U.S. airlines’ big debt may soon equate to higher fares

Large U.S. airlines are carrying about $20 more debt per passenger than before the pandemic, according to the chief executive officer of Frontier Group Holdings Inc., who predicts the carriers will start addressing those obligations with higher fares.

“How long can that last?” asked Barry Biffle, CEO of ultra-low-cost Frontier Airlines. “They either have to raise their leisure fares or you reduce capacity so you can raise prices.”

U.S. carriers amassed roughly $60 billion in new debt last year to contend with the collapse in business from the pandemic.

Their interest expense is likely to reach $20.7 billion through 2025, according to the trade group Airlines for America.

Frontier’s debt rose about $1 billion, or $1 a passenger, by the same accounting, according to the company.

U.S. airlines also face higher costs now and into next year from crew training, pricier jet fuel, and rising airport and aircraft-maintenance expenses.

“Cost issues remain topical and continue to run hot with our view that pressures will be more elevated into 2022 than Street estimates suggest,” MKM Partners analyst Conor Cunningham wrote in a Nov. 18 note to clients.

Fares are expected to rise 3.3% next year and 3.4% in 2023, according to a business travel forecast released Nov. 17 by travel manager CWT and the Global Business Travel Association.

Because airline capacity remains constrained compared with 2019, business and leisure travelers are competing for seats, the pair said.

“This will continue to exert pressure on airfare prices in 2022, as they move in unison with demand. If demand increases faster than capacity returns, price increases could outpace these forecasted increases,” they said.

In 2020, large airlines like United Airlines and American Airlines pivoted their networks to attract more leisure travelers in the absence of business traffic.

They also deployed international wide-body jets on several domestic routes as many countries’ borders closed.

Analysts have begun to wonder whether leisure-focused carriers like Frontier and Spirit Airlines will reap a benefit from the potential return of corporate road warriors next year as the majors retreat from some leisure flying.

Biffle said the industry will respond quickly if corporate trips return en masse.

If business travel comes back to at least 80% of the 2019 level, “then you can see the big guys chase business traffic,” he said in a wide-ranging interview Thursday. “If it’s not back, or something less than 80%, then they’re going to have to raise their leisure prices even more.”

Frontier remains in expansion mode, with plans to triple its fleet to 272 Airbus SE jets by the end of 2029, including 91 A321neos the company ordered this month at the Dubai Air Show.

The purchase was part of a wider 255-jet buying spree by private equity firm Indigo Partners, the company’s largest shareholder.

That order includes 18 of the A321XLR, a variant that Airbus launched two years ago with a longer range of 4,700 nautical miles.

The distance – as long as eight hours of flying time – would allow Frontier to begin transcontinental U.S. service and to consider European destinations like Ireland and the U.K., along with new routes to South America, Biffle said.

Frontier’s XLR deliveries start in 2025, and Biffle said the carrier will decide on some routes in late 2023.

“We’re going to put the airplane where we can make the most money,” he said.