Rising fuel costs put budget airlines under pressure as Spirit faces bankruptcy

[0:00] The war with Iran is driving energy costs to levels not seen in years, and that surge is now [0:05] rippling through global air travel. Several U.S. budget airlines are asking the federal government [0:11] for a $2.5 billion lifeline, warning that soaring jet fuel prices are putting pressure on their [0:16] business models and threatening thousands of jobs, along with the affordable fares that millions of [0:22] travelers depend on. The appeal comes as Spirit Airlines faces a potential bankruptcy and is [0:28] negotiating separately for a $500 million government bailout, one that could leave the Trump [0:33] administration with a significant ownership stake. We're joined now by David Shepardson, [0:38] aviation, transportation, and technology correspondent at Reuters. Thanks for being here. [0:42] Thanks, Jeff. [0:43] So as we mentioned, these low-cost carriers are asking for $2.5 billion bailout. What does that [0:48] really signal about the health of the sector? Is this just about the cost of fuel, or is this [0:55] an issue about the deeper business model, deeper problems? [0:58] I really do think it's about the fuel, right? So as you mentioned, jet fuel prices have doubled. [1:02] Everybody is suffering, not just the budget guys, but the mainline carriers, American Delta, United, [1:08] Southwest, they're all struggling. They're all being forced to raise prices, raise baggage fees, [1:12] and deal with this. But the budget guys are in a much, are in a tougher spot, in part because [1:16] they've got less room to raise prices. Their consumers are much more price sensitive, [1:21] so it's harder to raise fares and keep those planes filled. And they're also asking Congress [1:26] to waive the fuel taxes, the surcharge that you pay on your airline ticket. So between that and [1:33] $2.5 billion, it's a big ask. And right now, it doesn't appear Congress, the administration are [1:38] going to do it now. But depending how long these fuel prices go on, if we see some of these budget [1:43] guys get in trouble or file for bankruptcy, then I do think Congress might take a more realistic look. [1:48] How unusual is a request like this? The airlines got a, what was it, a $25 billion bailout back in [1:53] 2020. Of course, it was a once-in-a-generation pandemic, we hope once-in-a-generation. I mean, [1:58] how does this compare? [2:00] So I do think the rationale is somewhat similar, although you're right, the COVID pandemic was [2:04] much different, right, because demand fell 90% overnight. And they actually got three rounds [2:09] of bailouts, and they got $54 billion in funding in 2020, 2021. So the structure that the budget guys [2:16] are talking about is similar, in that the government would get warrants in exchange for [2:20] that money that they could exchange for stock. Because remember, in the COVID bailout, those [2:24] warrants were basically worthless on the day that they gave them the bailouts, and then the [2:28] government got the appreciation. So the government only got $500, $600 million in exchange for [2:32] a very large bailout. So I do think it's similar. Obviously, things are not nearly as bad, but [2:38] it really depends how long this goes on. [2:40] And Spirit Airlines is asking for a $500 million lifeline. If that funding falls through, [2:46] what options remain? [2:48] Really, it doesn't look like much. I mean, if you listen to Spirit and their lawyers, [2:51] they're basically facing liquidation. So they do have some money on hand, but they're restricted [2:55] from using it. There are negotiations with their creditors and the government to try to reach [3:00] a deal. It was supposed to be done by today. The talks are continuing. And Spirit has really [3:05] struggled. So since 2019, they haven't made a profit. They filed for bankruptcy twice in the [3:10] last two years. And they made some mistakes. They've made a big expansion bet before COVID. [3:15] It didn't pay off. And a lot of the market has moved toward the premium segment, right? People [3:19] want the fancier seats, the United American Deltas of the world. And so Spirit has struggled to keep [3:24] those seats filled. And that business plan they have depends on much cheaper fuel. And the question [3:30] is, how can they exit bankruptcy with a plan to survive with much higher fuel prices? [3:35] Why should we care if Spirit collapses? To your point, they've been struggling for seven years. [3:39] If they can't get it together, it's just a free market at play. [3:42] No, you hear that argument for a lot of people on both sides of the aisle. However, [3:45] even if you don't fly Spirit, you do benefit if you're a flyer. They're about 5% of the market. And [3:50] studies show that the markets where Spirit competes with a Delta or American, those fares are lower. [3:56] And we've seen certainly in the past that when budget carriers go out of business or stop flying, [4:00] the legacy carriers can raise prices. So they do act as a downward pressure on airfares. [4:07] And also, if you're a college kid or you just can't afford to travel, I mean, Spirit, Frontier, [4:12] the small guys, they do provide airline travel options for people who really can't afford [4:17] to fly the mainline carriers. [4:20] Well, what is the bigger picture for the major airlines? Because as you point out, [4:23] first class seats are really driving profits in airlines like Delta and United. [4:28] And credit cards too, right? Between the credit cards and that, that's billions of dollars in [4:32] profits. Now, there's still a big demand. They're all trying to fill those other seats. [4:37] And that's why you see the other airlines have these basic economy, no frills fares, [4:41] because they're trying to compete with the spirits and the frontiers of the world to have a lower cost [4:47] fare. But they're really trying to upsell you to all the fancier seats and the premium food or [4:53] whatever they have in the front of the cabin. But the spirits of the world, right, they just don't have [4:58] the run room to, like, raise the prices. Because, you know, their consumer base, [5:03] if you raise prices $20, $50, $75, they're much less likely to stick with that airfare. [5:08] And also they're less likely to be business travelers because they have fewer options [5:13] and with fewer flights. If your flight gets canceled, you might get stuck for a day on a [5:17] small carrier, unlike the bigger guys with lots more flights. [5:19] And let's leave our viewers with some news they can use. If they have summer travel plans, [5:23] now's the time to buy their tickets. [5:24] Yeah, it sounds like a salesman, right, but you really should buy, right? The airlines all say [5:28] they've only been able to pass on 30 to 40 percent of the higher cost of fuel. As the year goes on, [5:34] they plan to increase that. United wants to do all of it. So really my advice is look for airfares now [5:39] because prices are only going to go up, assuming the war and these high prices continue for months [5:44] to come. So don't wait. Get your airfares now before it's too late. [5:47] Okay. David Shefferson of Reuters, always great to speak with you. Thanks for coming in. [5:50] Thanks, Jeff. [6:05] Support journalism you trust. Support PBS News. Donate now or even better, start a monthly contribution today.