Around the world, low-cost airlines have entirely revolutionized air travel, allowing more and more people to take to the skies each year.

However, these airlines have begun to hit a bit of turbulence in recent years, with major U.S. carriers like Southwest, Spirit, and JetBlue suddenly facing issues.

Take Southwest, the pioneer of cheap air travel in the U.S., the country's largest domestic airline, and the world's fourth-largest carrier.

Their net income has struggled to recover from a post-pandemic slump.

In fact, things have become so bad that activist investor Elliott Management, who owns about 9.7% of the company, sent a letter to shareholders at the end of August demanding change, with them calling for the company's shareholders to sack both the chief executive and chairman.

It's not just Southwest either.

In fact, Southwest's modest $500 million in profit looks rather healthy compared to Spirit and JetBlue, both of whom have failed to even turn a profit since the pandemic.

So let's unpack the business of low-cost airlines, why they're struggling, and what they can do to get out of this tailspin.

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So let's start with what makes a low-cost airline a low-cost airline, and how the economics really works here.

Well, obviously, low-cost airlines, or LCAs, offer a cheap, no-frills experience.

Their prices undercut full-service airlines, at least in part because they offer less service, from reduced meal service, inferior customer experience, or less luxury.

Now many of these things are still offered by LCAs, but at an additional cost, from speedy boarding fees, to upcharge meals, or extra baggage allowance.

They're all available, but for a price.

Now, LCAs also save money by simplifying operations, often operating an entire fleet of identical aircraft in order to reduce maintenance and on point-to-point routes, rather than complex hub-and-spoke networks, with those point-to-point routes often dumping passengers at less expensive, but less desirable, secondary airports.

It's a pretty simple business model then, right?

A standardised, minimised service, aimed at prioritising price and utility, rather than luxury and comfort.

So why are these airlines beginning to face headwinds?

Well, the most obvious explanation is an increase in costs for LCAs.

That's because since Covid, finding pilots, flight attendants, and other key staff has become increasingly difficult, with many deciding to take early retirement, as well as the pandemic reducing the number of pilots entering the industry in the first place.

Now, that's made life hard for all airlines, but it's especially tough for LCAs, who have historically offered lower wages to staff members, making it more difficult for them to attract and retain staff during this period of low supply.

And it's not just the airlines that are struggling with staff shortages either.

Major aircraft manufacturers, Boeing and Airbus, have both faced major delays in delivering new aircraft, partly due to staffing problems in their factories,

partly due to the major and ongoing supply chain disruption around the world,

and partly because Boeing has an annoying habit of exploding the doors off their planes, something we actually discuss in another TLDR business video.

Anyway, this has significantly delayed the expansion plans for some low-cost airlines, something that's especially impactful given that LCAs tend to rely on newer, fuel-efficient aircraft in order to keep these fuel costs low.

Speaking of which, fuel prices have also hit LCAs harder than most.

Due to their scale and business model, LCAs tend to operate on thinner margins than legacy airlines, meaning that even minor changes can massively eat into profitability.

Not only that, but in some instances, larger carriers can implement sophisticated fuel hedging strategies in order to limit the impact of price rises, something that many smaller budget carriers are yet to fully implement, making them far more at risk of price spikes.

And inflation more generally has also been hitting LCAs hard.

The cost of maintenance, parts, and airport fees have risen for all airlines in recent years, but LCAs are particularly at risk when it comes to these changes, in part due to their razor-thin margins, but also because their customer base is just less likely to swallow these increased ticket prices.

Speaking of customers, LCAs also tend to focus on leisure customers, with business travellers generally preferring the reliability, scale, comfort, and loyalty programs offered by the legacy carriers.

Now to be fair, focusing on business customers isn't exactly the ideal business model either, especially since the pandemic, where many businesses have cut travel costs after discovering the joys of shouting, your mic is on mute over zoom.

But leisure travellers aren't exactly a cash cow right now either.

In this increasingly insecure economic environment, cash-strapped consumers are choosing to avoid big discretionary costs like holidays and air travel.

Not only that, but those leisure travellers who are still flying have different expectations in 2023.

People clearly still love those low prices, but consumers are also beginning to demand more of LCAs, with a growing segment of the market beginning to demand convenience, comfort, and flexibility.

Now some of these conveniences and comforts can be paid for as extras on LCAs, but others you just can't.

And regardless, once you start stacking these costs on top of the initial prices of flights, things begin to look a lot less low cost.

As such, some of these former LCA customers are beginning to choose full-service competitors instead.

Speaking of which, the legacy carriers are also becoming more serious competition for LCAs more generally.

These carriers have known for years that the LCAs are snapping at their heels.

So, faced with this competition, the full-service airlines have begun to offer more stripped-back, no-frills economy offerings too.

These often aren't quite as cheap as true LCAs, but many passengers are choosing the very basic economy options in place of LCAs, allowing them to secure a cheap price, but maintain the benefits provided by LCA's huge global networks and loyalty programs.

Now we might have focused a lot on the US market thus far, but the same factors are also true in Europe and around the world.

In fact, the European market is even more crowded than in North America, making competition even harder, especially for smaller and upstart carriers.

Add to that, Europe is a lot more densely populated and better connected, giving travellers, especially those who are more environmentally conscious, other, often better options.

Now, LCAs will be hoping that some of the wider market issues begin to turn in their direction in the years ahead, but they're also going to need to adapt to better cater to their customers' needs.

Because while a cheap initial price tag remains important, discerning and increasingly picky travellers are looking for true value before choosing to take to the air once again.

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