AirKarp

US ULCC earthquake: Ben Baldanza out at Spirit Airlines

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There was a fundamental shift in the way major US airlines viewed ULCCs in 2015.

The most significant figure in the establishment of the increasingly formidable US ultra low-cost carrier (ULCC) sector has exited stage right. Ben Baldanza’s abrupt departure from the CEO role at Spirit Airlines surely marks the end of what might be called the founding era of US ULCCs and will have wide reverberations in the US airline industry. Baldanza thrived as Spirit posted eye opening profit margins with a bare bones product in which passengers paid extremely low base fares, squeezed into tight seats on Airbus A320 family aircraft and paid fees for nearly everything, including both checked and carry-on bags.

Baldanza used humor to brush off complaints about the airline (I can’t imagine any other US airline CEO breaking into an impersonation of comedian Larry David in the middle of an earnings conference call). Florida-based Spirit, which was the first US airline to adopt the ULCC model in 2007, produced irreverent internet marketing videos in which puppet newscasters chronicled complaints about Spirit’s product and air travel generally. To explain its business model, it produced “bare fare” videos in which passengers provocatively disrobed.

Aside from adopting some of Spirit’s fee model, major US airlines basically ignored Spirit for most of Baldanza’s nearly decade-long run leading the airline, not considering it a legitimate competitor. Baldanza himself insisted Spirit largely ignored carriers like American, United and Delta—and even Southwest, the original US LCC. Spirit, he maintained, was creating new passengers. The business passenger flying to Chicago for an important meeting was not flying on Spirit. But the family that wanted to go to Chicago to see a Cubs game at Wrigley Field, the historic baseball stadium, was flying Spirit. Baldanza believed that if the ULCC didn’t exist, the family would stay home or perhaps drive to Chicago—but they wouldn’t consider flying.

So Spirit grew rapidly by choosing routes on which it felt this untapped market of budget flyers existed—and Delta, American, United and Southwest went about their business, figuring this group of “flyers” wasn’t reachable or worth going after.

But there was a fundamental shift in the way major US airlines viewed ULCCs in 2015, driven by two primary factors: 1) Spirit, which grew capacity 30% in 2015, reached a tipping point in size and network reach. 2) Denver-based Frontier Airlines, which adopted the ULCC model in 2014, started to find its footing.

The combined reach of Spirit and Frontier meant that American, United, Delta and Southwest were going head-to-head with ULCCs on numerous routes. American president Scott Kirby said in October that 28% of American’s domestic capacity overlaps with Spirit’s and 11% of American’s domestic ASMs overlap with Frontier’s. He noted that Spirit operates 50 flights a day from Dallas/Fort Worth and is American’s number two competitor at DFW. Spirit is American’s number three competitor at Chicago O’Hare.

So American and the other big airlines last year started aggressively matching fares with Spirit and Frontier on competitive routes. That helped significantly drive down Spirit’s unit revenue performance. Delta in late 2015 rolled out a new tiered fare structure offering a basic low fare option, and American and United are both planning to do something similar this year. United is working on making sure “we are a competitive option for anyone traveling by air,” acting CEO Brett Hart told me in Chicago last month when discussing the new fare options United is planning to roll out in 2016.

“We are not prepared to concede that any of our customers should fly our competitor over our product,” Hart added. “We look forward to being competitive at all levels.”

In the face of all this, Baldanza struck a defiant, stick-to-the-strategy tone. Wall Street balked: Spirit’s stock price was down by as much as 60% at one point in 2015 and ended the year about half as valuable as it was when 2015 started. Notably, Spirit’s stock price jumped 8.8% in the first 24 hours after Baldanza’s departure was announced.

With Baldanza out and former AirTran CEO Bob Fornaro now calling the shots at Spirit, what to expect? My sense is that Spirit—and the US ULCC sector—will move from the founding era to the competition era. By that I mean Spirit and Frontier will no longer view themselves as disinterested in competition with American, United, Delta and Southwest and accept that they are now directly competing for US budget travelers—not just creating new passengers. Even if Spirit was truly creating new passengers over the last several years, those passengers now exist, have gotten a taste of flying and will look around for the best deal.

For Spirit, I suspect this new era will mean a more refined tone in its marketing and perhaps a more refined product. It may mean slowing growth a bit to allow its unit revenue performance to recover. And, of course, it could mean merger talks with Frontier, which Baldanza was known to not be keen on. Frontier chairman Bill Franke and president Barry Biffle both have ties to Spirit.

Allegiant Air, the Las Vegas-based ULCC that flies from small markets like Allentown, Pennsylvania to leisure destinations, may be the last niche, competes-mostly-against-itself player left in the US airline market. I would expect it to remain independent, though if Spirit or Frontier get the consolidation bug, don’t rule anything out.

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