Airlines' turbulent start to the year shows why budget carriers are racing to overhaul their business models

• Major airlines say premium cabins and international demand are key amid economic uncertainty.
• Budget carriers have historically lacked premium seats in favor of cheaper no-frills cabins.
• Frontier, Spirit, and Southwest are all deploying new premium strategies to generate more revenue.

Major airlines continue to prove the importance of premium cabins as budget carriers play catch-up.

First-quarter earnings from American Airlines, Delta Air Lines, and United Airlines showed slowed growth and planned capacity cuts amid economic uncertainty and diminishing demand. Less government travel and fewer US-bound tourists didn't help.

Only one carrier, United, offered any financial guidance for the rest of the year, and warned a recession could cut profits by a third.

One thing all major carriers reporting results so far can agree on is that premium and international demand are helping to keep things afloat, even as share prices crater. That's something budget carriers have only recently begun to invest heavily in.

Without first-class or business seats to offer flyers, Frontier Airlines, Spirit Airlines, and Southwest Airlines have fewer ways to compensate for decreased demand and capacity cuts.

"We anticipate softness in the domestic main cabin to continue," American CFO Devon May said in the airline's Thursday earnings call. "To partially offset this, we expect long-haul, international, and premium bookings to outperform year over year."

Delta and United said economy cabin travelers tend to be more price sensitive and may delay travel plans amid the downturn, while premium economy, business class, and first-class seats are a more resilient and significant portion of their revenue.

New premium strategies announced by a slew of budget airlines last year, like plusher seats and luxury amenities, could help generate more revenue in the long run, but installing them on planes will take time.

Mainline carriers are cashing in on premium demand

All three major carriers reported year-over-year premium revenue growth in their first-quarter earnings. American saw a 3% rise, Delta's was 7%, while United increased by 9.2%.

"I don't think we've ever had premium as a larger percent of our total revenues as we do right now," Delta president Glen Hauenstein said in the airline's April earnings call. "It's sitting very resilient."

Executives attributed this to affluent travelers still willing to pay for premium seats despite the economic environment, especially long-haul flights to Europe and Asia.

They said as much as 75% to 80% of their international revenue originates in the US, and bookings remain strong through the summer compared to the comparatively lower domestic demand.

On the other hand, low-cost airlines' historically all-economy airplanes do not have swanky first or business-class cabins and do not fly long-haul to popular international markets like London and Japan.

Budget carriers' limited revenue streams and lower profit margin offerings make it harder to account for their losses as they cut thousands of flights this year. Mainline flight reductions can be more easily offset.

Budget carriers want a piece of the premium pie

Frontier, Spirit, and Southwest started bucking their historically no-frills trend in 2024. These add-ons come at a cost and would help the budget carriers collect more revenue.

For example, Spirit revamped its premium "Big Front Seat" bundle with more perks like free snacks, alcohol, Wi-Fi, and priority check-in. Frontier added a "business-class-like" cabin where the middle seat is blocked.

Southwest plans to deploy new premium extra legroom and front row seats in 2026. It will also start charging for checked bags in May for the first time in its 50-year history, though loyalty and elite status holders will still keep the perk. Those investments likely won't show up until at least the third-quarter results, analysts said.

"There was a better way to maximize the revenue per square foot in the aircraft, which is the whole game here," Southwest CEO Bob Jordan said in Thursday's earnings call on adding premium seating.

Delta earned $5.4 billion in revenue from its economy seats and $4.7 billion from its premium cabins during the first quarter. That means its premium cabin revenue was equal to 88% of the economy class revenue despite taking up much less real estate inside the plane.

Those are the types of returns the low-cost airlines and their investors hope to get a taste of.

Expected second-quarter revenue from Delta and American ranges from down 2% to up 2%, while Southwest expects flat performance or a decrease of as much as 4% year-over-year.

Frontier's stock is down about 55% year to date, and Southwest is down 21%, outpacing the broader market. Both have pulled their full-year guidance.

Spirit shares will begin trading again on April 29 after the airline emerged from Chapter 11 bankruptcy in March.