Morgan Stanley Challenges Low-Cost Airlines’ Future
Morgan Stanley Doubts Low-Cost Airline Viability
Investing.com — Morgan Stanley is raising serious doubts about the long-term sustainability of the low-cost and ultra-low-cost airline business models amid ongoing structural shifts in the aviation sector that are eroding profits and competitive edges.
In their latest research note, the investment bank highlights that the difficulties encountered by budget carriers since the COVID-19 pandemic stem from fundamental changes in customer preferences and operational cost dynamics, rather than mere temporary setbacks.
The core discussion revolves around determining if the recent downturn in performance for low-cost operators compared to traditional full-service airlines represents a lasting transformation or just a passing phase.
According to Morgan Stanley, travelers are increasingly favoring upscale travel options and rewards from frequent flyer programs, which diminishes the attractiveness of the bare-bones, price-driven strategy characterized by inflexible scheduling that dominated low-cost airlines over the last ten years.
Meanwhile, established network carriers have improved their efficiency and cost management at major hub airports, creating steeper barriers for discount rivals to compete there, thereby forcing them to focus more on secondary regional markets.
The firm points out that post-pandemic cost pressures, including inflation, have impacted budget airlines more severely than their legacy counterparts.
Permanent limitations such as shortages of pilots and planes, congested air traffic control systems, and restricted airport slot availability have hit hardest those business models dependent on aggressive expansion and maximum plane turnaround times.
Consequently, the once-significant cost advantages that set low-cost airlines apart have diminished substantially or even flipped in favor of competitors, as per the analysts’ assessment.
Profitability metrics underscore this strain: projections for 2025 show earnings before interest and taxes for discount carriers lagging far behind pre-2019 levels and underperforming legacy airlines, driven by steeper per-unit cost rises and sharper declines in profit margins.
The disparity in margins between low-cost airlines and their past benchmarks exceeds that of traditional carriers, emphasizing the magnitude of the ongoing industry reconfiguration.
Nevertheless, Morgan Stanley observes that budget airlines are proactively adapting their strategies to these pressures.
Companies like Southwest (NYSE:LUV), JetBlue (NASDAQ:JBLU), Frontier, and Spirit—the latter currently in Chapter 11 bankruptcy proceedings—are rolling out premium cabin classes, tiered fare packages, enhanced loyalty schemes, and new streams of supplementary income.
Additionally, certain operators are scaling back expansion ambitions, optimizing route networks for slower growth scenarios, and venturing into extended-haul or overseas flights.
These initiatives signal a profound departure from the classic discount carrier formula, according to Morgan Stanley.
The bank clarifies it does not predict superior growth or earnings from low-cost airlines versus legacy ones going forward. Rather, it views the industry as reaching a pivotal moment, with 2026 poised to reveal if these adaptations can steady financial results and close valuation discounts.
If successful, these efforts might restore faith among investors; if not, market value could increasingly consolidate among dominant network carriers, the analysts conclude.
