Spirit Airlines Case Study

Spirit Airlines is known to consumers as an ultra-low-cost-carrier (ULCC) modeling its?business strategy similarly to Ryanair.? It is known for its low airfare offerings that directly?compete with some of the more well-known airlines in the United States.? Consumers looking to?save a buck, find Spirit Airlines an attractive alternative for their travel needs when comparing?them against their competition.? To give credit where credit is due, the founding of ULCC?business strategies is largely due in part to the The Airline Deregulation Act of 1978.??Deregulation enabled the ability for new airlines like Spirit to offer and drive competition?between airlines to provide services on the most coveted travel route destinations.? This article will provide a case study on Spirit Airlines and their rise as one of the United States fastest?growing airlines.? We will further dive into the services they offer, fleets they manage, financial?structures, promotional segmentation, competition, and profit history.?

?Spirit Airline Origins

The roots of Spirit can be traced back to the establishment of the Clipper Trucking?Company in 1964.? Starting out as a specialized auto parts delivery service, it was transformed?into Charter One in 1983 after acquiring turboprop airplanes offering gambling trips to Atlantic?City, New Jersey from Chicago, Illinois (Hardiman, 2022).? As Charter One expanded?its route network and implemented the use of jet aircraft, it changed its name to what we know?now as Spirit Airlines in 1992.? This began the fortification of Spirit offering scheduled?commercial services to consumers in the Midwest with destinations to Florida and the Northeast.

Spirit struggled to gain a competitive hold against rivals and it was consistently losing?money to the tone of $110 million in deficits by the Spring of 2004.? An infusion of investment?money is what kept Spirit Airlines alive during this treacherous time with investors planning to?overhaul its fleet and intentions to offer it as a public stock.? Flight Global (2006) states, “Indigo?Partners, took a controlling stake in Spirit earlier this year (2006) and has now increased it,?Oaktree Capital Management put another tranche of money into the carrier as Indigo came in,?bringing its total investment in Spirit since 2004 to $195 million”.? Indigo Partners management?was the missing piece in Spirit’s transition to becoming a ULCC as it focused on providing?services to consumers who were looking for the lowest airfare prices.? This strategy worked, as?Spirit Airline has become one of the fastest growing airlines over the past 20 years working its?way into the top 10 airlines as shown in Figure 1.? Spirit Airlines has been averaging ASM?growth of nearly 20% per year (last 3 years) and increasing capacity growth (17% – 19%)?per year due to further expansion domestically and internationally (Center for Aviation, 2019).

Figure 1.?

Top 10 Domestic Carriers US January 2018 – October 2018

Note: Figure 1. provides a pie chart on the Top 10 Domestic Carriers in the United States.? As?show, Spirit Airlines has worked its way into the top 10 over the last two decades transporting?over 3% (21,863.935 passengers) of all airline market share between January and October?2018. Source: (Rodriguez, 2021)

Route Architecture

Spirit Airline’s primary focus is the accomplishment of its domestic route offerings.? The?majority of their flights are situated in the United States with routes flying to the East and West?coast serving cities such as Seattle, Los Angeles, Denver, Kansas City, New York, Atlanta, and?Orlando.? They also offer several routes flying to the Caribbean and South America to?destinations such as, Los Cabos, Guatemala City, Panama City, Bogota, and Medellin.? That?being said, 84% of Spirit’s route architecture is entangled with direct head to head competition?from other airlines, Southwest Airlines being its biggest competitor by overlapping on 134 routes?out of 269 (Airline Network News and Analysis, 2020).? Referencing Figure 2. Spirit operates?out of several hubs located throughout the United States with its main hub being Fort?Lauderdale, Florida.? Its hubs enable a consistent and connected supported aircraft flow with?locations in Atlanta, Atlantic City, Chicago, Dallas, Detroit, Houston, Las Vegas, Miami, and?Orlando.? Spirit is advantageous in its route offerings as it not only serves some of the biggest?and most congested airports in the country but, it also offers services to smaller airports were?major carriers offer no services due to minimal cost advantages.

Figure 2.?

Spirit Airline Route Architecture

Note: Figure 2. provides a map with the route offerings of Spirit Airlines. Source: (Centre for?Aviation, 2016).?

Spirit Airlines continues to grow its domestic and international market offerings after?recognizing their lack of route offerings by only serving 52 destinations in the continental United?States.? Kirby via Casey (2021) states, “to put that in perspective, that's less than half of the next?two largest ULCCs, even though we're larger than them. We think that there’s a lot of?opportunity to add a lot more dots to the map”.? They have already started to expand routes at?destinations such as Las Vegas and Philadelphia in order to offer more services in the United?States. Internationally, they have expanded their services into Mexico by adding routes to other?travel destinations such as Puerto Vallarta.? Continued expansion to favorable destinations will?only help Spirit’s ability to grow as an airline.

Spirit Airline’s Fleet

As per their website (Spirit, n.d.), Spirit Airlines operates an all-Airbus fleet that prides?itself on being one of the most fuel efficient fleets.? They operate single aisle A319, A320, and?A321 aircraft capable of seating 145 to 228 passengers.? Its main workhorse is derived of its?A319 fleet, which was once in the running to being phased out by the more efficient A320neo?aircraft.? Within the next year, Spirit will upgrade its fleet with 24 A320neo orders scheduled to?be delivered.? Even with these new aircraft coming, Spirit decided not to retire the A319 and?continue its operations.? Singh (2021) states, “Spirit wanted to grow faster than its new deliveries?would be able to fuel, particularly in the second half of 2021, which includes most of the summer?season and busy Thanksgiving and Christmas holiday periods”.? Currently, Spirit operates a fleet?of 168 aircraft at an average age of 6.9 years.???

Product, Fare, and Cost Structure

Spirit offers an attractive business model by offering low-cost fares that targets the most?price conscious consumers.? Rather than offer bundled services (checked bags, seat assignment,?etc…) like its competitors, Spirit unbundles these services giving control to the consumer to?purchase the options they require.? They target a customer segment who is keen on saving money?that other airlines cannot compete against due to the loss of revenue if they did.? Consumers who?only purchase the base fare are subject to ancillary fees which is were a lot of their revenue is?derived from.? Unbundled charges range from, checked baggage, carry-on baggage, seat?assignment, customer service help, boarding pass printing, in-flight services, and more.? The?expectation is placed on the traveler to have everything prepared and paid for on their upcoming?flight, the usage of customer service help incurs charges were required.?

That being said, Ancillary services in 2015 accounted for 43.4 percent of its total revenue?(The Travel Pro, 2016).? Figure 3. details different segments in which the most ancillary fees are?collected.? Although cheap fares are popular, their business strategy of ancillary fees does not?

Figure 3.?

Spirit Airlines Ancillary Revenue

Note: Figure 3. is a pie chart representing the ancillary fee revenue split for Spirit Airlines.??Checked and cabin baggage is the highest earning ancillary fee for the airline. Source: (Samaha,?2014)

come without controversy.? Spirit is one of the most complained about airlines in the industry.??Between 2009 and 2013, Spirit amassed an average of 8 complaints per 100,000 enplanements.??This is over twice the amount of complaints of competitor airlines during that time.? Recently,?Spirit found themselves in a legal dispute with customers who had purchased airfare on with?online travel agencies (OTA) in which they were imposed unannounced carry-on baggage fees.??

At some points, these carry-on fees amounted to more than the cost of the base fare itself.???Cost structure strategies may play a part in the cause for complaints.? A ULCC like Spirit?is focused on keeping costs lower than its competition as it is the main basis of its business?strategy.? Spirit prides itself in having the highest aircraft utilization compared to its competition.??Its aircraft is structured to fit the most seats with customers paying base fares plus ancillary fees?to generate the revenue.? Spirit’s gauges its cost advantages by using a cost per available seat?mile (CASM) indicator.? CASM is the measure of the cost, rather than the revenue of producing?available seat miles (ASM) (Cook & Billig, 2017).? As shown in Figure 4. CASM for Spirit was?the lowest of any airline in its market with competitors coming in at up to 92% higher.??

Achieving these low costs advantages are a product of a carefully managed strategies.? Its

Figure 4.?

Lowest Cost Producers (CASM) in 2014

Note: Spirit airlines in 2014 was the lowest cost producer amongst its market competitors.?Source: (Seeking Alpha, 2015).?

implementation of an all Airbus fleet comes with many distinct advantages.? Costs to train flight?crews are minimized due in part that they can interchange between aircraft type due to similarity.??Another advantage is that the support of maintenance and part infrastructure is less complex do?to having similar aircraft types which helps keep costs down.? Along with prioritizing seat?capacity on their aircraft, Spirit’s daily aircraft utilization average is 12.7 hours compared to?competitors like Jetblue and Southwest who come in at 11.8 and 10.9 hours respectively (TOM,?2015).? This is further enhanced by its unbundling strategy as ancillary fees discourage passenger?from obtaining extra services.? This minimizes passenger boarding and exiting time as there are?fewer bags to offload and fewer services to replenish upon arrival to airport gates.??

Distribution, Promotion, and Targeted Passenger Segment

There are many distribution avenues that airlines use to make their airfare ticket sales?available to the public.? For ULCCs like Spirit, the more common modes of distribution are?direct connection to their website, global distribution systems (GDS), and new distribution?capability (NDC) which is where most of your online travel agents (OTA) are found.? For this?reason, the majority of consumers find themselves buying their airline tickets online.? The Spirit?website alone accounted for 62.6% of airfare sales in 2021.? GDS and NDS accounted for 31.4%?sales while phone customer support services sold 6% of tickets as shown in Figure 5.

Figure 5.?

Spirit Airlines Distribution Sales

Note:? Spirit sold tickets via different distribution channels demonstrating that a consumer’s?most popular way of booking was directly through their website. (Spirit Airlines, Form 10-k)

Spirit’s grasp as a leader in the ULCC market enables them to focus less on promotional?strategies.? There is no need to flaunt the lowest airfares when your consumer base already?knows what you offer.? Their current promotional strategy is named “Invest in the Guest”.? Their?focus is not to advertise low fares but to match or exceed the services of economy fares by?their competition.? Their initiative is to deliver the best value in the sky by, introducing the most?fuel efficient planes, installing ergonomic seats with more legroom, and the offering of Wi-Fi?capability on their flights (Spirit Airlines, Inc., 2022).? As mentioned previously, Spirit’s main?targeted passenger segment are travelers looking to save some money.? With very little?international services offered, travelers are looking to book the lowest domestic fares who do not?mind missing out on offered amenities.??

Competition and Profit History

Since its entry into the airline industry as a ULCC, Spirit has continued to grow and?expand its services yearly.? Its main competition is derived of other ULCC and airlines offering?economy friendly airfares.? Trends of economic turmoil like the housing crash and inflation have?been key attracters to consumers flying with Spirit.? As the economy in a country deteriorates,?there is less disposable income causing travelers to search for the lowest fares. ? Spirit operates in?a in a small area of the United States; therefore, there are not that big of a threat to the more well?established airlines in the industry.? They also do not thrive in luxurious or business offerings,?this further eliminates competition with airlines whose business models are well established to?cater and serve this consumer base.? Spirit Airlines customers are mostly traveling for leisure and?are more worried about arriving to their destination then what kind of amenities the airline is?offering.?

Spirit’s profitability as a ULLC airline has been great for business.? Spirit has had a?steady mostly positive quarterly growth since 2010.? This in part is due to the attractiveness of?their low airfare offerings.? With inflation continually rising in 2022, Spirit has seen tremendous?success in their quarterly financials.? Year on year in 2022, revenue for Spirit has risen by almost?60% with revenue reaching 1.37 Billion as of June 2022.? Figure 6. illustrates the quarterly?growth of Spirit Airlines since 2010.?

Figure 6.?

YoY Quarterly Growth of Spirit Airlines

Note. This figure illustrates the steadily positive YoY growth of Spirit Airlines since 2010.? After?negative losses due to the Covid-19 pandemic, Spirit has bounced back tremendously in the?recovery years. Source: (Macrotrends, n.d.)

Spirit Airline Success

Since is integration as a ULCC, Spirit has been an airline success story.? Spirit’s primary?target segment of price conscious travelers is viable and continually popular as disposable?income is hurt by rising inflation.? For the foreseeable future, there are no flaws in their business?methodologies unless other airlines decide to lower their fare rates.? Their adaptability to change?is sound.? As fuel costs rise they have focused on obtaining fuel-efficient aircraft to reduce their?costs. Furthermore, their “Invest in the Guest” strategy now includes ancillary amenities rivaling?the offerings of their most competitive low cost carriers (LCC).? Spirit Airlines is and will?remain a household name for consumers traveling on a budget and their continued focus on?providing air services at affordable prices will remain their most attractive strategy.??

References:

Airline Network News and Analysis. (2020). Spirit Airlines had Direct Competition on 84% of routes; Southwest is #1 by Route Overlap. Anna Aero. Retrieved October 5, 2022 from https://www.anna.aero/2020/06/29/spirit-airlines-has-direct-competition-on-84-of-routes-southwest-is-1-by-route-overlap/

Casey, D. (2021). Spirit Gears Up for Period of Massive Growth. Routes. Retrieved October 8, 2022 from https://www.routesonline.com/news/29/breaking-news/296175/spirit-gears-up-for-period-of-massive-growth/

CAPA. (2016). Spirit Airlines’ Network Changes have been more Subtle than Dramatic Under New CEO. Centre for Aviation. Retrieved October 5, 2022 from https://centreforaviation.com/analysis/reports/spirit-airlines-network-changes-have-been-more-subtle-than-dramatic-under-new-ceo-317447

CAPA. (2019). https://centreforaviation.com/analysis/reports/spirit-airlines-maturing-markets-could-create-upside-in-2020-501989

Cook, G. N., & Billig, B. G. (2017). Airline operations and management: A management textbook. Routledge. Flight Global. (2006). Airline Veteran is Spirit Air’s New Backer. Flight Global. Retrieved October 5, 2022 from https://www.flightglobal.com/airline-veteran-is-spirit-airs-new-backer-/68735.article

Hardiman, J. (2022) A Brief History of Spirit Airlines. Simple Flying. Retrieved October 8, 2022 from https://simpleflying.com/spirit-airlines-history/

Macrotrends. (n.d.). Spirit Airlines Revenue 2010-2022. Macrotrends. Retrieved October 7, 2022 from https://www.macrotrends.net/stocks/charts/SAVE/spirit-airlines/revenue

Rodriguez, C. (2021). Which U.S. Airlines Dominate the Market Share in North America? Upgraded Points. Retrieved October 5, 2022 from https://upgradedpoints.com/travel/airlines/us-airlines-marketshare-north-america/

Samaha, L. (2014). Guess Which Airlines Are Making the Most From Non-Ticket Fees? The Motley Fool. Retrieved October 6, 2022 from

https://www.fool.com/investing/general/2014/10/05/guess-which-airlines-are-making-the-most-from-non.aspx

Seeking Alpha. (2015). Spirit Airlines: Don’t Ignore Costs. Seeking Alpha. Retrieved October 6, 2022 from https://seekingalpha.com/article/2911436-spirit-airlines-dont-ignore-costs

Singh, J. (2021). Why Spirit Airlines Brought back Its Airbus A319s. Simple Flying. Retrieved October 6, 2022 from https://simpleflying.com/spirit-airlines-airbus-a319s/

Spirit. (n.d.). What Type of Aircraft Does Spirit Fly? Spirit. Retrieved October 6, 2022 from https://customersupport.spirit.com/en-us/category/article/KA-01304

Spirit Airlines. (2021). Spirit Airlines, Inc. Form 10-K. SEC. Retrieved October 7, 2022 from https://sec.report/Document/0001498710-22-000088/

Spirit Airlines, Inc. (2022). Spirit Airlines Embarks on a New Daily Service at Norfolk. Cision. Retrieved October 7, 2022 from https://www.prnewswire.com/news-releases/spirit-airlines-embarks-on-new-daily-service-at-norfolk-301639485.html

The Travel Pro. (2016). Us Airlines Rake in Highest Amount of Ancillary Revenue. The Travel Pro. Retrieved October 6, 2022 from https://www.thetravelpro.us/2016/09/us-airlines-rake-in-highest-amount-of.html

TOM. (2015). Spirit Airlines: Ultra-Low-Cost, Ultra-Impressive-Profits. Technology and Operations Management. Retrieved October 6, 2022 from https://d3.harvard.edu/platform-rctom/submission/spirit-airlines-ultra-low-cost-ultra-impressiveprofits/#:~:text=Spirit%20describes%20itself%20as%20an,in%20the%20markets%20they%20serve .