Morgan Stanley questions the future of the low-cost airline model

## Reassessing the Viability of Budget Aviation: Morgan Stanley Highlights Structural Erosion of the Low-Cost Model

A recent analysis by Morgan Stanley suggests that the prevailing business model for budget and ultra-low-cost carriers (ULCCs) may be reaching a critical juncture, questioning whether the sector can remain competitively viable in its current configuration. The brokerage posits that ongoing structural shifts within the aviation industry are fundamentally eroding the core competitive positioning and earnings potential of these operators.

The core of the debate revolves around whether the recent reversal in fortunes, favoring established network carriers over their budget counterparts, represents a temporary market fluctuation or a permanent, systemic shift. Morgan Stanley believes the challenges confronting low-cost operators since the pandemic reflect deep-seated changes in consumer behavior and the industry’s overall cost structure, moving beyond the scope of short-term disruption.

The analysis identifies two primary pressures diminishing the traditional low-cost appeal. Firstly, consumer preferences have decisively trended toward premium travel experiences and robust loyalty benefits. This shift minimizes the appeal of a bare-bones, "schedule at all costs" approach that defined the budget model over the past decade. Simultaneously, legacy carriers have successfully fortified their operational cost bases at key hubs, making it increasingly difficult and expensive for lower-cost competitors to operate efficiently in those high-demand markets, often pushing them toward less favorable regional routes.

Furthermore, post-pandemic inflationary pressures have disproportionately impacted budget operators compared to legacy airlines. Structural constraints—including persistent limitations in pilot and aircraft availability, air traffic control capacity, and airport gate access—have critically hindered business models that rely heavily on aggressive growth and maximum fleet utilization. Consequently, the historic structural cost advantage that once underpinned the low-cost segment has narrowed significantly or, in certain highly competitive cases, vanished entirely, according to the research.

Profitability metrics underscore the severity of this sectoral stress. Estimates for 2025 earnings before interest and taxes (EBIT) show low-cost and ultra-low-cost carriers lagging markedly behind 2019 averages, demonstrating higher unit cost inflation and deeper margin erosion when compared to their legacy peers. Morgan Stanley stresses that the disparity between LCC margins and their historical norms is far greater than the gap observed among network airlines, emphasizing the extent of the necessary market correction underway.

In response to these pervasive pressures, budget carriers are actively undertaking a fundamental reappraisal of their traditional playbook. Operators such as Southwest, JetBlue, Frontier, and Spirit are pivoting strategically, introducing premium seating options, developing bundled fares, expanding loyalty programs, and aggressively pursuing ancillary revenue streams. Some carriers are also scaling back aggressive growth plans, reconfiguring networks to suit lower-growth environments, and cautiously exploring international or long-haul routes—a distinct departure from the historic LCC strategy.

Morgan Stanley clarifies that this prognosis does not argue for stronger future growth or profitability for LCCs over network airlines. Instead, it concludes that the sector stands at an inflection point, identifying 2026 as the crucial examination period. This year will test whether these profound business model adjustments can successfully stabilize earnings and narrow existing valuation gaps. Should these efforts succeed, LCCs may regain investor confidence; failure, however, would likely result in the further concentration of market value within established network carriers.