UpstartSpirit Airlines (
) has thrived by offering rock-bottom fares on a limited number
of routes in the U.S. and Latin America.
So how is it that in an industry known for suicidal price
wars, Spirit's low fares generally produce little fare-cutting
It may just be because Spirit offers a novel approach to
"Instead of trying to be a major player, they try to be a
minor player," said Imperial Capital analyst Bob McAdoo.
Trying to be "a minor player" doesn't sound like the typical
no-holds-barred corporate push to grab the gold. But in Spirit's
case, it's worked just fine, thank you.
Since its May 2011 IPO, shares have climbed from 12 to nearly
30 as Spirit has managed to grow profit in a cutthroat
In the first quarter of this year, Spirit grew revenue by
almost 23% over the prior year. Earnings came in at 45 cents
compared with 33 cents the year before. For its last 12 months,
Spirit reported earnings of $1.55. And since it leases its
planes, Spirit boasts a debt-free balance sheet.
Spirit first earned its flight wings by challenging American
Airlines on routes to the Caribbean and Latin America out of
Since then , it has built a limited network of destinations in
the U.S. Key cities include Fort Lauderdale, Dallas, Chicago,
Atlantic City and Las Vegas. Spirit's low base fares typically
sit atop Web searches for the cheapest seats.
But Spirit's head-turning fares are apparently not threatening
enough to provoke a fare-slashing response from its larger
CEO Ben Baldanza offered an explanation:
"We're not trying to steal traffic from the major carriers,"
Baldanza told IBD. "We're not trying to be competitive with the
bigger airlines with the traffic they care most about."
That traffic is the business traveler willing to pay high
ticket prices for some combination of convenience and luxury.
Spirit goes after the more price-conscious leisure traveler who
might not even fly if ticket prices are too high. "We're an
airline built to carry travelers who pay for their tickets
themselves," he explained.
The Spirit formula involves offering new service on
high-traffic routes where there's plenty of room for fare
"We're looking to deploy our airplanes where we can lower
prevailing rates by 25% to 30%, and when we do that, we stimulate
a lot of new traffic," said Baldanza. So Spirit positions itself
as a market expander, not a traffic thief.
Spirit may only offer one or two flights a day out of a city
that larger carriers serve with 10 or more. If you want to fly to
Dallas out of the Miami-Fort Lauderdale area, you can choose from
16 American Airlines flights, notes Avondale Partners analyst
Fred Lowrance. But if you want to fly Spirit, you have only two
daily choices, both out of Fort Lauderdale.
So Spirit's modest goal of luring fare-conscious fliers -- but
not going after the attractive business traveler -- helps keeps
it out of price wars.
Besides, fare wars would be financial suicide for the major
"If American were to come down to Spirit fares, Spirit would
still be generating 20% profit, but American would be losing
millions of dollars a day," said Lowrance.
So how is it that Spirit can afford to undercut the fares of
One key reason: Spirit unbundles services.
On Spirit flights, you'll pay extra for stored baggage. You
might even pay as much as $100 to store carry-on luggage in an
overhead bin. Food is an extra, of course. But you might also
have to pay $10 just to have an attendant print your boarding
Such ancillary charges now account for more than 40% of
Spirit's revenue. That's a lot of nickels and dimes.
Still, even after tacking on all those extra charges, Spirit
fares are often lower. Spirit can live with those fares because
it keeps its own flying costs down.
Baldanza focuses on efficient utilization of all assets,
beginning with plane real estate. "We put as many people on a
plane as the FAA allows," he notes
Spirit packs 178 seats onto the Airbus A320. Jet Blue has just
150 seats, some carriers even fewer. But don't more seats mean
less leg room, he was asked. "It's less leg room, but you pay a
lower price," he replied.
"We also use our gates very efficiently, said Baldanza. "We
operate 12 flights with a single gate."
Larger airlines, explains Lowrance, have planes sitting idle
at gates for longer periods. That's because the large carriers
fly through hubs, and must have planes available on the ground
for numerous connecting flights. Sprint, by contrast, only flies
Spirit even squeezes efficiency out of the clock. "You can
utilize underutilized hours of the day," said Baldanza. A Spirit
flight may take off at 10 p.m. That's not an appealing departure
time for business travelers, but one cost-conscious travelers
might accept in return for a cheap seat.
At 49 planes, Spirit's fleet is small, especially when
compared with a large carrier like Delta with more than 700
planes. But Baldanza expects to grow capacity by roughly 20% a
year. And he sees ample opportunity to deploy his growing fleet
of leased Airbus planes on new routes.
"We have identified more than 400 routes that we do not fly
where we could profitably deploy our business model," he told
Spirit has properly recognized the importance of price to many
But safety is even more important. As long as Spirit keeps its
safety record up, its pricing will lure travelers.
But analysts warn that fare-cutting airlines may be more
vulnerable to consumer backlash resulting from accidents than
large carriers. Though the FAA sets standard maintenance
procedures for all carriers, low-fare airlines could be damaged
by the perception that they cut corners to slash costs.
Fare wars could become an issue if Spirit deviates from its
niche strategy and grows overly ambitious, warned analyst
"If they tried to dominate someone else's market with eight
flights a day, they would likely have a pretty different kind of
reaction," he said.
"They need to stick to what works," McAdoo concluded.