*

Budget carriers struggle with profitability, cut schedules

to

protect margins

*

Full-service airlines benefit from loyalty programs and

premium

product offerings

*

Frontier CEO predicts recession will benefit low-cost

carriers

By Rajesh Kumar Singh

CHICAGO, May 7 (Reuters) - A slump in travel demand due

to President Donald Trump's trade war has left all U.S. airlines

reeling, but the pain is most acute at budget carriers.

Southwest ( LUV ), Frontier and JetBlue ( JBLU )

all saw sharp declines in their operating margins in the first

quarter. In comparison, margins at Delta and United

Airlines held up, despite faltering consumer demand.

As the odds of slower economic growth and higher inflation

rise, the margin gap between budget and full-service airlines is

expected to widen further. This will potentially mark a shift

from previous downturns, when low-cost airlines led by Southwest ( LUV )

outperformed the market.

Analysts say a surge in demand for premium travel and the

growing value of customer loyalty programs have handed an

advantage to full-service airlines.

Budget carriers, meanwhile, have been struggling to return

to sustained profitability after the pandemic.

Domestic flight schedules for the current quarter reflect

the changed industry landscape. Low-cost airlines are slashing

capacity, or available seats, to protect their margins. In

contrast, United and Delta have added flights and are taking

bookings at lower fares.

Analysts and industry officials say full-service airlines

are working on a two-pronged strategy - prevent the loss of

customers due to a shortage of seats and steal customers from

budget rivals.

"Much like how Southwest ( LUV ) used to emerge stronger through

downturns, this time we basically think it's United's turn, it's

Delta's turn," said Jamie Baker, an analyst with JPMorgan.

Demand for high-end travel has been booming, and Delta,

United and Alaska Airlines have made big investments to

seize on it.

Premium revenue accounts for 41% of Delta's passenger

revenue, up from 35% in 2019.

With airlines generating more revenue from high-end leisure

travelers, their reliance on business traffic has been reduced.

United last month said the share of corporate travel in its

passenger revenue is well below pre-pandemic levels.

Bolstering the outlook, Bank of America data shows spending

and earnings of higher-income households are still growing.

"The premium orientation shift that's happened in the

industry ... is going to be durable," Alaska's Chief Financial

Officer Shane Tackett told Reuters.

PULLBACK IN DISCRETIONARY TRAVEL

Budget airlines have been trying to tap into the high-end

travel market, but their investments and offerings pale in

comparison with those of full-service rivals.

Low-cost carriers mainly rely on price-sensitive leisure

customers and serve the U.S. domestic market. But consumer

spending is weakest among lower-income households, and the

United States is currently the softest travel market.

Airlines are mostly losing money in the domestic market.

United and Delta, however, are leaning on strong demand for

long-haul international flights to shield their margins.

Industry officials say a shortage of wide-body jets will

likely underpin fares. United has forecast growth in its

second-quarter revenue per available seat mile, a proxy for

pricing power, in all international markets.

A vast international network as well as premium product

offerings are also helping legacy airlines attract more

high-value travelers to their loyalty credit-card programs,

producing billions of dollars in quarterly revenue.

The more customers spend, the more miles they earn and the

more credit-card-issuing banks pay to airlines. Delta's

remuneration from American Express in the March quarter was

equivalent to nearly one-fifth of its passenger revenue.

"It's one thing to be able to produce a premium seat, it's

another to get customer loyalty," said Delta President Glen

Hauenstein.

PROFIT STRUGGLE AT BUDGET AIRLINES

During the 2001 and 2008 downturns, Southwest's ( LUV ) brand

loyalty among customers helped it defy broader industry trends

and generate profits. The airline is now grappling with

lackluster earnings.

A runup in operating expenses has fueled pressure to find

new revenue streams, forcing the company to abandon some of its

unique passenger-friendly policies.

Ben Thomas, a 34-year-old Dallas-based marketing executive,

said he is considering ditching Southwest ( LUV ) and flying with

American after the company scrapped its no-bag-fee policy.

"This change has the potential to make travel way more

expensive," Thomas said.

Southwest ( LUV ) recently said it had seen no evidence of customers

choosing rivals following its recent policy changes.

Other budget carriers are also in a funk. Spirit

just exited bankruptcy. Frontier has posted positive operating

margin just once in the past five years.

Still, Frontier CEO Barry Biffle scoffed at the suggestion

that full-service airlines would outperform low-cost carriers.

Biffle attributed the post-pandemic troubles of low-cost

airlines to excess supply of domestic seats. He argued that a

recession would hammer corporate travel and force customers to

trade down, hurting legacy airlines and driving up business for

budget carriers.

"It's not a business model story," he told Reuters. "It's

your concentration of geography."