Shrinking Cost Gap Challenges U.S. LCCs

In a rapidly evolving aviation market, the operating cost gap between network carriers and low-cost carriers (LCCs) is narrowing, particularly in the U.S. This trend is making it increasingly difficult for LCCs to compete and differentiate themselves on price alone. At Routes Americas 2025 in Nassau, Bahamas, airline and airport executives discussed these disruptions and explored strategies to address rising costs and shifting customer expectations.

John Pepper, Vice President for Corporate Development and Government Affairs at U.S. LCC Allegiant, explained that increasing labor costs and other expenses have driven up the cost per available seat mile (CASM) by roughly 20%. “There’s been a close in the CASM gap between LCCs and other airlines,” Pepper noted. He emphasized that although most customers still prefer the lowest fares, the post-pandemic era has seen a “small but real” uptick in demand for premium products—a trend that places additional pressure on LCCs, which traditionally have not been able to subsidize service enhancements like network carriers.

Nacim Yala, Chief Commercial and Strategy Officer at Arajet—a Dominican Republic-based LCC—further highlighted that the cost structures of LCCs and network carriers are converging. “All the variable costs are much closer now,” Yala said. He described a market dislocation where the low-end has struggled due to inflation, leading to closures of businesses such as Dollar Stores. Meanwhile, the middle market has fared better, driving increased demand for premium travel options. This shift is prompting airlines to reconsider their strategies as they attempt to balance cost efficiency with enhanced customer service.

Beyond cost challenges, the industry is also focusing on improving the passenger experience. Brett Smith, CEO at Propeller Airports, which develops U.S. passenger terminals and co-owns the Seattle Paine Field terminal, stressed that passenger expectations have evolved significantly since the pandemic. “It’s important to treat every passenger like a first-class customer, not just a number,” he explained. At Seattle Paine Field, innovative services such as full-time concierge bag checking, cozy fireplaces, an inviting bar, and panoramic views of the airfield are now part of the travel experience. “As a private company, we can do things a lot quicker than governments can,” Smith added, emphasizing the agility of private sector solutions.

While many industry players agree that making travel less painful is in everyone’s interest, Yala pointed out that there remains a critical question of whether these improvements can justify higher fares. “I’ve not seen the data that shows more passengers are willing to pay more for that,” he said. “I still see cost as paramount.”

Frank Scremin, Vice President for Global Operational Services at Vantage Group, an airport and transportation investment firm, underlined the challenge of understanding diverse customer needs. “We are looking at how we can get more people through the airport as quickly as possible while making the experience better,” he said. Scremin stressed that different traveler segments—such as solo business travelers versus families on vacation—have distinct expectations, and tailoring the experience to meet these varied demands remains a complex task.

As the operating cost gap continues to shrink, U.S. LCCs face the dual challenge of maintaining low fares while adapting to new customer preferences. With market conditions evolving and the demand for premium products rising, airlines must innovate and invest in both cost management and customer experience to stay competitive in a dynamic aviation landscape.

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