The Year of the Budget Airlines: 3 to Watch in 2014

North America's budget airlines will see rapid growth and increasing market share this year.

Jan 6, 2014 at 2:53PM

The International Air Transport Association, IATA, estimates that the U.S. domestic air travel market will grow 2.2% through 2017, making the U.S. the largest national market for domestic air travel. The airlines mentioned below each chose a strategy to meet that increasing customer base head-on. In 2014, customers will vote with their dollars and tell the airlines which strategy is most appreciated. Here are the three budget airlines to watch this year.

Southwest Airlines (NYSE:LUV) 
At Houston's Hobby, Southwest is building its first international terminal. Service to the Caribbean, Central and South America, and Mexico is planned. While AirTran currently flies to select Caribbean and Mexican destinations, Central and South America is a new market. 

International travel is a focus for Southwest, but the United States has not been left out of the expansion plan.    This summer, Southwest will increase traffic from San Diego with five new routes. Portland will see three new flights and increased frequency on some existing routes.  

In May, Southwest will expand at New York's LaGuardia, using flight slots that American gave up as part of its merger agreement with the DOJ. Nashville and Akron/Canton will get one new flight each.   Two new flights will go to Houston's Hobby and two to Chicago's Midway. With the new flights between Midway and LaGuardia, Southwest alone will service the route eight times daily. 

Currently the Wright Amendment prevents Southwest from flying out of Dallas Love Field past states bordering Texas. When this restriction is lifted in October, expect new flights from Dallas to New York and destinations across America. 

Southwest's expansion is focused on competing with the legacy carriers for more market share. By expanding service on the Midway-LaGuardia route, one of America's most popular, Southwest is jockeying to win over the higher-paying business passenger.  Its domestic and international expansion out of Texas will also put it in direct competition with American and its partners.

In 2014, Southwest's trend of increasing passenger revenue will continue.   Additionally, Southwest indicated a desire to complete the integration of AirTran by the end of the year. When the temporary expenditures of combining ground operations and changing over the livery end, investors should see net income stabilize and better reflect Southwest's increasing operational revenue.  

JetBlue announced two changes that make the airline a more viable option for business travelers. Fly Fi is JetBlue's new in-flight satellite WiFi service. Already available on certain flights, Fly Fi will be installed across the fleet in 2014. Unlike the competition, Fly Fi allows for streaming and use of bandwidth-heavy applications. Third party tests of the service's speed agree with JetBlue's advertising slogan: an Internet experience "much like you would expect at home." 

JetBlue also announced Mint, a new class of service for business travelers. Mint will take to the skies in June on flights from New York's JFK to San Francisco and Los Angeles. These routes will be operated by JetBlue's brand new Airbus 321 aircraft. Priced at just $599 one-way, JetBlue seeks to gain back customers lost to the legacy carriers who in 2013 all introduced new transcontinental premium service products.    

The competition on this route will be fierce. American flies brand-new aircraft, and the only aircraft with three classes of service, on its transcontinental routes. However, with passengers looking for connectivity and comfort, along with modest pricing, JetBlue is prepared to compete. The IATA agrees citing product innovations as a successful revenue growth strategy.

Much like Southwest, JetBlue's new services will help it capture more market share, especially from the higher fare paying business passenger. If successful, JetBlue will have better luck retaining customers and gaining new ones. This will see its profit margins, market share, and passenger revenue all increase.

Spirit Airlines (NASDAQ:SAVE) 
 . From 2012-2013, Spirit Airlines increased its employee ranks by 24% while American, Delta, United, and even budget carriers Frontier and Southwest, all cut staffing. 

Spirit's profits are another sign of steady growth. Annual passenger revenue and net income have both increased steadily since 2010. This year was no different; each quarter of 2013 saw increases in both metrics. Net income in the third quarter of 2013 was nearly double that of the first quarter. 

Spirit's oft-complained-about fee structure is the driving force behind its success. Bloggers and analysts take a look at Spirit's strategy each time a new fee is introduced. Each time the votes come in, the strategy is called a success. This ever-increasing nickel-and-dime approach saw Spirit out of near bankruptcy, and transformed it into a viable contender for market share.  

Final Takeaway
Southwest, JetBlue, and Spirit all have a unique vision and a unique growth strategy. Whether a strategy of route expansion, new products, or high fees, there is one commonality among these budget airlines. Each is led by a CEO committed to the chosen strategy who ensures that every action taken is in line with that strategy. No matter how many complaints come in, the CEOs realise that they can only please a certain segment of passengers at once. This method of operating has worked to date and should work just as well this year. 

Fool contributor Benjamin Szweda has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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