Too Cheap to Fly - Why the Budget Airline Model May Have Finally Met Its End

The sudden collapse of Iceland-based WOW Airlines is yet another sign that the airline industry is moving up-market. WOW proved that you actually can't sell tickets from New York City to Amsterdam for $169 and survive. Heck, you can't even sell tickets to Amsterdam, New York for that price and make it work.

Norwegian Air, another European budget air carrier, is also teetering on the edge of bankruptcy. A recent post on Quartz questioned whether the long-haul budget airline model is viable at all. But I would go further and make the case that ultra-low-cost airline flights, always a problematic business model, may finally be seeing its end.

With the exception of Spirit so far, which matches its low fares with its low customer experience, ultra low cost carriers simply don't survive. And while they delay the inevitable with investor cash, they are plagued by operational questions. Allegiant Air has been showing quarterly profits, but at the cost of reportedly spotty maintenance and unhappy pilots. Frontier's operational issues have made it notorious for cancellations.

There is a general trend across the industry of moving up-market. Delta is perhaps the best example. Delta made the decision a number of years ago to offer superior passenger service through more legroom, a return of free food on board, new entertainment options, and new planes. And they charge for it. The airline reports in its financial filings that its premium economy class offers brought in 19% more revenue year over year. And it now represents a significant part of its economy class total revenue.

Even Spirt Airlines provides options to make its service more palatable. Spirit offers its "Big Front Seat" for a few dozen more dollars and it reportedly is so popular those seats are nearly always filled.

So people will pay more for a better experience. In fact, this has been proven out by corporate expense reports. For example, companies want their employees to choose the lowest cost option on a flight. However, when the employee ultimately flies they will often pay out of their own pocket for better service, e.g. more legroom, checking a bag, or food. So the airlines have successfully educated ticket buyers to pay the lowest fare, but the actual traveler is willing to pay for a better experience.

And, if you read through financial reports, these up-sold items are driving almost all of airline profits.

Ultra low cost carriers miss this revenue opportunity, if all they are selling the lowest quality product.

On the private aviation side, we see companies that had been promising super cheap (by charter standards) options also moving upmarket. WheelsUp now offers traditional cabin-class jet aircraft, and while the membership program has new lower membership costs, WheelsUp's lowest cost aircraft (based on their website) is now nearly $4,000 an hour.

Our friends over at Blade have expanded their private jet charter offerings, presumably because their seasonal, low cost helicopter business needs the support of higher revenue sources.

And in the air taxi space, where my company, Hopscotch Air plays, it's clear that competing on price is a losing proposition as we've seen virtually every one of our competitors fold. Imagine Air competed against us on flights from White Plains to Boston that were priced - as far as I can tell - at about 70% of the costs of operating those flights. As they say, you can't lose money of every trip you sell and make it up on volume. Imagine Air is out of business now, too.

Airliners may  defy gravity, but they can’t defy basic economics. 

Andrew Schmertz is the CEO of Hopscotch Air and VP of Marketing for Transcend Air, a start-up VTOL manufacturer and airline.