The Troubling Similarity Between Southwest And Spirit Airlines

Photo: John Pullen | LiftOff by John Pullen Writes

On the surface, Southwest Airlines and Spirit Airlines seem like vastly different companies. But while the value propositions they offer customers differ, the airlines have both been driven by the same principle: make money by bringing lower fares to the market than their legacy rivals. For years, this strategy proved to be a very successful one.

However, years after the COVID-19 pandemic, things have changed dramatically. The traditional budget airline business model, once celebrated for its innovative and disruptive nature, now faces a bleak future. And a startling commonality between Southwest's and Spirit’s operations demonstrates just how badly things need to change.

Southwest And Spirit’s Core Business Is Bleeding Cash

Initially, comparing the financial performance of Southwest and Spirit seems absurd. Spirit fell into Chapter 11 bankruptcy last year, and even after restructuring, Spirit remains on the brink of an existential crisis. Meanwhile, Southwest squeezed a modest profit out of 2024. Though both airlines underperform compared to legacy peers, this seems to be where the similarities end.

Southwest’s modest success in 2024 starkly contrasts Spirit’s financial struggles. However, if you remove one key ingredient from Southwest’s business model, then the two carriers are facing similar circumstances. Without Southwest’s Rapid Rewards program, the Dallas-based airline would have an operating margin very close to Spirit’s. In short, the core business of these airlines (flying passengers) is failing them:

Airline	Operating Profit Margin (2024)
Southwest Airlines	1.2%
Southwest Airlines (Excluding Loyalty Revenue)	-19.9%
Spirit Airlines	-22.5%

*According to Visual Approach Analytics and One Mile At A Time

Southwest’s modest profit is largely thanks to its age. First taking flight decades before Spirit, the carrier has had years to expand its scale and reach. This has allowed it to establish more core markets and a robust network, making its loyalty program far more enticing and relevant than Spirit's, which has a more limited scale.

Photo: John Pullen | LiftOff by John Pullen Writes

But this first-mover advantage is the only thing standing between Southwest and financial turmoil. The money both carriers are losing on their core business- transporting passengers- demonstrates that the traditional low-cost business model, in any of its forms, is no longer feasible in the United States. Looking beyond Southwest’s inherent advantage spells a troubling message for the US budget airline sector.

Other Airlines Have Turned Flying Into A Loss Leader Too

Losing money on flight operations isn’t exclusive to budget airlines these days. In fact, the United States’ five largest airlines have all turned flying into a loss leader. Revenue associated with loyalty programs, like selling miles to credit card partners, is responsible for driving impressive profitability at airlines like United and Delta last year:

Airline	Operating Margin (excluding loyalty revenue)	Operating Margin
Delta Air Lines	10.5%	-2.5%
United Airlines	8.9%	-1.9%
Alaska Airlines	4.9%	-11.4%
American Airlines	4.8%	-8.3%

*From Visual Approach Analytics

However, unlike Southwest, the Big Three US carriers (American, Delta, and United) all have single-digit negative operating margins without loyalty revenue. With labor costs spiking and strong demand for premium travel products, these carriers have an inherent advantage. Revenue from their premium products largely offsets today's higher costs. Almost no budget airline today has such robust premium offerings, which explains the significant loss they take from flying passengers.

Photo: John Pullen | LiftOff by John Pullen Writes

Loyalty programs reign supreme in today’s industry. But, when observing airline performance without it, we see just how dire the circumstances are for low-cost carriers. As these former industry leaders navigate today’s challenges, it should come as no surprise that business models are being overhauled in a bid to restore profitability.