As America’s most profitable, notorious airline, Spirit Airlines is obsessively focused on one value proposition for customers: flying from point A to point B safely at the lowest price. The company’s operating margins regularly top all other US carriers by 8%+, and profit per plane can be 40% greater. For the ultra-price-sensitive customer, Spirit makes flying possible when the only affordable alternatives are long bus rides or not traveling at all. These “discretionary” flyers are not easy to attract, but Spirit does so by driving a near-perfect alignment between its business and operating models. Spirit runs a ruthlessly low-cost business through 3 key operational elements: unbundled fares, minimal customer service, and aircraft design.
Flying is usually an all-inclusive experience: pay for the ticket upfront, and proceed to “enjoy your flight.” Spirit’s unbundled fares means its ticket price only includes an unspecified seat in the plane and room for one personal carry-on item. Everything else costs extra. Unbundling the fare adds value on both the revenue and cost side of the business. The base fare generates demand among consumers by offering them the lowest price possible for a 100% “no-frills” experience. Additional fees on top of the base fee certainly boost revenue, but more importantly, they incentivize changes in customer behavior that enhance operational efficiency.
For example, when water is free, ~100% of passengers ask for it. At Spirit’s $3 price tag, demand for water is much lower than 100%, so Spirit saves on costs in storing and serving beverages. Charging passengers to print boarding passes reduces demand to print at the airport and in turn, reduces the need for investment in building and staffing printing kiosks. Charging passengers for both carry-on and checked bags reduces total flight freight and in turn, reduces passenger boarding time and baggage handling cost while increasing fuel efficiency. Charging customers to join its loyalty program means fewer people join and in turn, less customer service support (i.e. labor) is required.
In fact, terrible minimal customer service is a tenet of Spirit’s price-focused business strategy. Not maintaining adequate service employees obviously reduces labor cost, but a more interesting side effect is that the deficiency generates free publicity, thereby reducing marketing expense. When ConsumerReports ranked Spirit as the worst airline, CBS invited Spirit CEO Ben Baldanza for an interview to discuss its bad ratings. As the reporter says to Baldanza, “I gotta hand it to you for being here because most CEOs, if they had been rated at the bottom of the list, wouldn’t say ‘let’s go on CBS this morning.’” But since Spirit’s strategy is to compete on price alone, publicity about anything other than “high base fares” is good publicity. High-quality journalistic pieces and YouTube rants about the awfulness of Spirit abound all over the web, with only two things in common: no mention of high base fares and lots of views. When the company refused to issue a refund to a dying veteran who no longer needed to fly Spirit for a medical procedure, every major news outlet, from Fox News to the Economist, covered the story for days, eliciting thousands of Tweets and comments from potential future Spirit customers who’d never heard of the company before.
At its core, Spirit has made several aircraft selection/customization decisions to further create value. Its fleet consists of only one type of plane, so it has a fully interchangeable flight crew without any cross-training expense. Spirit’s planes also refitted for greater capacity to increase profitability per flight; its A320s contain 178 unreclinable seats vs. the standard 150. None are upgraded with in-flight entertainment systems or wifi capability. And to generate just a tad more revenue, overhead cabins and seat-back trays are plastered with advertisements. In fact, only a huge union protest stopped management from picking ad-covered uniforms for the crew.
All these operational strategies have yielded impressive profitability that has enabled Spirit to expand aggressively, as the fastest-growing North American airline. From servicing mostly the Southeast, Spirit has doubled capacity since 2010 and added cross-continental flights (see route maps below).
Naturally, expansion to new markets entails both business and operating model adaptations. Customers may care only about price on sub-3-hour flights, but they will demand better service on anything longer. Still, considering how this guy got 29,000 views on YouTube for teaching people to “hack” Spirit for even lower fares, and this lady got 68,000 for “How to fly without fees,” we can safely assume that the ultra-price-sensitive Spirit customer base is not shrinking anytime soon.