United Airlines CEO Again Predicts the Demise of Lower-Cost Carriers

The chief executive of United Airlines says that lower-cost U.S. airlines are about to face a reckoning as soon as next year, with their costs rising closer to the industry’s largest players and Americans increasingly choosing to fly only two carriers with a diverse array of fares.

Airlines like Spirit and Frontier are seeing customers migrate to carriers with better customer service and the ability to match the lowest fares without losing money as they had in the past, United CEO Scott Kirby said Wednesday.

“The domestic market is going to see a shakeout,” Kirby told analysts, following up on a similar sentiment he expressed Tuesday on his LinkedIn account. “I’m not going to predict what the exact changes are going to be. But here’s what I’d say: There’s been a structural change in the industry. I don’t think air travel is a commodity. 

Some in the industry think it is. I do not. I think product, service, experience matter. That’s true across the board. From the premium all the way down to the basic economy customers. And particularly as it pertains to low-cost carriers.”

Kirby raised this same issue in 2019, noting these lower-cost carriers operate like a Ponzi scheme because they always need new market growth to keep costs down.

Aside from Kirby’s prognostications, United reported a $1.5 billion pretax profit for the summer period on Tuesday evening, on record third-quarter sales of $14.5 billion, nearly 13% higher than in 2022.

Still, the carrier said profit in the current quarter will be smaller than previously forecast, due to higher fuel costs and the impact of suspending service to Israel. United shares fell 8% at midday, leading to a broader decline across the industry.

United’s message of a new war for value-conscious travelers comes as Spirit and Frontier both warned investors last month of a marked decline in their businesses, leading to expected losses. Startup airlines Avelo and Breeze are privately held low-cost operators and do not report their financial results.

On the low-cost consolidation front, JetBlue Airways is seeking to win approval of its $3.8 billion bid for Spirit Airlines, a merger U.S. regulators have sued to stop. The trial in that case begins Monday in a federal court in Boston. Spirit reports its quarterly results on Oct. 26.

The mix of larger aircraft, more low-fare seats and a pandemic-induced turn to leisure destinations has come as labor costs for pilots, mechanics and flight attendants has narrowed across the industry. This “cost convergence” among worker compensation has pressured the low-cost airlines on their primary advantage of years past. 

United noted that revenue for its lowest basic economy fares had jumped 50% in the third quarter, compared to 2022. The company said that about 12% of its domestic passengers now fly on basic economy tickets as the airline has increased the size of its domestic aircraft at most hubs, boosting the available inventory with which to pursue price-sensitive travelers.

United introduced its basic economy fare class in late 2016, matching peers who had adopted the minimal-frills tickets as a way to combat ultra low-cost airlines. 

Yet United flew regional jets in many markets, limiting seat supply for its basic economy product. As it swapped in larger narrow-body jets, the marginal cost of those additional seats boosted the carrier’s ability to expand basic economy fares in Florida, Las Vegas, California and other leisure destinations, where low-cost airlines have traditionally focused their low fares.

“We can be price competitive but offer a far superior product still than you can get on a low-cost carrier,” Kirby said, also noting a “commission” that a rival airline (Frontier) has paid gate agents for monitoring bags and charging passengers a $100 fee for those deemed too large for carry-on.

“We can be price competitive but offer a far superior product still than you can get on a low-cost carrier,” Kirby said, also noting a “commission” that a rival airline (Frontier) has paid gate agents for monitoring bags and charging passengers a $100 fee for those deemed too large for carry-on. That agent policy received media attention in May following complaints on social media.

In an email, a Frontier spokeswoman said that the carrier’s $10 commission for gate agents is “designed to incentivize our team members to ensure compliance with the bag size requirements to ensure all customers are treated fairly, including the majority who comply with the rules.”

Kirby added that “the airlines that succeed are going to invest in quality, product and service, and if you don’t do that you’re going to fail.”

UPDATE: Updates earlier story with comment from Frontier about gate agent commission.