Budget Airlines' Real Rival Isn't Each Other — It's the Credit Card Business That Sells Miles
Ultra-low-cost carriers built their business on rock-bottom fares, and now they're squeezed between Big Air's Basic Economy and frequent-flyer credit cards — the latter gets travelers to pay $100 more just to rack up points, which makes price-sensitive customers the least reliable customers of all.
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The argument · tap a timestamp to hear it
What budget airlines sell is: you get what you pay for
The episode opens with a string of passenger complaints that define the category: trays too small to hold anything, water costs extra, seats have almost no padding, and after an oversell they randomly kick people off the plane. But precisely because the price is low enough, people who want to travel cheap keep pouring into budget airlines. Allison Sider says the peak of this model was about ten to twelve years ago, when it looked like it would become the dominant business model, and the big airlines genuinely felt they had to find a way to respond.
— Allison SiderFrontier even changed its ticker to ULCC
Frontier is headquartered in Denver, with white fuselages and forest-green lettering, and a different animal on the tail of every plane. In the 2010s it went all in on the ultra-low-cost model, and its ticker symbol is literally ULCC (ultra-low-cost carrier) — in Allison's words, that is ‘how much it wanted to embody that business model, to own that identity.’ Its business model is highly similar to Spirit's and shares the same roots. But Frontier's operations have long been rough, with on-time rates, cancellation rates and involuntary-denied-boarding numbers sitting at the bottom of the rankings year after year.
— Allison SiderBoth mergers failed, and Spirit simply vanished
In 2022 Frontier proposed acquiring Spirit, hoping to merge into a national budget airline that could take on the big four of Delta, United, American and Southwest, with the two route networks complementary — Spirit stronger in the East, Frontier in the West. But JetBlue bid higher, Spirit turned to JetBlue, and a federal judge then blocked that deal on antitrust grounds. In the end nobody got Spirit; it went through multiple bankruptcies and shut down entirely this year. Spirit's disappearance opened up market space for Frontier, and the company says it has benefited — but it also ran into inflation, high jet fuel costs, and a fading of demand for cheap travel itself.
— Allison SiderBig Air flanked budget carriers with Basic Economy
Delta, American and United all rolled out Basic Economy — a cheaper, stripped-down fare class below the rest of the cabin. The big carriers' move was not to cut prices across the board, but to take a handful of seats, price them close to budget, and pair them with close-to-budget bare service, such as no seat assignment in advance. For consumers, that amounts to a budget airline experience on a big carrier's routes and reliability. Allison says this is the bet most airlines are now making: people want a more premium experience and are willing to pay for it. Delta made that bet first, fifteen years ago, wagering that ‘if you have the best product and the most reliable operation, people will come’ — and it worked extremely well.
— Allison SiderWhat really kills budget airlines is the frequent-flyer credit card
The other mechanism big airlines use to keep customers is loyalty programs: co-branded credit cards mean travelers don't even shop on price. Allison's example is that someone who wants to accumulate miles or earn status might be willing to pay $100 more. That makes it extremely hard for Frontier to compete — its route options aren't as broad and its loyalty program isn't as strong. Frontier's response has been to start selling bundled products (ticket plus bag plus seat selection), and soon it will add first class and in-flight Wi-Fi. In other words, it is becoming more and more like an ordinary airline.
— Allison SiderFrontier's CEO: fix operations first, everything else after
Frontier CEO Jimmy Dempsey told Allison the company's future is bright, but it has to adapt to the environment — ‘customers are seeking a more premium product, and we're adapting to that.’ Some of the actions he lists are very basic: improve operations, be more reliable. Allison's reading is that reliability is the center that holds up everything else: only if operations are reliable, not constantly delayed or cancelled, with enough flights for backup, does it make sense to invest in a loyalty program and a credit card. Dempsey's framing is to keep offering very low fares across the industry to get people on planes, while layering on premium products to improve the overall revenue mix, and to find the ‘right balance’ over the next year.
— Allison SiderSouthwest's hesitation exposes the real problem with this trend
Southwest was the pioneer of budget flying, bringing cheap air travel to America, and it ran things minimally — every plane the same, every seat the same — which for a long time was an operational advantage, but also cost it revenue, because there was nothing to sell to people who wanted to upgrade. Now Southwest is also agonizing over whether to pivot toward premium demand, and it ultimately decided to do so. But Allison points out that the U.S. also has an affordability crisis, so ‘whether consumers' willingness to pay more for pricier tickets and premium experiences can last’ is the big question hanging over this premiumization trend for years, and it is why Southwest hesitated in the first place.
— Allison SiderPrice-sensitive customers have been judged unreliable
Allison says that for a long time, if you were the cheapest in the industry, you almost couldn't lose, so the question is: is this a fundamental change in the business model, or just a moment in the economic cycle that will swing back in the next recession? She thinks that remains an open question. But airlines are forming a judgment: price-sensitive customers may not be very reliable customers; wealthy customers who can keep swiping their cards even when the economy wobbles are the better customers. The whole industry is reshaping itself to serve that person. For budget airlines, that may mean room for only one national player, and after Spirit's disappearance that spot looks like Frontier's — but it has to get back to profitability, and it may no longer look the way it used to.
— Allison SiderIn their own words · checked verbatim
So sort of the peak of the budget airline era, which was maybe 10, 12 years ago, this seemed like it was going to be the dominant business model.
Allison Sider0:00
For the last several years, these airlines that were once sort of the fastest growing, most competitive, most disruptive, now they're kind of on the back foot.
Allison Sider1:00
it's a little bit more like you're flying the budget airline, but you're still on the big airline.
Allison Sider8:18
if someone wants to earn their miles, like they might be willing to pay $100 extra because they want to amass points and earn status.
Allison Sider9:27
Customers are seeking more premium products, and we're adapting to that.
Jimmy Dempsey10:29
And so we continue to offer very low fares across the industry for people to step into. And then we're adding that with premium products in order to improve the overall revenue base of the airline.
Jimmy Dempsey11:31
the price sensitive customers, maybe not as reliable a customer. And the people who can afford to continue spending on travel, even when the economy wobbles, who are going to continue swiping their credit card.
Allison Sider13:39
I think there's a feeling that there probably is room for at least one big... big budget airline. And, you know, with Spirit gone, it seems like that will be Frontier
Allison Sider14:41
Figures
| Frontier's bid for Spirit | $2.9 billion | 5:07 |
| The four airlines dominating the U.S. market | Delta, United, American, Southwest | 5:07 |
| Frontier's ticker symbol | ULCC | 2:01 |
| What travelers will pay extra to accumulate miles | $100 | 9:27 |
| When Delta bet on premium experiences | 15 years ago | 8:18 |
Glossary
- ULCC
- ultra-low-cost carrier, an airline model that sells only the basic ticket and charges for everything else.
- Basic Economy
- a cheap, bare-bones fare class rolled out by big airlines to fight budget carriers head-on.
- premiumization
- the trend of airlines tilting their products and revenue mix toward travelers willing to pay more.
How to listen
Investors and founders watching consumer and airline sectors, especially anyone asking whether low-price strategies can hold up long term and how loyalty programs intercept price-sensitive customers.
The passenger-complaint bits at the top can be fast-forwarded, and the self-promotion at 6:07 about a previous episode on mergers can be skipped.