What happened

Frontier Group Holdings (ULCC 1.78%), the parent company of Frontier Airlines, reported third-quarter results on Wednesday that largely put to rest investors' fears that it would experience turbulence amid an economic slowdown. The market reacted by bidding up shares of both Frontier and its discount airline peers.

Shares of Frontier traded up as much as 24% for the week through mid-afternoon Thursday, according to data provided by S&P Global Market Intelligence, while shares of Sun Country Airlines Holdings (SNCY 0.61%) were up 16% and Allegiant Travel (ALGT 0.67%) stock gained 12%.

So what

Airline investors went into earnings season unsure about what to expect. On one hand, airports and planes continue to be packed with passengers eager to get away after a prolonged pandemic pause in travel. But fuel costs have skyrocketed, labor costs have also risen, and there was at least some reason to be concerned that inflation fears could cause many consumers to delay big-ticket purchases like airline tickets and vacations.

Frontier's earnings went a long way toward supporting the bull case for the company. It earned $0.13 per share in the quarter, besting analysts' consensus expectations for a $0.10 per share profit. Revenue came in at $906 million, which was slightly below the consensus estimate but up 35% from Q3 2019, prior to the pandemic.

Frontier management sees reason to be optimistic.

"Leisure demand has structurally changed with customers having more flexibility and a desire to travel more often," CEO Barry Biffle said in the earnings press release.

Its ancillary revenue -- i.e., charges for add-on services beyond those included in the price of a ticket -- was $78 per passenger. That's up 38% from pre-pandemic levels.

While the report was company-specific, it matches the broader trend we've seen from airlines this quarter. And consumer acceptance of higher ancillary charges is particularly good news for companies like Sun Country and Allegiant that, like Frontier, operate using an "ultra-low-cost" model under which they set their base ticket prices low, but charge extra fees for a host of things that airlines historically provided as standard parts of their service.

Now what

Sun Country is due to report its third-quarter results on Nov. 1, and Allegiant will follow a day later. Given what we saw from Frontier, investors will have high expectations coming into those reports.

That could cause some near-term turbulence. This week, shares of both JetBlue Airways and Hawaiian Holdings fell post-earnings not so much because their results were bad, but rather because expectations had been set too high following solid reports from other carriers.

But whatever happens in the near term, the long-term setup for the industry right now is bullish. Historically, air travel trends have been closely tied to the health of the overall economy, and in times of uncertainty, airlines have disappointed. However, it appears this time around, pent-up demand and relatively healthy household finances thanks to the strong job market are allowing airlines to fly clear of trouble.

Time will tell how long that can continue, especially if economic conditions worsen, but for now, airline investors are enjoying the ride.