriers

Spirit Airlines' financial troubles reveal that going upscale is not a panacea for the challenges facing low-cost carriers, which are grappling with mounting operating costs, changing customer preferences and stiff competition from the Big Three US airlines. After emerging from bankruptcy protection in March, Spirit tried to rebrand itself and focus on more affluent travelers to turn its business around.

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But within six months, the Florida-based airline filed for bankruptcy again, underscoring the limits of a strategy that is being replicated across the low-cost sector with similarly mixed results. A post-pandemic runup in wages, aircraft lease costs and other operating expenses has eroded the cost advantage that low-cost airlines once relied on. At the same time, inflation has hit their core customer base harder, while the Big Three - Delta, United, and American - have deployed larger aircraft and expanded basic economy offerings to compete directly for price-sensitive travelers.

The result is a squeeze from both ends: rising costs and shrinking market share.

Spirit's strategic shift was aimed at tapping in to rising demand for premium travel and building a high-margin revenue stream to offset rising costs. Frontier Airlines, its closest peer, has followed suit by adding first-class-style seating and expanding loyalty perks. Breeze Airways, founded by JetBlue veteran David Neeleman, also offers bundled amenities and larger seats at lower prices than legacy carriers.

But Spirit's quarterly revenue fell 20% amid a sharp drop in passenger volume, while non-fuel operating costs surged. The airline posted a $246 million loss in the June quarter. Frontier lost $70 million.