• Major airlines say premium cabins and international demand are key amid economic uncertainty.
• Budget carriers have historically lacked premium seats in favor of cheaper no-frills cabins.
• Frontier, Spirit, and Southwest are all deploying new premium strategies to generate more revenue.

Major airlines continue to prove the importance of premium cabins as budget carriers play catch-up.

First-quarter earnings from American Airlines, Delta Air Lines, and United Airlines showed slowed growth and planned capacity cuts amid economic uncertainty and diminishing demand. Less government travel and fewer US-bound tourists didn't help.

Only one carrier, United, offered any financial guidance for the rest of the year, and warned a recession could cut profits by a third.

One thing all major carriers reporting results so far can agree on is that premium and international demand are helping to keep things afloat, even as share prices crater. That's something budget carriers have only recently begun to invest heavily in.

Without first-class or business seats to offer flyers, Frontier Airlines, Spirit Airlines, and Southwest Airlines have fewer ways to compensate for decreased demand and capacity cuts.

"We anticipate softness in the domestic main cabin to continue," American CFO Devon May said in the airline's Thursday earnings call. "To partially offset this, we expect long-haul, international, and premium bookings to outperform year over year."

Delta and United said economy cabin travelers tend to be more price sensitive and may delay travel plans amid the downturn, while premium economy, business class, and first-class seats are a more resilient and significant portion of their revenue.

New premium strategies announced by a slew of budget airlines last year, like plusher seats and luxury amenities, could help generate more revenue in the long run, but installing them on planes will take time.

Mainline carriers are cashing in on premium demand

All three major carriers reported year-over-year premium revenue growth in their first-quarter earnings. American saw a 3% rise, Delta's was 7%, while United increased by 9.2%.

"I don't think we've ever had premium as a larger percent of our total revenues as we do right now," Delta president Glen Hauenstein said in the airline's April earnings call. "It's sitting very resilient."

Executives attributed this to affluent travelers still willing to pay for premium seats despite the economic environment, especially long-haul flights to Europe and Asia.

They said as much as 75% to 80% of their international revenue originates in the US, and bookings remain strong through the summer compared to the comparatively lower domestic demand.

On the other hand, low-cost airlines' historically all-economy airplanes do not have swanky first or business-class cabins and do not fly long-haul to popular international markets like London and Japan.

Budget carriers' limited revenue streams and lower profit margin offerings make it harder to account for their losses as they cut thousands of flights this year. Mainline flight reductions can be more easily offset.

Budget carriers want a piece of the premium pie

Frontier, Spirit, and Southwest started bucking their historically no-frills trend in 2024. These add-ons come at a cost and would help the budget carriers collect more revenue.

For example, Spirit revamped its premium "Big Front Seat" bundle with more perks like free snacks, alcohol, Wi-Fi, and priority check-in. Frontier added a "business-class-like" cabin where the middle seat is blocked.

Southwest plans to deploy new premium extra legroom and front row seats in 2026. It will also start charging for checked bags in May for the first time in its 50-year history, though loyalty and elite status holders will still keep the perk. Those investments likely won't show up until at least the third-quarter results, analysts said.

"There was a better way to maximize the revenue per square foot in the aircraft, which is the whole game here," Southwest CEO Bob Jordan said in Thursday's earnings call on adding premium seating.

Delta earned $5.4 billion in revenue from its economy seats and $4.7 billion from its premium cabins during the first quarter. That means its premium cabin revenue was equal to 88% of the economy class revenue despite taking up much less real estate inside the plane.

Those are the types of returns the low-cost airlines and their investors hope to get a taste of.

Expected second-quarter revenue from Delta and American ranges from down 2% to up 2%, while Southwest expects flat performance or a decrease of as much as 4% year-over-year.

Frontier's stock is down about 55% year to date, and Southwest is down 21%, outpacing the broader market. Both have pulled their full-year guidance.

Spirit shares will begin trading again on April 29 after the airline emerged from Chapter 11 bankruptcy in March.

• Airline stocks have been plummeting this year on fears of reduced demand.
• They were among the hardest hit by Trump's Wednesday tariff announcements.
• Analysts also expect ticket prices to rise for customers as a result of the sweeping tariffs.

Tariffs are spelling more bad news for airlines and passengers.

Even before Donald Trump's self-styled "Liberation Day" announcement, the big three airline stocks had fallen around a quarter in a month.

Analysts have already warned that airline customers are set to have less spending money while plane ticket prices rise. Morgan Stanley and Bank of America analysts said the effective tariff rate was about double what they expected.

With US companies paying the tariffs on items they import, prices are set to go up for Americans.

"The resulting hit to purchasing power could take real disposable personal income growth in 2Q-3Q into negative territory, and with it the risk that real consumer spending could also contract in those quarters," JPMorgan Chase's chief US economist Michael Feroli wrote in an analyst note.

Vacations aren't a necessity, so are something people can forego when they tighten their purse strings. Cruise and hotel stocks have dipped, too. Corporate travel is expected to drop as well, since the tariffs are designed to incentivize doing business at home.

Higher-than-expected tariffs have exacerbated an already dreary outlook for travel.

Delta Air Lines and United Airlines' share prices have fallen more than a third since the start of the year. American Airlines' is down 44%.

Stocks dipped on Tuesday after Jefferies analysts downgraded American Airlines and Delta Air Lines to Hold ratings.

They said consumer sentiment was at a four-year low and cited "swelling macro uncertainty." In other words, fewer people want to fly because of the state of the economy.

On Monday, Virgin Atlantic executives also warned of softening demand for Americans flying to the UK — although travel in the opposite direction remains at expected levels.

"We think that's quite a natural reaction to the general consumer uncertainty there is in the US at the minute," chief financial officer Oli Byers said in comments reported by several outlets.

The day after the tariffs were announced, the big three airline stocks dropped between 10% and 15% — compared to the broader S&P 500's 5% decline.

Airline ticket prices have been lower this year due to slower demand, but some analysts say they're set to get more expensive.

Airfares set to rise

Tariffs are set to hit planemakers with the costs ultimately being passed down to passengers.

Boeing CEO Kelly Ortberg told a Senate hearing Wednesday that 80% of its airplanes are sold to customers outside the US, and a fifth of the production materials are imported.

"Free trade is very important to us," he added.

Morningstar's analyst for aerospace and defense equities, Nicolas Owens, said: "Investors concerned that the new import tariffs might be devastating to US aerospace firms may overestimate the risk."

However, there is also the risk of retaliatory tariffs on exports. Boeing's share price fell more than 10% on Thursday.

While European rival Airbus has an assembly line in Alabama, it would still have to import parts there.

"Obviously there would be an increase of cost and most probably in price for the airlines, and therefore to the end customers," CEO Guillaume Faury said in February.

In a note Thursday, analysts at Vertical Research Partners also warned they expect airfares to get more expensive.

"Ultimately we see these cost increases being passed on to airlines, and the flying public, which logically will have a negative impact on passenger demand […] and airline profits," they wrote.

Business Insider attended a summit at Airbus' headquarters in Toulouse, France, last week. At the summit, executives spoke to reporters ahead of the tariff announcement.

"We are in an industry where I think tariffs will be very, very damaging," Faury said. "Probably more damaging to the US at first glance."

He also pointed to the effects of a 17-year dispute between the US and Europe over subsidies given to Boeing and Airbus, with tariffs imposed as a result.

"It was so bad for everybody that it came to a cease-fire," he said.

Airlines have already taken a hit as Canadians book fewer flights to the US. Europeans are also starting to lose interest in transatlantic travel, the CEO of hotel operator Accor told Bloomberg.

While airlines have yet to see a drop in demand on this route, the looming trade war could change that.