Almost Every Large U.S. Airline Soon Will Have First Class
Except Southwest — that's weird, right? Also today: Frontier is teasing profitability next year, and Air France-KLM and Lufthansa Group both want Tap Air Portugal.
Dear readers,
We've reached August, and like many of you, I'm taking a vacation.1 Before I go, I’ll share some of the more interesting things I have learned recently from earnings reports.
Now that airlines have digested and accepted the reality of higher fuel prices, U.S. carriers are once again discussing more prosaic topics in earnings calls, such as their plans to install first class seats (almost every U.S. airline will have them by next year), and their promises of better earnings ahead.
Across the Atlantic, I’m intrigued by what I see as a brewing rivalry between Carsten Spohr and Ben Smith over who can capture the big prize in this round of consolidation: a hefty slice of TAP Air Portugal that the government is putting up for sale.2
Let's get into it.
Allegiant has always had rich customers. Now it is leaning into them.
Allegiant never really embraced the ULCC label the way its competitors did (for example, Frontier uses ULCC as its ticker symbol). But low unit costs have been a key part of its business model since the beginning (CASM-ex fuel was 6.22 cents in 2019), so I always lumped it in with the others.
I can’t do that anymore. Chief commercial officer Drew Wells told analysts this week that he has a new name for Allegiant’s business model. During the carrier’s second-quarter earnings call, he said that it competes in the "smart value area of the industry."
Allegiant is adding free drinks in economy class and first class on new Boeing 737 Max deliveries (it has about 30 firm airplanes remaining from its 2022 order for 50). Allegiant First will have eight seats3, though the airline will be crafty in adding them; the airplanes will lose two economy seats from their LOPA (190 seats to 188).
This is a logical progression for Allegiant, which has touted for years how many of its customers are flying to second homes and expensive vacations in Florida and Las Vegas. These are people with “household incomes meaningfully over $100,000,” Wells said, who are willing to pay for premium products and the convenience of nonstop flights. Wells said this segment frequently buys Allegiant’s extra-legroom seats, and buyers of extra-legroom seats tend to end up as repeat customers.
“We started [Allegiant Extra] in 2018, 2019 as a test across four aircraft and never could have dreamed it would have expanded to the success that we’ve seen over the last two or three years,” he said. “It really opened the door, at least to me, to say, ‘hey, there’s more that we can provide that gives value to the customer.’”
This recent decision to offer free drinks to all passengers uses similar logic. Allegiant hasn't been a punitive, ‘we hate our customer’-type airline in at least a dozen years (even then, its problem was operational reliability, not ruthless nickel-and-diming), but now it is really pivoting into that "value" space.
“The Sun Country brand and the Allegiant brand are very interested in customer experience and exploring this void” in the market, Wells said.
I've heard that providing free drinks is expensive when accounting for transportation costs, but CFO BJ Neal downplayed the expense. “On the cost side, it's not material, at least for the remainder of this year,” he told analysts.
How long until Southwest adds first class?
Setting aside all-economy Avelo, which has such a zest for frugality that it doesn’t even sell drinks on board (though water is free), by next year Southwest will be the only U.S. passenger airline without first class. As one senior executive at another U.S. airline said in a text to me: "I’m sure their HQ isn’t happy to be on par with Avelo’s seating product.“
I poked around at Southwest, and while I suspect it eventually will add first class as it chases premium revenue, I don't sense an announcement is imminent. Southwest is moving faster than before Elliott Investment Management woke it from its inertia, but I think it wants to digest its two recent cabin moves (advanced seat assignments and extra-legroom seating) before it considers recliners. It also is developing a lounge program that likely eats up considerable corporate bandwidth.
Let’s also remember that all the latest airlines to introduce first class — Frontier, JetBlue, and Allegiant — had years of data on premium economy sales to consult. JetBlue waited 18 years (probably 10 years too many) between adding extra-legroom seats and adopting domestic first class. Meanwhile, Frontier created its Stretch extra-legroom section in 2012, and then a blocked-middle seat premium section in 2024.
Southwest also is gigantic compared to the others, and its project would be more complex than Allegiant’s limited expansion. Allegiant can get away with adding recliners only on new deliveries, because it bases aircraft in various cities and they usually go out and back. I don’t think that works for a sprawling airline like Southwest with its huge footprint, unless it wants to disappoint customers with tail swaps.
First class might also require Southwest to re-think its digital and loyalty strategy. Yes, premium is hot today, but that’s not only because people like wider seats with extra legroom. The biggest airlines have become very sophisticated with how they merchandise products. They know when to sell seats in advance for big prices and they know when to unload them at the last minute to customers who want to buy-up.
A buy-up program requires the technology and know-how to make it work. Or a company can contract with Plusgrade, but typically the bigger U.S. airlines do it themselves, and building that platform takes time. The Big 3 (plus Alaska) also design their loyalty programs to promote upgrades to better seats — something Southwest doesn’t do. (Of course, these airlines would prefer to sell the seats, but not every flight has the demand.)
This stuff can be fixed, but airlines don’t have unlimited resources. Still, I think recliners will come — and not only because Southwest must be losing customers (and missing revenue) on its longer flights. Southwest has been on a partnership binge, and while I once chided its executives for negotiating only with eighth-rate airlines (sorry about that comment) that treat air travel as a commodity, some newer partners are major global premium airlines, including Turkish and Singapore Airlines. If Southwest wants those partnerships to grow, it probably needs true premium seating.
Can Frontier make a profit?
I learned in journalism school that I should never use clichés. But I love a good one. And when I look at Frontier's future, I think of this one: when the tide goes out, we learn who has been swimming naked.
Let me explain. This year, through June, Frontier booked roughly $94 million in sale-leaseback gains, which it uses (under accounting rules) to lower its operating expenses. Executives said the airline expects to realize another $50-60 million in gains during the third quarter. As it has grown, Frontier repeatedly has used these gains to make its operating expenses appear lower than they should be. Last year, Frontier recognized about $300 million from its sale-leaseback business.
Soon, though, that tide will be going out. On the second quarter earnings call on July 29, CEO Jimmy Dempsey said the fleet size will barely change next year so the airline can "mature into itself and improve operational performance.“
Executives said they’re hopeful they can still make money next year despite losing benefits from sale-leasebacks. Frontier last made a full-year profit in 2024 (net income of $85 million), though its result was helped by $294 million in sale-leaseback gains.
“If you look at '27 based upon our fleet plan, there's little to no sale-leaseback gains in there and we're targeting profitability in '27," CFO Mark Mitchell said.
I think there's a chance Frontier again will make a profit, as its main competitor no longer exists (Frontier will grow capacity 17-18 percent year-over-year in the third quarter to take advantage of that). Still, with the loss of sale-leaseback gains, plus fuel prices that could remain high next year, that’s not a sure thing.
There’s one other item I found interesting from Dempsey’s remarks. Like Wells, he prefers another unique name for Frontier’s niche — “the high-value carrier space.”4
Now, to what I think is a budding Euro CEO rivalry.
Has Lufthansa Group made a mistake with its branding?
At Lufthansa Group’s head office in Frankfurt, top executives have decreed that they want to brand all the group’s airlines in two ways: by their actual name (Austrian, for example), and then as a member of the Lufthansa Group.
According to reports, flight attendants at Swiss (a notoriously proud national airline) have complained that they're now required to mention the Lufthansa Group in cabin announcements. Stuff like that is small-ball stuff, but I wonder if Lufthansa Group will come to regret its branding decisions now that is competing with Air France-KLM for the opportunity to buy a major stake in TAP Air Portugal — a stake that comes with access to a well-placed hub that can act as a connector to South America and Africa.
In a normal transaction, a board would not care about branding and would simply choose the best offer. But TAP is fully government-owned, and in most countries, ministers care deeply about making sure national airlines continue to fly the flag across the world (and they also want to maintain key nonstop links to trading partners).
Ben Smith knows this well. Smith used his group's half-year earnings call on July 30 to poke at Lufthansa Group — and as he did, I suspect he was speaking directly to bureaucrats in Lisbon. Smith prefers each of his airlines to stand on its own, with customers sometimes unaware they belong to the same group.
“We have a head office for KLM next to Amsterdam Schiphol," Smith said. "We have the brand secure, which was a big concern at the time. … We've invested a lot of money into the KLM brand, and it has paid off. We've maintained the strategic jobs and those people who add a lot of value to the strength of the group, and they are based in Amsterdam, so we have a good balance of talent throughout our network.”
Smith, who is something of a savant at negotiating with unions, pointed out that at least one of TAP's labor unions has concerns over Lufthansa's bid, given that Lufthansa Group sometimes takes a harsh stance against workers.
“The TAP Air Portugal unions have publicly come out,” Smith said. “They are nervous about what they're seeing with the other bidder. We've had good alignment with our staff on our strategies over the last eight years.” (On his August 4 earnings call, Spohr downplayed that issue, saying it's only one union, and that group “is very closely aligned to our German pilot union, so think about that one.”)
There is some question, though, about why these airlines want a non-controlling stake in TAP. Air France-KLM CFO Steven Zaat responded that its bid for 44.9-49.9 percent of the company is enough to make the deal profitable. “We will have the synergies you usually have on the network, on the cargo, on the MRO, [and] we can completely work together,” he said. “It is a minority share, but we can cooperate together with TAP to optimize both companies.”
Zaat said this is a different situation than SAS. While it soon expects to have majority control of SAS, it now only has 19.9 percent so it lacks influence on some major decisions.5 “The synergies on SAS ... came due to the fact that they moved from the Star Alliance to SkyTeam,” Zaat said. “We have codeshares and we work together. We don't work together on the loyalty. We don't work together on network organization. We don't work together on pricing.”
I’m guessing Air France-KLM will win TAP, only because Lufthansa Group recently picked up a Southern Europe hub when it took a stake in ITA (it soon will have majority ownership). But Spohr said this is a different situation because Lisbon is a connecting hub for South America, whereas Rome is a more traditional European hub, albeit in a more southern location than other Lufthansa Group hubs.
He also claimed that Portugal would benefit if TAP remains in Star Alliance. If Lufthansa Group won the bid, TAP also would significantly tighten its relationship with United, the largest U.S. airline, and that might be intriguing to the government.
As for the dig about Lufthansa's centralized approach, Spohr shrugged it off. “Under the motto from a group of airlines to one airline group, we're making Lufthansa Group more efficient and more profitable,” he said.
We all make mistakes, right?
As someone from American kindly pointed out, I made a mistake in my last story about American's four pillars strategy. Executives earlier discussed their pillars — on customer experience, growing the global network, driving premium revenue, and leading in loyalty — at an investor conference in March. I regret the error.
Speaking of mistakes, the Global Business Travel Association held its annual conference in Chicago this week. Given how much revenue it has lost in major cities and its fight with United at O’Hare, American took this event seriously. Unfortunately, a competitor texted me this picture that the airline posted on social media.
That's not Chicago.6
My poor family (including my children, ages 6 and 9) are being dragged to two continents and will take 10 flights over two-and-half weeks. I hope we make it!
Isn’t it wild that TAP Air Portugal is a big prize? It’s a relatively small airline that is 100 percent owned by the national government. And it doesn’t exactly have the best track record. But Southern Europe is hot now, and the Europe-to-South America market is probably even hotter, as Iberia keeps telling us.
On a recent episode of The Air Show, I gave Breeze CCO Lukas Johnson a hard time about the name of the airline’s premium cabin, called Breeze Ascent. While he tells me the cabin is selling well, and I believe that, I think companies generally should go with straight-forward naming conventions I like that Allegiant didn’t go with a fancy name for the cabin, but tells customers exactly what it is. That should help it win new customers who won’t wonder what they’re buying.
We shouldn’t be surprised that both carriers prefer the term, “value airline.” In June 2025, they were founding members of the Association of Value Airlines, a lobbying group in Washington, D.C.
This includes SAS’ June 30 firm order for 18 Airbus A330-900s. It came nine days before CEO Anko van der Werff announced he soon will leave for Air Canada. It also came as Air France-KLM awaits nears final control of SAS, under its agreement to acquire another 40.6 percent of the airline. I was surprised by the timing of the order, figuring van der Werff would let Smith have the final say on fleet growth. Smith said he’s not upset. “It's a very efficient airplane,” he said. “We studied it extensively. We didn't buy it for the Air France-KLM group, but we were fully aware of its strength. For SAS and its geographical position and its growth opportunities, we're very happy that's the aircraft they selected.”
This is the second time in less than 18 months that American has used a picture of the wrong city in a post about its commitment to Chicago. Again, we all make mistakes, and sometimes we make the same mistake twice. I don’t bring this up to make fun of American. I include it because I think it shows us how closely other airlines are watching for mistakes at American, and how much they delight in texting me about even the slightest errors.