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

Investing.com -- Morgan Stanley is questioning whether the low-cost airline and ultra-low-cost airline business model can remain viable in its current form as structural changes in the industry continue to weigh on earnings and competitive positioning.

In a recent note, the brokerage said the challenges faced by low-cost carriers since the pandemic reflect a shift in both consumer demand and the industry cost structure rather than a short-term disruption.

The debate centers on whether the reversal in fortunes between legacy airlines and low-cost operators is permanent or cyclical.

Morgan Stanley said consumer preferences have moved toward premium experiences and loyalty benefits, reducing the appeal of the lowest-price, “schedule at all costs” approach that defined the low-cost model for much of the past decade.

At the same time, legacy carriers have strengthened their cost position at core hubs, making it more difficult and expensive for lower-cost competitors to operate effectively in those airports and pushing them toward regional routes instead.

Morgan Stanley said cost inflation following the pandemic hit low-cost and ultra-low-cost carriers harder than legacy airlines.

Structural constraints, including pilot and aircraft availability, air traffic control limitations and airport gate capacity, have disproportionately affected models that rely on rapid growth and high aircraft utilization.

As a result, the structural cost advantage that once defined the low-cost segment has narrowed or, in some cases, reversed, according to the brokerage.

The analysts noted that profitability outcomes highlight the pressure on the sector. In 2025 estimates compared with 2019 averages, earnings before interest and taxes for low-cost and ultra-low-cost carriers remained significantly weaker than for legacy airlines, reflecting higher unit cost inflation and deeper margin erosion.

Morgan Stanley said the margin gap between low-cost carriers and their historical levels is larger than that of legacy peers, underscoring the extent of the reset underway.

At the same time, Morgan Stanley said low-cost carriers are actively reshaping their business models in response.

Airlines including Southwest (NYSE: LUV), JetBlue (NASDAQ: JBLU), Frontier and Spirit, which has filed for Chapter 11 protection, are introducing premium seating options, bundling fares, expanding loyalty programs and pursuing ancillary revenue.

Some carriers are also reducing growth plans, reconfiguring networks for lower-growth conditions and exploring long-haul or international routes.

Morgan Stanley said these steps represent a fundamental shift away from the traditional low-cost playbook.

Morgan Stanley stressed that it is not arguing low-cost carriers will deliver stronger growth or profitability than legacy airlines. Instead, it said the sector is at an inflection point, with 2026 shaping up as a test year for whether these changes can stabilize earnings and narrow valuation gaps.

Success could allow low-cost carriers to regain investor confidence, while failure would further concentrate value with network airlines, the brokerage added.

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