Budget airlines want to go premium. That’s easier said than done.

The pioneer of low-cost air travel, Southwest Airlines, unveiled a big overhaul of its operating strategy this summer, which includes the introduction of rows with more legroom. Shortly after, Florida-based Spirit Airlines said it would offer premium services starting in August. Options include simple seat selection and onboard Wi-Fi—but also blocked middle seats and cabins with extra comfort.

In the airline industry, the full-service model exemplified by Delta Air Lines uses hub-and-spoke networks to fill as many higher-margin premium cabins as possible and only then seeks to occupy the cheaper seats. Conversely, low-cost players use dirt-cheap fares to engineer new travel demand for specific point-to-point routes.

Historically, the latter has been the better investment, because air travel is a commoditized, low-margin service: Surveys have consistently found that price is the No. 1 priority when booking a flight, followed by punctuality. Only 10% to 15% of fliers have ever paid for the comfort of a premium cabin, and a majority of those did so by relying on corporate travel budgets, which tend to be axed during downturns.

An investor who bought $100 in shares of Continental Airlines when it emerged from its umpteenth bankruptcy in 1993 and rolled them over into United Airlines stock when both carriers merged in 2010 has a bit more than $300 today. The equivalent investment in Southwest in 1993 is now worth around $500. The low-cost airline held its own much better during the post-9/11 crisis, and had an impressive run during the pre-Covid-19 aviation boom.

When the pandemic hit, most in the industry assumed history would repeat itself. This is why, in March 2021, Spirit’s stock had almost recovered and Southwest’s was near a record high. Then, everything went wrong.

Low-cost carriers were unable to keep costs low, because of parts and fuel inflation, labor shortages and delays in the delivery of more fuel-efficient aircraft. Also, a surprising trend emerged: Leisure fliers went upscale, forking over an extra $300 for some extra legroom, priority booking and more snacks—the so-called premium economy class, which sits between coach and business.

Until last year, budget airlines could afford to dismiss this as a fad fueled by Covid-era stimulus programs. Ever since, executives have been forced to consider that the extra comfort discovered during the days of social distancing and blocked middle seats might have changed how consumers see air travel, particularly millennials who have grown up and joined the ranks of the wealthy.

Investors are also showing a preference for airlines—such as Delta—with a superior experience. Their profit margins are narrower than in 2019, because premium leisure fliers can’t replace price-insensitive corporate travelers. But the likes of Southwest and Spirit are doing much worse. Their shares are now down 54% and 93% from pre-Covid levels, respectively, and investors harbor doubts about Spirit’s very survival.

In Canada, Jetlines recently filed for creditor protection, as did Lynx Air in February.

To outfly the storm, low-cost carriers are pivoting toward the hybrid model of combining discounted fares with more amenities.

The most salient follower of this playbook is New York-based JetBlue Airways, which deploys its Mint premium class in trans-Atlantic and select coast-to-coast flights. On JetBlue’s latest earnings call, executives suggested that Mint could expand further. Southwest, by not charging ancillary fees for everything, has always been positioned a notch above the “ultralow-cost" Spirit and Frontier, even though the latter has been offering “stretch seats" since 2013. In Europe, EasyJet and IAG-owned Vueling also feature seats with extra legroom.

But getting some of these airlines associated with a premium product is far from straightforward: According to the American Customer Satisfaction Index, Spirit and Frontier are more reviled than even broadband providers such as AT&T Internet. Plus, they might not have the know-how required to deliver the right boarding experience, in-flight entertainment and refurbished cabins.

Not to mention, this all costs a lot of money, which underscores the larger issue: The hybrid model often means higher fares.

A focus on maximizing how much each passenger pays isn’t easy to mix with casting as wide a net as possible. A carrier that offers premium cabins has a harder time filling planes. It also tends to develop a bias toward crowded markets at the expense of trying to find new ponds in which to fish. Even before Southwest during the pandemic in 2020 attempted to gain beachheads in Chicago’s O’Hare and Houston’s Bush Intercontinental—from which it has recently reduced and dismantled, respectively—it was already flying farther and increasing its presence in big cities.

EasyJet has pursued such a strategy for longer, yet the bump in passenger yields gained from entering hubs such as Milan Malpensa and Madrid Barajas came with extra costs, and didn’t lead to a sustained catch-up with Ryanair’s operating margins. Yes, EasyJet has done better this year but, zooming out, it is the Dublin-based powerhouse, with its focus on small airports, no-frills offerings and low unit costs, that has been the place to be in terms of return on equity.

Admittedly, Southwest’s situation is different. Before the pandemic, 35% of its revenues already came from corporate travel, which makes a small upsell less of a stretch. In the U.S., it takes longer than in Europe to travel between densely populated areas, lessening the appeal of extremely bare-bones flights. And Boeing’s delays in delivering the smallest variant of the 737 MAX have led Dallas-based Southwest to be stuck with many aircraft that are larger than their routes warrant. A premium section might be a clever way to use the extra space.

Nevertheless, more revenue generation looks like the wrong cure for today’s ills. Contrary to the narrative that budget travel is over, ultralow-cost carriers have far higher sales now than in 2019, and more passengers.

The reason U.S. airfares were 8% cheaper in July than five years ago, according to official data, is lack of capacity control. In the midst of post-Covid optimism, executives aggressively expanded routes.

Airlines are now trying to roll that back, but it takes time: The number of scheduled seats on U.S. domestic flights is 7% above 2019 levels, data by Cirium Diio Mi shows, and ultralow-cost players have increased them 52%.

Demand, too, is now easing as consumers have gotten “revenge travel" out of their systems.

To be sure, the upscaling trend remains robust, and budget airlines can’t ignore it. Before assuming the economics of the industry have changed forever, though, they should remember how to play to their existing strengths.

Write to Jon Sindreu at jon.sindreu@wsj.com