Low-cost airlines can no longer hold on
Have you noticed recently that low - cost flight routes you bookmarked months ago have been cancelled without warning? You frequently receive grey text messages about flight cancellations on the eve of holidays. Destinations that used to cost only a couple of hundred yuan for a round - trip now have ticket prices that have quietly doubled.
These signs all indicate that low - cost airlines are under heavy pressure.
Last month, Spirit Airlines, one of the largest low - cost airlines in the United States, announced its closure. Most of the remaining low - cost airlines are also reducing their flight routes. For example, among the low - cost airlines in the Asia - Pacific region, some flights to Japan, Southeast Asia, and Hong Kong have been suspended for a certain period.
The fuse of the low - cost airline crisis is the out - of - control aviation fuel. From February to May this year, the Strait of Hormuz was blocked. Due to the extremely tight inventory of aviation fuel, the Platts Aviation Fuel Price Index soared by more than 70% in a short period.
In the cost transmission process, since low - cost airlines have already cut other operating expenses to the extreme, the proportion of fuel costs in the total expenditure far exceeds that of traditional full - service airlines. Therefore, they are the first to be pushed to the edge of a cliff.
Now, as the peace agreement between the United States and Iran is about to be signed, this aviation fuel crisis caused by geopolitics may ease. However, the weakness of low - cost airlines is not just aviation fuel. The increasingly obvious "low - cost airline trend" in the entire industry is squeezing the market of traditional low - cost airlines.
/ 01 / The most profitable aviation business model has fallen first
In common business sense, the universal rule is that "the more expensive the product, the more profitable it is."
However, the financial statements of the aviation industry present the opposite side of common sense. For a long time, the most profitable segment in the industry is not the full - service airlines with luxurious first - class cabins, but rather the low - cost airlines, which are jokingly called "the green - skin trains in the air."
Taking 2025 as an example, among the 8 airlines listed on the A - share market, the one with the highest net profit was Spring Airlines, a representative of domestic low - cost airlines, with a net profit of 1 billion yuan. At the same time, two of the three major domestic airlines were still in the red. In terms of profitability, Spring Airlines' net profit margin of 10% far exceeded the average level of 4.7% in the aviation sector.
Why are low - cost airlines more profitable? The core reasons can be summarized as two lows, two highs, and two singles:
"Two lows" refer to extremely low sales and management expenses. Usually, the proportion of these two expenses for low - cost airlines is only about half of the industry average. This cost - saving comes from careful calculation. For example, more than 98% of the tickets of some low - cost airlines are sold through their own official websites, completely bypassing third - party platforms, saving more than 100 million yuan in commissions every year.
"Two highs" refer to high seat occupancy rates and high aircraft utilization rates. This means that the seats on flights can be fully utilized, and the fixed costs can be spread to the maximum extent. Among them, the daily aircraft utilization rate is the core KPI of low - cost airlines. To keep the aircraft running continuously, low - cost airlines increase red - eye flights and adopt point - to - point direct flight models to increase the number of daily flights. At the same time, combined with the low - price strategy, they maintain a seat occupancy rate of over 90%, far exceeding the industry average.
"Two singles" refer to a single aircraft model and a single cabin class. Low - cost airlines usually only purchase one type of aircraft and only set up economy class throughout the plane. This can reduce the training cost of pilots and the maintenance cost of logistical spare parts.
However, such a business model, which was extremely profitable in the past, is now facing a shutdown crisis.
Spirit Airlines, one of the largest low - cost airlines in the United States, announced its closure and cancelled all flights in May this year. Ascend Airways, a low - cost freight company in Europe, also officially announced its closure.
The low - cost airlines still in operation are also reducing their flight routes. Ryanair, a European low - cost airline, once cut 12 routes, reducing 700,000 seats. In the domestic and Asia - Pacific markets, the flights of low - cost airlines to Japan, Southeast Asia, and Hong Kong have also been frequently cancelled.
So, what exactly are the reasons that have pushed these cost - saving experts into a corner?
/ 02 / Overwhelmed by aviation fuel costs
"Despite our best efforts to cope, the recent sharp rise in oil prices and other operational pressures have seriously affected the company's financial prospects."
This is a common reason mentioned by many low - cost airlines when announcing flight cancellations this year. From the perspective of cost structure, what low - cost airlines say is true.
For any airline, aviation fuel is the largest cost expenditure, usually accounting for about 30%, almost equivalent to the sum of the second - largest cost, depreciation and leasing, and the third - largest cost, personnel salaries.
The particularity of low - cost airlines lies in that, since they have cut labor, depreciation, and management expenses to the limit in advance, the proportion of fuel in the total cost is even higher. The aviation fuel cost of some airlines even accounts for nearly 40%.
A higher cost proportion means that low - cost airlines are more sensitive to oil price fluctuations. Unfortunately, in the first half of this year, the world happened to be in a cycle of out - of - control aviation fuel costs.
From the start of the Middle East war in February to early May this year, the Brent crude oil price increased by 30%. However, on the aviation fuel side, the Platts Aviation Fuel Price Index increased by more than 70% during the same period, and the Singapore aviation fuel index soared by 100%.
The reason why the increase in aviation fuel prices is much higher than that of crude oil is essentially because aviation fuel, as a refined product, has more supply bottlenecks and a very small inventory scale, ultimately leading to greater price fluctuations.
Specifically, affected by the energy transition, Europe has significantly reduced its local refineries in recent years and highly depends on refined oil imports from the Middle East. According to Macquarie Group, about 41% of Europe's aviation fuel imports must pass through the Strait of Hormuz. This proportion is much higher than the 25% share of oil transportation through this strait.
Not only is the supply more restricted, but the inventory of aviation fuel is also lower. Since aviation kerosene is a refined product, it has high requirements for storage conditions and a limited shelf - life, and cannot be stockpiled in large quantities like strategic oil reserves. According to the International Energy Agency (IEA), Europe's aviation fuel reserves "may only last for about six weeks." This reserve time is far less than the EU's rigid requirement of at least 90 days for oil reserves.
Facing the aviation fuel supply crisis, low - cost airlines with thin profit margins can only be forced to raise prices to transfer costs. As a result, the market has seen a direct consequence: the price of destinations that used to cost only a couple of hundred yuan for a round - trip has now doubled, and the increase in fuel surcharges is nearly five times.
However, the problem is that oil prices can rise, but consumers' demand for air tickets is elastic. A rise in ticket prices will directly lead to a decrease in seat occupancy rates. Once the seat occupancy rate drops, the effect of spreading fixed costs will weaken, thus deteriorating the profit model of a single flight.
In the situation where "there is no ceiling for the rise in oil prices, but there is no support for demand," canceling unprofitable flight routes has become the best choice for many low - cost airlines.
/ 03 / A signed agreement, but an unrecoverable world
The aviation fuel crisis of low - cost airlines is easing. After experiencing daily turns and crises, the United States and Iran have finally, rarely, simultaneously admitted that they have reached a peace agreement, which will be officially signed this Friday.
Along with the news of the peace agreement, there is also the reopening of the Strait of Hormuz. The Brent crude oil index has dropped from $100 at the beginning of the month to the latest $85. Although it will take time for the aviation fuel supply to recover, from a trend perspective, the crisis will probably be resolved.
However, the weakness of low - cost airlines is not just the sky - rocketing oil prices, but also the intensification of competition after the change in the global economic order.
In fact, the low - cost airline crisis has not only occurred this year. Since 2020, many low - cost airlines around the world have either disappeared or undergone bankruptcy reorganization, such as Norwegian Air Shuttle in Europe and AIR Japan in Japan.
Why is it becoming more and more difficult to operate low - cost airlines? The core lies in the "low - cost airline trend" in the entire industry, which is squeezing the living space of traditional low - cost airlines.
In the past, the profit model of a traditional full - service airline was very clear: the domestic business golden routes determined the "lower limit" of profits, while the high - potential international routes determined the "upper limit" of profits.
Specifically, the high - end customers on international routes often have high pricing potential. This is reflected in corporate business travel: fixed travel times, inability to wait for discounts in advance, and insensitivity to ticket prices. This allows traditional airlines to maintain high prices for a long time. The price of a round - trip business - class ticket between China and the United States or Europe is often between 30,000 and 80,000 yuan, much higher than that of domestic routes.
However, the problem is that international routes are extremely vulnerable to policy influence. For example, some routes have had their flight frequencies reduced due to air - rights negotiations and geopolitical reasons. More importantly, the trend of anti - globalization is also weakening cross - border business connections. Companies have reduced cross - border business trips, and business travel expenses have decreased accordingly, ultimately affecting the profits of traditional airlines.
According to a report from the GBTA (Global Business Travel Association), after deducting inflation and the sky - high ticket and hotel costs, the global actual business travel spending is still $134 billion lower than that in 2019, a decline of 14%.
After the profits of international routes were challenged, a "low - cost airline trend" has emerged among major traditional airlines. This is manifested in the fact that traditional airlines have also started to establish their own low - cost sub - brands. The main brand continues to maintain a high - end image, while the low - cost subsidiaries compete for the medium - and short - haul markets of low - cost airlines.
For example, in April, Air France transferred its slots and operating resources at Paris Orly Airport to its low - cost subsidiary, Transavia. In the Middle East, Dubai has both Emirates Airlines, known for its high - end image, and flydubai, a low - cost airline. In some scenarios in the domestic market, it is not uncommon for the ticket prices of traditional airlines to be close to those of low - cost airlines.
The past success of low - cost airlines was essentially due to a set of operating methods that extremely controlled costs. However, this operating model is not unrepeatable. Whether it is canceling free meals, purchasing a single aircraft model, or increasing aircraft turnover, traditional airlines can copy it. This means that in the future, low - cost airlines will face increasingly fierce competition.
This article is from the WeChat official account "Read and Understand Finance," author: Yang Yang. It is published by 36Kr with permission.