Spirit is still the lowest cost operator in the US airline industry.
“Reputation does matter.” New Spirit Airlines president and CEO Bob Fornaro repeated that line, or a variation of it, a number of times during a recent conference call with analysts. Ben Baldanza, the pioneering CEO of the Florida-based ultra-low cost carrier (ULCC) whom Fornaro replaced in January, reveled in Spirit’s reputation as a “cheap” airline. Under Baldanza’s watch, puppet newscasters mockingly chronicled complaints about Spirit in irreverent online videos produced by the airline.
Baldanza believed those complaining about Spirit mostly just didn’t get the ULCC’s business model, not understanding that Spirit was the “fast food” alternative to mainline US airlines (a McDonald’s in the sky). In contrast, Fornaro believes Spirit’s biggest problem is its reputation. He wants to “provide low fares with a good reputation.” Fornaro mentioned on-time performance most prominently. He also brought up aircraft cleanliness multiple times unprompted. Getting passengers to their destinations on time and keeping aircraft clean are “basics” that Spirit must get right, he said.
“Some of the criticism we’ve received is warranted,” Fornaro conceded, adding, “We can smooth out some rough edges … I think the key thing for us is to make sure our reputation improves.”
Fornaro doesn’t want to reinvent the wheel. “The model works,” he said. “I do not feel a need to make sweeping changes, but I do have a few ideas.”
Spirit is still the lowest cost operator in the US airline industry, posting a CASM ex-fuel of 5.15 cents in 2015. (Southwest Airlines’ 2015 CASM ex-fuel, as a point of comparison, was 8.51 cents. Niche ULCC Allegiant Air, at 5.81 cents, has the closest CASM ex-fuel to Spirit’s.) That is not something Fornaro wants to change.
And the airline’s famous fee structure remains stable. Its average non-ticket revenue (ancillary fees) per passenger flight segment in 2015 was $54.24, just off from $55.03 in 2014. But where the ULCC got hurt badly in 2015 was its base fares—average ticket revenue per passenger flight segment plunged 18.5% year-over-year to just $65.25.
That was due to other US airlines finally taking Spirit seriously and aggressively matching the ULCC’s fares. The airline’s 2015 RASM fell 14.7% year-over-year and yield was down 12.8%. That’s what spooked Wall Street, leading to Spirit’s stock price losing half its value in 2015 and, ultimately, Baldanza’s exit.
So what does Fornaro plan to do? He still appears to be in the assessment phase of his tenure leading the ULCC, but his comments during the recent conference call with analysts offer some clues:
He won’t abandon the basic business model. “Our ultra low-cost structure is the foundation of our competitive advantage,” CFO Ted Christie said. After all, Spirit did earn a net profit of $317.2 million in 2015, up 40.7% over 2014.
Let carriers like American Airlines, which posted a CASM ex-fuel of 9.99 centsin 2015 (almost double Spirit’s), sweat a little about matching fares with Spirit. American can only afford to discount so much of its capacity. “It’s a very, very expensive proposition to try and match our fares,” Fornaro said.
Acknowledge—as Baldanza never really did—that carriers like American are now direct competitors. 2012, 2013 and 2014—when major US airlines mostly ignored Spirit—“were very unique times in the [US market’s] post-merger period, but we have to plan for a more competitive environment,” Fornaro said. Christie noted, “Fares in our markets remain very low and we expect them to remain very low.”
Given that competition, work to improve Spirit’s day-to-day execution of the “basics”—clean planes, on-time performance and, importantly, recovering more quickly from service disruptions. Fornaro said he can live with the passenger who complains about having to pay bag fees, which are fundamental to Spirit’s model, but he can’t live with a passenger paying the bag fee and then waiting for days or longer to receive a mishandled bag.
Rethink the route network so that Spirit doesn’t operate so many routes with such infrequency that one or two cancelled flights makes operational recovery difficult. Also don’t focus so much on routes on which the major US airlines are operating—one way to mitigate the price-matching of carriers like American. “Over time we will be just as interested in looking at midsize markets and small markets to leisure destinations routes,” Fornaro said.
Slow growth a little. Fornaro said he won’t repeat the breakneck pace of 2015’s capacity expansion. “We do not expect to repeat a 30% growth rate in the future, but we are comfortable with a 15%-20% [annual growth] range,” he explained. “I fully … support Spirit being a high-growth carrier for the foreseeable future.” The airline is slated to grow its fleet by 14 aircraft in 2016. Spirit ended 2015 with 79 aircraft in its all-Airbus A320 family fleet and plans to take delivery of three A320s, nine A321s and five Pratt & Whitney PW1100G-powered A320neos while retiring three A319s in 2016. It has 29 A319s in its fleet that it plans to begin phasing out this year. However, Christie said Airbus has warned Spirit “to anticipate several months’ delays for one or more of the A320neos scheduled for delivery in 2016.” As a result, he added, Spirit is “working through a couple of contingency plans,” which couldmean keeping the three A319s in the fleet. Full-year capacity is expected to be up about 20% in 2016 vs. 2015.
Pursue a merger? Former AirTran Airways CEO Fornaro was akeyplayer inthe negotiations that led to the 2011 Southwest-AirTran merger, so his pick to lead Spirit by the airline’s board of directors hassparkedtalk that thecarriermay explore a merger with fellow ULCC Frontier Airlines or even Allegiant. Talk of US ULCC consolidation is “mostly speculation,” Fornaro told analysts. “There is really nothing to report ... nothing for us to deal with or discuss at this point.”