Discount Airlines Compete with Legacy Airlines, but the Differences Are Beginning to Blur

The Coronavirus pandemic will cause long-lasting changes to airlines of all types, and it remains to be seen how the competition will change. Many of the world’s discount airlines, particularly in Asia and Europe, are relatively new and under the stress of high levels of debt. Mergers, downsizing and bankruptcies may occur over the mid-term.

Since its first flight in 1971, Southwest Airlines and its no-frills business model enjoyed tremendous success, wooing customers based on price, not perks. For most of its history, Southwest’s single-plane platform strategy (Boeing’s 737) kept maintenance costs low, while its point-to-point flying system has helped to give it a solid reputation in on-time performance. (Southwest picked up some Boeing 717s when it acquired AirTran, adding a second type of aircraft for the first time in its history.)

Despite the fact that Southwest started out as a discount airline, it has grown to be one of the U.S.’ largest carriers with operating expenses commensurate with its size. Some might argue that Southwest is no longer a discount airline—that its decades of operations, massive size, ticket prices and business strategy make it more of a legacy airline, albeit one without significant overseas routes.

In general terms, Southwest is facing tough competition in the form of newer discount airlines such as JetBlue. Although JetBlue has only a fraction of the fleet that Southwest boasts, it has expanded rapidly, adding new planes and entering new markets.

JetBlue and Southwest have been making efforts to attract more business travelers. Both offer in-flight internet access on a large portion of their fleets, which has powerful appeal to business travelers because they can work while flying. Southwest offers “business select” fares which afford business travelers to board Southwest aircraft first for priority seating for an additional charge.

Historically, U.S. discount carriers largely confined their operations to domestic travel, leaving international flights to the full-service airlines. However, JetBlue and Spirit are now offering tourist destinations like the Bahamas, Jamaica, Costa Rica, Aruba and the Dominican Republic, and may eventually fly even further afield. Southwest’s acquisition of AirTran gave it a number of international destinations (including Jamaica, Mexico, the Dominican Republic and the Bahamas). Southwest’s relatively new $100 million international terminal at Houston’s Hobby Airport supports Southwest flights deep into Latin America. This puts Southwest in direct competition with United on vital flights to Mexico, Central America and South America.

Keeping costs low is a challenge for long-haul flights, and carriers must rely on fuel efficient planes such as the Boeing 787 Dreamliner and the Airbus A350. The discount carriers are having to configure these planes with nine-across seating to come out ahead. Quick turnarounds are also a problem on international routes, due to more departure restrictions than domestic flights. However, growing numbers of discount airlines are taking the long-haul plunge.

The fact that major legacy airlines offer extensive global flight schedules to Asia/Pacific, South America, Europe and beyond provides an opportunity for airlines like American, Delta and United to differentiate themselves from the discount airlines, especially given the fact that their full-service domestic flights can connect smoothly with their international flights at major hubs. Legacy airlines traditionally earned a significant portion of their net profits from international routes. Their ability to lure business travelers with first or business class seats, airline clubs and destination lounges that offer showers and changing rooms, gives them a significant competitive advantage. However, with the advent of competition from so many long-haul discount carrier flights, legacy airlines have found themselves forced to offer deeply discounted basic coach seating in order to maintain market share. These basic seats are bare bones, with no advance seat selection and few perks. At the same time, legacy airlines are upselling with extra charges for premium economy seats in prime locations.

Meanwhile, dozens of discount airlines based on the Southwest model have built large businesses. Ryanair and EasyJet are setting the standard for discount operations in much of Europe. Ryanair is being especially aggressive in its cost-cutting efforts and increasing revenue by eliminating seat back pockets to lower weight and cleaning costs; eliminating airport check-in; banning checked baggage altogether; and selling virtually all of its tickets via its web site.

Although it was launched on a true discount airline model, changes in JetBlue’s strategy are moving it more into the legacy airline category and away from the discount segment. JetBlue is pushing a premium economy section. Also, the firm now has a highly competitive “Mint” business-class service on certain coast-to-coast flights within the U.S. (as well as a few flights to the Caribbean), such as New York to Los Angeles. Mint cabins feature lie-flat seats. Mint’s premium seating and competitive fares have been so successful that they have forced new, competitive strategies at legacy airlines on coast-to-coast routes.

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