Spirit Airlines: The airline everyone loves to hate

How an airline that consumers claim to hate continues to outperform competitors on profit margin and revenue growth

 

Spirit Airlines is a business paradox: the airline has the highest percentage of complaints per 10,000 passengers, but also boasts the best profit margins in the industry. How does an airline that consumers claim to hate continue to outperform competitors on profit margin and revenue growth? It’s because Spirit has a significant competitive advantage (low-cost tickets) due to the alignment between the business model and the operating model.

Business Model:

Spirit is an ultra-low cost airline carrier, targeting price sensitive leisure travelers who pay for their own travel. This leisure segment of the market is underserved, as the major U.S carriers focus on business travelers who care most about flight schedule and service.

Spirit believes that passengers should only pay for what they want.

Spirit Airlines competes by offering low “Bare Fares,” which is, in their own words, a seat and “gas money to get you from A to B.” The Bare Fare does not include items typically included in an airline ticket, such as beverages on the flight, carry-on baggage, and a reserved seat. These additional services are optional and come with a price tag of their own. Even with the add-ons, Spirit reports that its total all-in fares for consumers are 40% less than other major airlines.

Operating Model:

To support this low-cost business model, Spirit effectively drives operating costs down by strategically maximizing capacity and asset utilization.

    • Equipment & Labor: Spirit operates just one type of aircraft – Airbus A320s. Spirit flight crews only need to be trained on this type of aircraft, which cuts down on incremental training costs, and they can operate across all of Spirit’s fleet, allowing for maximum flight crew utilization & flexibility. In addition, some of Spirit’s personnel execute multiple roles for the airline. For example, flight attendants might also act as gate agents.
    • Maximizing capacity: Spirit’s Airbuses have the capacity to carry about 20% more passengers than their competitors. In an effort to maximize number of seats on a given plane, Spirit seats are organized in a dense configuration with minimal leg room, plus the seats don’t recline. Though uncomfortable for passenger, this lowers Spirit’s operating costs per available seat mile (or CASM). Having more passengers on Spirit’s planes allows the fixed costs to be spread over more seats, thus lowering the cost that each passenger needs to pay.
      • Passenger capacity of Airbus 320 by airline:
        • Spirit: 178
        • United: 138-150
        • Jet Blue: 150
    • Asset Utilization:
      • Flying time: Spirit’s flight schedule is quite erratic, with some routes having take-off times of 1:30am. Flying at all hours of the day and night plus turning their planes around quickly enables Spirit to maximize daily flight time and, in turn, asset utilization. Spirit has the highest daily flight time compared to other low-cost carriers: Spirit: 12.7 hours per day, Jet Blue: 11.8 hours/day, and Southwest: 10.9 hours per day.
      • Fuel Efficiency: In an effort to reduce fuel costs, Spirit strives to minimize the weight of each plane. They have cut every extra nonessential item in their passenger cabins: no television, entertainment centers or wifi, no magazines in the seat-back pocket (in fact, no seat-back pocket at all!), and only one bathroom in the coach cabin. Spirit also incentives passengers to lighten their load by applying hefty fees to checked bags and carry-on bags ($100/carry-on if you wait until the gate). These efforts have paid off: in 2014, Spirit was ranked as the most fuel efficient airline.

Costs per available seat mile (CASM) by airline: 

graph 1

Advertising: To optimize a scrappy media budget, Spirit’s advertising strategy has been to create humorous, off-color advertising in hopes that they go viral. For example, they released an advertisement for a route to Toronto with the headline “We’re not smoking crack… our fares really are this low!” which was a dig at Toronto major Rob Ford, who had recently admitted that he smoked crack. Spirit’s ads do go viral in some cases, giving them tons of earned media for a fraction of the cost of their competitors.

Conclusion: Spirit Airlines has clearly done a great job of aligning its business model to its operating model to drive down costs, while growing profit margin. And Spirit’s not overly worried about improving their reputation, though they are trying to better manage consumer expectations. According to Spirit’s CEO Ben Baldanza, “What people say and what people do are different things. And people like to save money.”

graph 2

Sources:

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5 thoughts on “Spirit Airlines: The airline everyone loves to hate

  1. This is super interesting! I have had the unpleasant experience of flying Spirit, but had never thought about it from a business perspective. I had no idea they were so well-run and effective. I wonder if they will be able to sustain this model or if they will give in to customer demand and start improving the customer experience and add costs (similar to what happened to Southwest). Also, curious how many times a customer can fly Spirit and have their weekend trip canceled or shortened by a day before they start losing them (for me it was 3)?

    1. Thanks for your comment, Meg! I’m so sorry to hear about your 3 weekends getting ruined. 🙁 I completely agree with you, but it seems that Spirit is really doubling down on these ultra-price sensitive consumers, and Spirit is assuming that their target consumers would rather be late (even a day late) versus pay high prices for flights.

      Believe it or not, there is evidence that Spirit is actually generating demand and increasing the number of fliers on certain routes. The data says that Spirit grows base traffic by 37% when adding a route (Check out the chart on the middle on this post: http://seekingalpha.com/article/3701366-spirit-airlines-is-poised-to-be-the-next-ryanair). So the Spirit management is seeing this data as support for the business model of ultra-low fares, even at the price of service.

  2. Great post! I have never flown Spirit Airlines, but I understand why the pricing model would appeal to price-sensitive customers. One question I have is why Spirit chooses to have a pay-for-service model when their all-in fares are already 40% lower than competitors, as you mentioned. We discussed in Marketing that customer perceive prices as “unfair” if they are asked to pay for something that they expect to be free (e.g., reserved seat). If they can compete head-to-head with competitors on price, why does Spirit risk dealing with the customer backlash that comes from their business model?

    But, on the other hand, I can see two additional benefits to their business model. First, they are likely very successful with infrequent travelers. If someone rarely flies, they do not have an expected service level that they can compare to Spirit. It is also less important to provide them a good customer service experience since they have a low likelihood of being a repeat customer and, therefore, a low customer lifetime value. Second, Spirit’s business model is well-designed to withstand fluctuations in the economy, which are notoriously difficult on airlines. When the economy is weak, people are less likely to fly, which decreases the entire market. But, they are also more likely to be price sensitive, which increases the market share for Spirit. This balance should them going forward.

    1. Thanks for the comment, Kim!

      In response to your question, the fact that Spirit’s all-in fares are 40% less than competitors reflects not only the operating model cost efficiency, but also the customers’ choices of not purchasing add-ins. A large portion of the 40% customer savings comes from the customer choosing not to pay for add-ons: not bring a carry-on, not to order a drink on the flight, not to reserve a seat, etc.. So I wouldn’t say that Spirit can compete head-to-head on price in a meaningful way without unbundling, but when they “unbundle” the fare, they allows customers pay significantly less if they so desire.

      But your point is well taken that customers typically don’t like this since these elements of service used to be “free” (Spirit would say they were included in the higher base fares). To combat the consumer sentiment, Spirit has named 2015 “The Year of the Consumer” and are running massive campaigns to explain the “bare fare” in an effort to manage customer expectations.

      Thanks for reading!

  3. Maggie – this was a really great post! I was always curious to learn how Spirit was able to operate (and quite profitably!) while garnering such low consumer satisfaction. I understand their target consumers are price sensitive, but do you think they could offer more services to attract the higher-end consumer as well? For example, perhaps they could charge more for seats that recline and have more leg room. Given that I am 6’4″, I would pay a premium for additional space and thus prefer to fly other commercial airlines.

    Finally, why aren’t there other airlines adopting a similar strategy? Does Southwest run a similar operating model?

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