Bob Fornaro, the new CEO of Spirit Airlines, delivered his first investor call address today, and while he didn’t announce any major changes, he gave us some insight into what changes the company would look to make. The subject of the call was the company’s financial performance in 2015.
The “Old Spirit Airlines”
Once upon a time, Spirit was managed by Ben Baldanza under the philosophy that ticket price was all that mattered. Complaints? Spirit reveled in them. This is the company that once had a promotion called “Hate Thousand Miles,” which gave you 8,000 miles for registering a complaint about them (or any other airline) on their site. Bad publicity? No such thing. He didn’t have much of an apology after accidentally hitting “reply to all” on an email, sending the letter writer (and, I assume, the intended employee) a note that said, “we owe him nothing as far as I’m concerned. Let him tell the world how bad we are. He’s never flown us before anyway and will be back when we save him a penny.”
The problem is, people actually expect to get to where they are going, and Spirit wasn’t doing a particularly good job of meeting expectations. Year to date through November, 2015, Spirit only managed to get 69% of their flights to their destinations on-time, including an astounding 50% on-time arrival rate in June.
Complaints? Turns out they do matter. For the first six months of 2015, United was the subject of 1,271 DOT complaints. Spirit, which is a fraction of United’s size, generated 937. On a per passenger basis, Spirit had about four times as many as its larger competitors. When you can’t get your flights where they are going when they are supposed to be there, it not only ticks off your passengers but costs you money. Goodbye, Mr. Baldanza.
The “New Spirit Airlines”
In comes Bob Fornaro. The former CEO of AirTran gave his first public performance today to investors, with the tenor of the call being summed up in the following statement:
“I know many of you are anxious to hear my vision for Spirit and changes that may be forthcoming. I do not feel a need to make sweeping changes but I do have a few ideas on how we can further improve. One of the primary areas we’re focused on is improvement in the overall customer experience and we have made this a top priority for 2016. This includes improving our on-time performance and maintaining a high completion factor as well as improving our customer service metrics.”
That sounds like basic blocking and tackling to most of us, but for Spirit, it is a change from their previous game plan. It will mean keeping more spare parts on hand, reducing peak flying and yes, hiring a few more people. All of those things will cost the company money, which had previously been anathema to the business plan.
But Fees Aren’t Going Away…
“As for improving our customer service metrics, that does not mean we are changing the business model.It’s already a proven and successful business model…”
One interesting statistic that caught my attention: Spirit Airlines generated revenue per passenger segment of $111.78, down $16.13 from the fourth quarter of 2014. But here’s what stands out: While ticket price accounted for just over 50% of the segment sales, it accounted for 97% of that $16.13 decline. In other words, after other carriers started to match Spirit’s fares, Spirit’s overall ticket revenue dropped precipitously, while their fee revenue was almost exactly the same. Thus, the company’s path to earnings remains the same: They just want to get you on the plane. Once they have you, they’ll be able to sell you everything from a seat assignment to a bottle of water.
“We do not expect to repeat a 30% growth rate in the future but we are very comfortable with the growth rate in the range of 15% and 20%. As a normal course of business, we’re in a mix of updating our five-year fleet plan which begins with a detailed review of gauge and mix.”
The dirty little secret in the airline industry is that the best way to lower your costs is to grow. Huh? Simply put, costs in the airline industry are measured on a “seat-mile” basis, or how much it costs the airline to fly one seat one mile. So there is a cost to adding planes and flight attendants, but growing 30% doesn’t mean that you need to add 30% more mechanics, 30% of a CEO, etc. The problem is that revenue is measured the same way, so unit revenue for the airline is also on the downtrend. Of course, Spirit uses that number as marketing material: “Hey, it looks like we’re actually lowering our prices!” And 15-20% growth is still five times as fast as the legacy carriers are growing.
“I think going forward we’re going to be much more open to a broader view of routes. Over the last couple of years, we focused on mostly big to other big markets, which really put us in legacy carrier hubs. I think over time we will be just as interested in looking at midsize markets and small markets to leisure.”
“I think the environment again has changed a little bit. For several years, we were in a unique period of time where capacity was well below, let’s say, the previous peak, which was 2008. A couple of carriers were going through post-merger integration another carrier was still coming out of bankruptcy and it created, perhaps, a reduced competitive environment. And so many of the opportunities that we chose were in hub-to-hub [markets] and it produced really good results…”
Interesting. In the answer to two separate questions, Mr. Fornaro referenced the fact that it might not be a good idea to challenge an airline in its own hub. And he should know, as a former AirTran executive that was constantly fighting with Delta in Atlanta. While it might seem smart to go into markets where fares are highest, such as a legacy carrier’s hub, all you’re going to do is force them to match you, and their balance sheets are much stronger than yours. Legacy carriers are like snakes; if you don’t bother them, they won’t bother you. Probably. While carriers were integrating or facing other issues, there was an opportunity to make money. Now? Not so much?
The west and midwest seem to be the biggest opportunity for them. They noted a dearth of ultra low-cost carriers on the west coast, as well as in the center of the country. I’m curious as to what their thoughts on the midwest are. Spirit is a leisure carrier, and the major un-hubbed (or formerly-hubbed) cities of Cincinnati and Cleveland are heavier on business travel. But there is probably an opportunity for north-south traffic in California, and Spirit is moving into Seattle.
The Bottom Line
Spirit is going to change, although exactly what those changes will entail is not yet clear. But at least talking about the customer experience is a good start.
Cover photo credit: Creative Commons