Low fare carriers to contract ~3% in December quarter: Deutsche Bank

Investing.com -- Deutsche Bank reports that low-cost airlines plan to reduce their system capacity by about 3% in the upcoming December quarter. Recent schedule changes indicate this shift in airline operations.

As per analysts at Deutsche Bank, Spirit Airlines (NYSE:SAVE), a major player in the low fare carrier segment, has taken steps to reduce its capacity growth for the December quarter. The airline has removed 3 percentage points from its planned system capacity growth, resulting in a year-over-year reduction of 6.9% in available seat miles (ASMs) for the quarter.

This contraction reflects a broader trend among low fare carriers, which, in aggregate, are expected to decrease their December quarter capacity by 2.9% compared to the same period last year.

“Interestingly, the number of seats sold at a deep discount should contract at a greater percentage as several carriers, including Frontier (NASDAQ:ULCC) and Spirit, reallocate inventory for their new premium product offerings,” the analysts said. 

By focusing on these higher-margin products, these carriers aim to enhance their revenue streams, leveraging higher average fares and optimizing their financial performance. Despite the contraction among low fare carriers, the broader domestic airline market is expected to see growth in capacity during the December quarter. 

Deutsche Bank said that domestic capacity is projected to grow by 3.8% year-over-year, although this figure is slightly down by 0.2 percentage points from previous estimates. Major carriers are leading this growth, with a planned increase of 7.1% in domestic capacity, unchanged from the previous week.

In contrast, low fare carriers are expected to reduce their domestic capacity by 2.2% year-over-year, down by 0.6 percentage points from earlier projections. This divergence between major carriers and low fare airlines underscores the varied strategies being employed across the industry, with major carriers expanding their footprint while low fare carriers take a more conservative approach.

On a system-wide basis, US airlines are expected to increase capacity by 3.3% year-over-year in the December quarter, with major carriers contributing a 5.8% increase. Growth airlines, however, are anticipated to reduce their system capacity by 2.9%, reflecting a 0.5 percentage point decline from previous estimates.

The report also touches on capacity trends for non-US airlines operating in US markets. “For December quarter 2024, non-US airline capacity to/from US markets is expected to rise 6.7% year-over-year (unchanged week-over-week),” the analysts said.

This growth highlights the ongoing recovery and expansion of international travel, as non-US carriers continue to capitalize on the resurgence in demand for transatlantic and other long-haul routes.

The contraction among low fare carriers, as flagged by Deutsche Bank, suggests a shift towards more sustainable growth and profitability. 

By reducing capacity and focusing on premium offerings, airlines like Spirit and Frontier are positioning themselves to better navigate the current market conditions, which continue to be influenced by fluctuating demand, fuel prices, and competitive pressures.

As the industry moves further away from the disruptions caused by the global pandemic, the capacity adjustments made by low fare carriers may reflect a broader trend of recalibration within the sector. 

Investors and industry stakeholders will be closely monitoring these developments to gauge the long-term implications for market share, pricing power, and overall profitability in the low fare segment.