What happened
Shares in airline Frontier Group Holdings(NASDAQ: ULCC) were down 13% for the week as of Thursday at 11 a.m. ET. The move comes in a deteriorating environment for the budget carrier.
Frontier's fellow budget airline Spirit Airlines lowered its third-quarter guidance in mid-September because of rising fuel costs and a lower revenue outlook due to "steep discounting" ahead of Thanksgiving. It's hard to think that Frontier won't be similarly affected.
Moreover, market demand appears to have shifted toward premium cabins as consumers and corporate travelers are willing to pay extra to catch up on travel plans shelved during the pandemic.
That's great news for airlines like Delta that have moved toward that market, but it's not part of Frontier's business model. It's reportedly considering adding premium seats, but that might prove costly and bring about challenges for its pricing strategy.
So what
Investors are bracing themselves for a challenging third quarter from Frontier, and it's not being helped by persistently high interest rates pressuring consumer discretionary spending. Moreover, there's little the airline can do about rising fuel costs, particularly given its slim profit margins. It's somewhat disappointing, given the high hopes for budget airlines following the difficulties created by travel restrictions.
Now what
While there appears to be near-term pressure on budget airlines, it's important to note that these factors might be temporary. It's tough to predict where fuel prices will go, and the shift to premium travel demand might play itself out as travel patterns normalize. Meanwhile, lower interest rates in 2024 would relieve some pressure on consumer discretionary spending.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
