Spirit Airlines announced that it is going to be the second ultra low-cost carrier (ULCC) to enter the Seattle market, launching “double-daily (twice per day)” flights to Las Vegas and Los Angeles at the end of March. This move is on top of Frontier, which flies to Denver from Sea-Tac. These two routes are logical for Spirit, as they have a heavy amount of leisure traffic, a demographic that likes Spirit’s low-price, fee-heavy model.
Seattle is still dominated by Alaska Airlines, which had 45% domestic capacity share at the end of 2014, but Delta has started growing capacity there, climbing to 17% (and rising) at the end of last year. This kind of battle between partners is unusual. Alaska has a strong hold on the Pacific Northwest, but little traffic elsewhere in the country, so they’ve signed partnerships with US carriers from more than one major alliance, including American and Delta (I’ve heard them self-described as the prostitute of the airline industry, willing to partner with anyone.). Thus, Delta’s incursion into its frenemy’s geography was a major faux pas in airline etiquette, but profits are profits, and if Thanksgiving is a little awkward this year, so be it.
Frontier is an unusual ULCC. With its genesis in both failed regional and network carriers, it came equipped with a high cost structure. Part of that problem stems from the fact that it has so much connecting traffic through Denver, which is almost 10X as large as Dulles, its next largest city (per OAG). Connections are expensive for the airline, so it has worked on paring down smaller destinations that encouraged passengers to transfer in Denver. It has provided only minimal competition for the carriers in Seattle, since Denver is the only airport that it services non-stop.
Spirit is a whole new ballgame. Spirit originated with a low cost structure, and its growth has made those costs go even lower. Costs are measured as a function of the amount of seat-miles flown (flying one seat one mile, whether it has a butt in it or not), known as CASM. With the denominator growing quickly, the output goes lower. But times are changing for Spirit. When they first launched, nobody challenged them because they were so small and frankly, few people actually want to fly Spirit. But their prices are so low that nobody can resist a bargain (although whether Spirit is truly a bargain after all the fees is up for debate). Before long, however, they began to have an impact in the markets where they were flying. Delta implemented “basic fares,” a no-frills fare similar to Spirit’s base fares, but American was too busy digging out of bankruptcy and its merger hole. Before American declared bankruptcy in 2011, Spirit served three cities out of Dallas, AA’s biggest hub. Today, they serve 25. Airlines learned quickly that if they don’t have a product (or a fare) to match Spirit’s, Spirit will grow in their markets and drive down prices even further. So this past year, American began to match Spirit. Given a choice of carriers at the same price, passengers moved from no-frills Spirit to some-frills American. As the competition hurt their earnings, Spirit’s stock price began to plummet, now down by more than 50% year-to-date. Clearly, the competitors’ game plan for dealing with Spirit has changed. The ULCC, which went public at $12 per share in 2011 and climbed to over $80 by late-2014, now trades at $36. Ouch.
Seattle represents another entry into the Pacific Northwest region that has historically had minimal low-cost competition. True, Southwest does fly to a handful of cities from the airport, but the traditional low-cost carriers and the network carriers have learned to work and play well together, with neither trying to destroy the other’s business model.
And while a ULCC argues that it actually makes the market better for all airlines, by stimulating low-fare traffic that otherwise would not have flown, the fact remains that the network carriers are forced to match Spirit’s low sticker price, or face the growth that American saw in Dallas. Spirit only has 5% overall market share there, but if you look only at the routes it flies, that share quadruples. Since non-stop “origination and departure (O&D)” traffic is generally the most profitable (Nobody likes to connect.), that 20% number is painful.
Two cities is the airline equivalent of dipping its toe in the water for Spirit. They will be happy to let Alaska and Delta fight it out for the business and connecting traffic while they try to scoop up the most price-sensitive customers. After its experience with Delta and American, Spirit has to be prepared for the competitors at Sea-Tac to match it immediately. This should be an interesting battle to watch but, if Spirit manages to survive in the city, Seattle passengers will have another way to get around the country inexpensively.