Summary
The low-cost airline model is under pressure, but that does not mean affordable air travel has no future. In this episode, Avy and Michael examine what makes discount pricing work, why some airlines struggle to sustain it, and how cost structure, customer value, and product mix shape long-term results.
Key takeaways
- A low-price strategy needs a structural cost advantage that competitors cannot easily copy.
- Low-cost demand is real, especially as household budgets tighten, but demand alone does not create a healthy business.
- Full-service airlines can support low fares through premium mix, including first class and premium economy.
- AI can reduce operating costs and improve customer experience, but its value should not automatically be given away through lower prices.
- Strong pricing decisions require three views at once: customer value, company financials, and market conditions.
The “there can only be one” problem
The discussion starts with a reference to Highlander: there can only be one. That idea fits the low-cost pricing game surprisingly well.
In many industries, companies want to be known as the cheapest provider. But only one business can truly own that position. Everyone else is competing for second place while trying to carry a similar cost base.
The recent financial trouble at Spirit Airlines brought this issue into focus. Some competitors see an opportunity to capture Spirit’s customers and volume. Others see the situation as evidence that the ultra-low-cost model is difficult to sustain.
Both reactions may contain some truth. The market clearly has customers who need low fares. The harder question is whether a provider can serve those customers while maintaining a cost structure that supports the business.
Low prices require a real cost advantage
If a company wants to win by being the cheapest, it cannot rely on temporary discounts or optimistic forecasts. It needs a structural cost advantage.
That advantage might come from:
- Lower labor or operating costs.
- More efficient processes and technology.
- Better aircraft, distribution, or supplier agreements.
- Higher asset utilization.
- A simpler product with fewer included services.
The advantage also has to last. If a competitor can copy it quickly, the price position will disappear. If the business is losing money on every transaction, volume only makes the problem larger.
Bankruptcy protection can create an opportunity to reset the cost base. A company may renegotiate labor agreements, revisit supplier contracts, simplify operations, and use AI to reduce manual work. That can produce a stronger business, but it is not guaranteed. The new model still has to match customer demand and market realities.
This is where Revenue Management Labs takes a practical view. AI can help identify patterns, reduce analysis time, and improve operating decisions. But it works best when embedded in a customized pricing model and guided by people who understand the industry, financials, and execution challenges.
Why full-service airlines can offer low fares
It is too simple to conclude that low-cost air travel cannot work. There is a large customer segment that needs affordable fares, and that segment may grow as personal budgets become tighter.
The more useful distinction is between a pure low-cost provider and a company with a broader product mix.
A full-service airline can offer a very low basic fare with restrictions such as:
- No included carry-on bag.
- Limited seat selection.
- Fewer changes or refunds.
- Lower boarding priority.
- Less flexibility overall.
At the same time, the airline may have customers paying for first class, premium economy, regular economy, extra bags, and other services. That mix gives it more control over the total profit and loss statement.
Some low fares may produce limited margin, or even a loss, while premium customers and add-on purchases support the overall flight economics. The airline is not relying on one price point or one type of customer.
A pure low-cost carrier has less room to absorb mistakes. It must be highly disciplined on costs, capacity, route decisions, and pricing. There is no premium segment to help balance the numbers.
Mix can open a market without damaging the brand
Product mix is not only an airline issue. It can be a strategic lever in consumer goods, software, manufacturing, distribution, and business services.
Consider beer. Craft brewers generally cannot compete in value beer because large producers have economies of scale that reduce their unit costs. A craft producer selling at the same price may lose money before the product even reaches the customer.
The larger producer, however, can serve several segments with different products and price points. This creates scale and allows the business to capture more demand.
B2B companies often overlook a similar opportunity. They may dismiss lower-priced work as a commodity business, without considering whether a carefully designed offering could create scale or introduce new customers.
The approach needs to be deliberate. A low-end product that looks too similar to the core offer can weaken the brand or shift existing customers to a cheaper option. But a clear tier, limited-scope service, or simplified package can reach a market that the main offer does not serve.
AI creates savings, but also creates value
AI adds another layer to the pricing question. A company may use AI to reduce call center staffing, automate routine requests, or shorten the time customers spend waiting for help.
That produces real cost savings. It can also create customer value by making service faster and easier.
The challenge is deciding how much of that benefit should appear in the price. Customers may argue that lower costs should lead to lower rates. That is not always the right answer.
If AI simply removes cost from a process without improving the customer experience, passing some savings through may be expected. But if it delivers faster resolution, better availability, and more reliable service, it is creating additional value too.
The right decision depends on the company’s market position, alternatives available to customers, and the role of the service in the overall offer. AI should support sharper pricing decisions, not replace pricing judgment.
The three-part pricing check
The episode closes with a useful reminder: value-based pricing matters, but it is not enough on its own.
Every pricing decision should consider three areas:
| Pricing lens | Key question |
|---|---|
| Customer value | What economic or practical benefit does the offer create? |
| Financials | Can the business deliver it profitably and sustainably? |
| Market context | What are competitors, customers, and market conditions doing? |
Ignore customer value, and the offer may become a commodity. Ignore the financials, and the business may sell profitably in theory but lose money in practice. Ignore the market, and the price may be disconnected from what buyers will accept.
Revenue Management Labs brings these perspectives together through industry-specific analysis, AI-supported models, and hands-on implementation. The goal is not simply to recommend a price. It is to build a pricing approach that teams can use, customers understand, and financial results can support.
Low-cost pricing can work. But being cheap is not a strategy by itself. It works only when the cost base, product design, customer value, and market position all hold together.
