The Atlanta Journal-Constitution
» Airline investors expect rebound in low-cost travel,
Two new carriers raise more than $100 million each in just over a year.
New money is flowing to lowcost airlines in the U.S. as they take on giant carriers racing to recover from the unprecedented collapse in travel during the pandemic.
Two established carriers that already had been flying sold shares in the past month, while two new airlines managed to raise more than $100 million each in a little more than one year to cover start-up costs. All four share a common trait: low operating costs and a customer base seeking affordable flights after more than a year of hunkering down.
They’re striking as the domestic leisure business is rapidly returning, even though industry revenue from corporate and international travelers — the domain of bigger carriers — remains depressed.
“Low-cost, leisure-focused, domestic-oriented air travel has been in vogue like it’s never been in vogue before,” said Barry Biffle, chief executive officer of Frontier Group Holdings Inc., which held an IPO in March after withdrawing an effort to sell stock seven months earlier.
The airline industry has never been particularly kind financially, with more than 200 failures or bankruptcies since 1978. But consolidation among the largest players since the 2008 recession set the stage for a comeback. U.S. carriers had $103 billion in net profits from 2010 through 2019, before the pandemic drove $46 billion in losses.
The environment now appears ripe for new entrants led by entrepreneurs focused on keeping costs far lower than the entrenched incumbents and stimulating traffic on mostly uncontested nonstop routes. It’s the same playbook that worked for the previous era of low-cost start-ups such as Allegiant and Spirit.
Shares of Sun Country Airlines Holdings Inc., a Minnesota-based carrier that specializes in Sun Belt destinations, have surged 69% since their March 17 debut, while investors have been cooler on Frontier, which has gained only 3.6% since trading started. Avelo Airlines raised $125 million from family offices, private equity firms and individuals, and plans to begin flights from the Los Angeles area on April 28. David Neeleman’s Breeze Aviation Group Inc. raised more than $100 million, most of it last year.
“Low-cost carriers are proven across the world to be better businesses,” said Avelo CEO Andrew Levy, who was a co-founder of Allegiant Travel Co. Las Vegasbased Allegiant touted 17 years of profitability before the pandemic ended that streak.
Lucrative corporate passengers are likely to avoid air travel for some time as the U.S. economic rebound from the pandemic damage remains a work in progress. Leisure travelers, however, are returning to the skies, with more than a million travelers passing through U.S. security checkpoints each day since March 11. Still, the 1.4 million people screened April 12 remained well below the 2.4 million at the same time in 2019. In response to growing demand, American Airlines is adding 150 routes, a mix of new flights and restored service to regional vacation destinations in and around the U.S.
Airline shares have mounted a major comeback in the past year. After a Standard & Poor’s index of the five largest U.S. carriers tumbled by two-thirds from a January 2020 peak to a trough in May, the gauge has since surged some 160%, though it remains below its pre-pandemic level.
That positive sentiment extends to low-cost players that don’t bank on corporate or international travel and whose balance sheets aren’t weighed down by debt. According to the lobbying group Airlines for America, U.S. carriers collectively added $58 billion in debt last year. New entrants can take advantage of hundreds of aircraft that were pulled from fleets and employees who left during a rush to slash spending after travel demand collapsed. More than 150,000 workers voluntarily left the four largest U.S. carriers or took temporary leave.
“It’s a time of opportunity,” said Peter Morris, chief economist at Ascend, the consultancy arm of Cirium. “You can get a deal like you never would have in 2019. The window of opportunity is probably not open more than a couple of years.”