Spirit Airlines: It’s a love/hate relationship…

Spirit Airlines operates on a paradoxical paradigm. Despite high levels of customer dissatisfaction, it is the fastest growing and most profitable US airline. How is the “most hated airline in the world” able to pull this off?

In an attempt to be a cost conscious business student in a long distance relationship, I chose to fly Spirit Airlines for the first time to visit my partner in Miami. The cost of a flight from Boston to Miami? $70.

Like many others, I postulated that this was too good to be true. It wasn’t until after my purchase that I realized how Spirit made this possible. I was not fond of my experience on the airline but to be honest, would certainly fly it again – primarily because my wallet is so grateful.

Spirit Airlines operates on a paradoxical paradigm. In a Consumers Report published survey, Spirit came in dead last out of all carriers rated – yet is the fastest growing and most profitable domestic airline, in terms of operating margin and return on invested capital. What explains this phenomenon for the ‘most hated airline in the world’ and how are they able to pull this off?

Consumer Affairs Report
Spirit’s One Star RatingConsumer Affairs Report

Low costs and revealed preferences

The company’s business model is centered on using lower fares to stimulate travel demand among people who are desperate for a cheaper alternative or would otherwise not fly. The lower Spirit pushes its cost, the lower the fare price it can accept while simultaneously earning a robust margin.

Spirit is in many ways the antithesis of the traditional airline by flipping the model of providing comfort and service on its head by stripping the experience of all the amenities consumers are accustomed to. The fare price captures only the value of the seat; other services such as picking a seat, checking-in in person, checked bags and even water among other things carry an additional fee. Traditional airline pricing builds most of these costs into the fare and essentially charges the customer for these amenities regardless of whether or not they use them.

Infograph on Spirit's 'Bare Fare' Program
Spirit’s ‘Bare Fare’ Program

Spirit is able to capture cost savings by charging customers only for what they use. Other airlines claim that their checked bags are free but the reality is that their tickets cost, on average, $60-70 more. Bags add a huge cost to airlines for multiple reasons. In addition to the extra fuel needed due to heavier cargo, airlines need to pay for the labor, the bag belt at the airport, insurance to cover broken bags, etc. Sprit shows their customers that they are valued not through the amenities they are familiar with but rather through the low prices offered.

 Given the common complaints voiced by consumers and the plethora of damning survey results, one would assume that Spirit is heading for disaster but that appears to be far from the case. This can be attributed to the gap between stated preferences and revealed preferences. Although customers, myself included, are quick to voice our frustrations about the experience – many of us are quick to book Spirit again if it leads to material cost savings. Spirit is able to target a large portion of the consumer segment that says that they, above all else, want the lowest possible fare.

Spirit Revenue Components - Wall Street Journal
Spirit Revenue Components – Wall Street Journal

Spirit, though unconventional in the American landscape, is in many ways seeking to emulate other low-cost bargain airlines such as Ryanair and Air Asia. Despite the exorbitant about of disdain for the firm, it has proven to be a success with profit margins almost double that of many competitors. Spirit’s profit margin is at roughly 11.7% while American Airlines operates at a margin of 6.8% and both Delta and United operate at roughly 3.0%.

A changing landscape

With all that said, it is critical for Spirit to sustain this competitive advantage in an increasingly competitive sector. 2015 has proved to be a challenging year for Spirit with stock prices tumbling by more than 50%. This is attributed in part to American Airlines’ aggressive price matching-strategy that has deeply cut into Spirit’s revenues and profits. However, the caveat here is that American’s significantly higher costs will make it tremendously difficult to sustain this strategy. As a result, well-managed companies with sustainably much lower costs than their competitors tend to do very well over time – just look at Wal-Mart and Costco over the past few decades.

Illustration by Marc Rosenthal
Illustration by Marc Rosenthal

There are many who are willing to put up with various inconveniences and/or minimal service levels to save money. As airfares are rising across the board, due primarily to consolidation, many Americans may decide that saving $100 or more is worth a bit of momentary indignity.

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5 thoughts on “Spirit Airlines: It’s a love/hate relationship…

  1. Great article. Spirit has done a good job of taking a page out of Steve Jobs’ playbook and realizing that customers don’t know what they want. When you asked most airline passengers with surveys or various marketing tools, they would undoubtedly respond ‘I want better service, more features, bigger seats, free food, free booze, more legroom, etc’. But, when it comes down to it, we are cheap. Airline passengers are a particularly fickle bunch and speak with their wallets when choosing an airline–and they choose Spirit.

    Once Spirit identified this key insight, they aligned their operational model around it quite effectively as you outlined above.

  2. Thank you for this interesting article. Do you think that Spirit’s competitive advantage is sustainable ? From the article, it sounds to me like Spirit’s genius was in pricing, i.e. separating the seat price from all the other services. Do you think it is very difficult for Spirit’s competitors to migrate to a similar pricing model that has proved to be popular with consumers. If they did, given the massive scale of some of the competitors and the economies that come with that, do you think Spirit would still be able to maintain double digit margins and stay on its current growth trajectory?

  3. Hi – great article. I completely agree with Spirit being “the most hated but most travelled” airline. I have had similar experiences with Ryanair (being charged 70 euros because I forgot to print my boarding pass in advance).

    That said, Indigo airlines, a low cost player in India has consistently provided great service while maintaining very low prices. It does this by maintaining a single type of fleet (low complexity and high standardisation in operations), leasing rather than buying planes, flying very specific routes, flying to and from airports that have lower taxes, using non-peak hour slots at the airports etc. Do you think some of these could be applicable to spirit to drop costs further and spend some of the savings on customer service? Or would you think that customers would prefer to have the entire savings passed on to them and not have any fringe benefits at all?

  4. I totally agree with Pluto! Reading this reminded me of Ryanair in Europe. Taking it to the extreme, I believe Ryanair even charges for the use of bathrooms. I think this business model is great in giving consumers choice and truly capturing a different segment in the willingness to pay curve. I wonder if there are any operational things other than essentially decomposing all the fees and services Sprit Airlines have done, perhaps in terms of its fleets. One example might be, assuming the consumers choosing to fly Sprit Airlines all want to minimize their expenses, they should have less luggage in their cargo. I wonder if Spirit have found ways to either reduce the cargo space or monetize the extra space they have. Would be interesting to see what other operational or design changes they have made to make their business model sustainable. Additionally, what prevents another carrier from copying this strategy?

  5. Thank you for the great article. I always hold doubt over the business model of discounted airline. They are a differentiated play in the market vs. Delta or United. They play in completely different consumer segments – personal vs. business, low cost vs. experience. American Airline’s price matching strategy is not necessarily wise since they are completely different players. But want is Spirit’s true competitive advantage? What truly differentiate them vs. other discounted airlines? In this segment, consumers only value low price so in the end, the operator with the lowest cost will win but still can only achieve a low margin due to competition if it doesn’t have true distinct competitive advantage.

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