It may have been almost two months since BA brought me out to London, but I still have some good material waiting to see the light of day. Today it’s a tour of the new British Airways First Class which is being rolled out to the fleet as we speak. I visited a mockup in the airline’s seat testing center in an overgrown hangar at Heathrow. Please excuse my horribly corny jokes, which were even worse than my usual corny jokes thanks to my not sleeping very much on the flight over the night before.

As you can see, it’s really well-done. The most impressive thing to me isn’t the seat but rather the ambience that they’ve managed to create in the cabin. The window shades just really change the feel for the better, along with several of the other touches. BA specifically avoided the completely private suite with walls like many competitors. Some will like that while others will hate it. Of course, most of us will only see the inside of this cabin if we’re redeeming miles, but if you’ve got ‘em, this looks like a good way to spend ‘em. (If it weren’t for that pesky fuel surcharge . . .)

It’s been awhile but the Cardinal is back. And he’s got some good advice for Spirit . . .

–
Spirit Airlines should be all over San Juan, PR (SJU), a leisure and VFR (visiting friends and relatives) market that has never been comprehensively attacked by a low-fare carrier. With American Airlines’ pull-down in SJU, both intra-Caribbean and mainland markets from SJU are ripe for such a carrier, and no airline is better positioned to do it than Spirit. In fact it’s kinda odd that Spirit’s not already in there, given some of the other weird stuff it’s attracted to instead.

Let’s take a step back

Spirit Airlines is one of the odder survivors in the industry. It’s been around for 30 years, but only in the past five-to-ten years has it really made that much of an impression. It started off in Detroit, flying clapped-out DC-9s and MD-80s. For a while it was run by a guy with a science doctorate, but those weren’t its best years.

Spirit hit the big time when private equity investors had the following brainwave after seeing the initial success of JetBlue – hey, why not make Spirit the next low-cost carrier (LCC) success? If David Neeleman can do this, how hard can it be? This resulted in several rounds of private equity investment to the ultimate tune of well over $200 million. Yeah, that’s a lot of fricking money to plow into a (at the time) small, crappy third-tier airline. Made the investors who threw money at Virgin America, Skybus and JetBlue look like models of sober propriety by comparison.

Turned out that in fact, it was a lot harder than the private equity investors expected. Spirit lost a ton of money (at one point, it apparently excused its flailing by blaming the MD-80 for its troubles – Spirit was in the process of getting A320 family aircraft. That alleged excuse looked pretty thin after Allegiant became the most profitable airline in the US flying, yes, MD-80s). Ultimately, a new private equity signed up in the form of Bill Franke’s Indigo, heavily diluting Oaktree, the original private equity.

Still, it was a near thing. Spirit damn near hit the wall in 2008, when it cashed in its remaining fuel hedges at the top of the fuel spike to get through a cash crunch. This was an incredibly gutsy move, essentially recognizing that if the fuel price run up was permanent, then Spirit was screwed anyway, so it might as well assume that it was temporary – taking the value of its hedges in cash, betting that fuel prices would go down – a bet it won. If only Southwest had had the same guts and cashed in its own, rather larger, fuel hedges at the same time, Southwest might not have gone through a deeply unpleasant experience later that year when it faced its own cash crunch.

Spirit’s ultimate success, after years of financial mediocrity or worse, has hinged on, essentially, two things:

• Introducing low-fare service to the Caribbean and the parts of Latin America that are closer to the US from its Ft Lauderdale (FLL) hub. This was the first time this geography has benefited from such service and Spirit deserves a lot of credit for that.
• Fairly aggressively mimicking Ryanair’s ultra-low cost carrier model. This is perhaps most evident in Spirit’s publicity strategy, where, like Ryanair, it scores free publicity by courting controversy – such as the notorious commercial featuring a young man sleeping with his best friend’s mother. But much of Spirit’s current business model is inspired by Ryanair, one way or another.

What is Spirit doing?

What’s somewhat unclear, however, is what Spirit’s longer-term network strategy might be. Some of its recent network moves make sense, others not so much.

One that makes sense is jumping onto Allegiant-style routes to FLL, especially those on which Allegiant is clearly coining money, such as Plattsburgh, NY (PBG – a gateway to Canada thanks to its proximity to Montreal). Not only can Spirit duplicate what Allegiant’s doing, it can also offer PBG customers a lot of interesting connections via FLL.

Some that make less sense are odd routes to Niagara Falls, NY and Latrobe, PA. These are close to the existing low-fare airports of Buffalo and Pittsburgh. For that reason, Spirit is not adding a lot of value to consumers in those areas. It generally makes more sense for a low-fare carrier to enter routes where there aren’t already a lot of low fares – which is what Allegiant does.

American’s disappearing San Juan hub

Which brings us to San Juan, PR (SJU). For 25 years, San Juan has been a hub for American Airlines, but American is basically throwing in the towel. The SJU hub dates back to a time when American saw itself as potentially offering all things to all people, but in the last 10 years especially, the SJU hub has been a leisure-centered anomaly in an airline that depends on higher-fare business traffic to survive.

American’s SJU hub basically collected folks from the US and connected them to all manner of Caribbean destinations. Inevitably, not many of these passengers were business travelers. It simply makes no sense for a high-cost legacy airline like American to do that. So, as the above graph shows, American is getting out (the graph shows weekly departing seats in July for the last 12 years – you get a similar decline if you look instead, at, say, January, so this decline is not restricted to just one season).

So hop to it, Spirit!

So who should be in this business? Why, an ultra-low cost carrier like Spirit. The leisure and VFR (visiting friends and relatives) business is incredibly elastic, as Spirit presumably already knows. Offer low fares and watch the number of passengers soar. There’s a little bit of low-fare service to San Juan at the moment, in the form of Spirit itself, AirTran and JetBlue on select routes to the US mainland. But no airline has ever gone after SJU in a comprehensive low-fare manner, and few markets are likely to surge quite as dramatically from the presence of a low-fare carrier.

Further, no airline has ever done any serious intra-Caribbean low-fare service. Barbados-based REDjet is supposed to be on the verge of starting such service, but so far nothing.

The Caribbean is a very interesting market to experiment with in this fashion. Existing fares are extremely high – American flew turboprops from SJU to many of the surrounding islands, but the fares were nosebleed high. Local players like Air Jamaica/Caribbean (now one and the same at a corporate level) and LIAT aren’t very strong, despite not particularly low fares. Further, many of the routes are quite short (which is good thing in an environment with increasing fuel prices, since fuel is a smaller component of the cost of short flights) yet there is, for obvious reasons, no viable competition from ground transport.

Further, no low-cost carrier has more experience in this part of the world than Spirit. They’ve already worked through many of the issues of serving markets where, for instance, web-commerce may be less developed.

So, the remaining question is, what’s Spirit waiting for, and why fool with the likes of Latrobe, PA, when there seems to be a big opportunity in SJU that appears tailor made for it? Hopefully, Spirit is simply waiting until Puerto Rico is desperate and is willing to cut them a good deal on airport costs…

–
The Cardinal is a long-time industry observer, who is currently [redacted]. He was previously a [redacted] at [redacted]. Prior to this he worked at [redacted], [redacted] and [redacted]. To his sorrow, he lives in [redacted] and in his spare time enjoys [redacted with extreme prejudice].

In the Trenches: Turnover Hurts – Intuit Small Business Blog
We had someone leave Cranky Concierge in the last couple weeks and that has made things difficult in the short run.

If you want better airline service, vote with your wallet – CNN Out of the Office
It’s easy to complain, but if you really want to see airline service and policies change, vote with your wallet.

Save Yourself (a Bundle): The Day of Ultra Low Cost Airlines Is Dawning – BNET Headwinds
With low cost carriers moving upmarket, the day of the ultra cost carrier may finally be here. Think Ryanair blanketing the US.

Rules to Encourage Airfare Ad Disclosure May Make Things Worse – BNET Headwinds
New rules to require fee disclosure in airline ads might just make things more confusing than they already are.

Southwest Computer Meltdown Uncharacteristically Left Travelers In the Dark – BNET Headwinds
Southwest had a computer meltdown when the time came to switch over to its new frequent flier program. But the strange thing was that their communication with the public was virtually non-existent. It was very strange.

In the Trenches: Managing from the Road – Intuit Small Business Blog
I’ve spent the last week and a half on the road and that makes it hard to keep the business running.

Southwest recovers from 2 glitches, snarled flights – Chicago Tribune
I spoke with the Chicago Tribune about Southwest’s lack of communication during its recent meltdown.

Why Southwest Went Silent During a Meltdown: It Didn’t Want to Make Things Worse – BNET Headwinds
I spoke with Southwest after the computer melt down to find out why the airline chose the strategy it did. I still have trouble with the path they’ve chosen.

Travel Insurance: The Revolution Won’t Be Covered – Business Week
I was asked about travel insurance, and in general, I find the policies rarely cover what you want them to.

Frontier announced its summer plans this week, and we have some interesting surprises as well as a big disappointment. The bad news (for me) is that Frontier is pulling out of Long Beach. Bummer. But there are some interesting new routes coming instead.

• Provo (50 miles south of Salt Lake City) will be served once daily from Denver with an Embraer 190
• Knoxville will be served four times a week from Denver with an Airbus A319
• Sioux Falls will be served once daily from Denver with an Embraer 190
• Minneapolis will be served twice daily (once on Sunday) from Kansas City with an Embraer 170 and 190
• San Antonio will be served five times a week from Kansas City with an Embraer 190

What do you think?

Allegiant has quietly slipped a note into a federal filing that says it wants people to be able to pay for fuel price fluctuations after a plane ticket has already been bought. And I like it. I know, you think I’m insane for saying such a thing, but there are some very good reasons why I like this. It really is good for the gambler, er, traveler.

Let me start by saying that the idea that you can buy a ticket and then be forced to pay more if fuel goes up sounds awful in theory. I mean, people save up for their trips over time, and not having certainty around how much that would cost would really destroy a lot of plans. Had that really been Allegiant’s goal, then this probably would have earned a Cranky Jackass Award. But that’s not what they’re doing. Let me take a snippet from the filing with the DOT itself.

Allegiant is considering a new pricing option for use on its website: when making a purchase, consumers would be able to choose between a traditional “locked in” fare that would not fluctuate, and a lower fare that could change before the date of travel. That lower fare could be reduced further or could increase (up to a set maximum that would be clearly disclosed) depending on changes in fuel price between the booking and travel dates. This would be a non-compulsory alternative for consumers; it would provide them another option for potential substantial savings on their trip costs and would be clearly disclosed and explained prior to any purchase.

In other words, there would be two pricing options. Let’s just throw some numbers around for the heck of it. You could pay $100 for your flight to East Bumblef**k and never have to worry about the price changing. Or you could pay $90 and then have the price fluctuate with the price of oil after. So if oil goes down from when you bought, presumably the price would go down and you’d save money. If oil goes up, the price would go up and you’d lose money. This is perfect for an airline based in Vegas, because it’s a gambler’s dream. (I wonder if they’ll hand out those sad pamphlets about gambling addiction with the sun setting on the cover?)

So why is Allegiant talking about this in a federal filing? Well there’s a proposal that would make it illegal to have post-purchase price changes. Allegiant is arguing that it would be a good thing for consumers and that one of the alternative ways to deal with this issue that has been proposed should be accepted instead. That alternative would not just allow blanket price changes, but it would have three main requirements.

1. The potential for the increase needs to be “conspicuously” disclosed to the buyer.
2. The maximum potential amount of the increase must be shown.
3. The customer would have to proactively agree to the arrangement before purchase.

Why does Allegiant want to do this? Because it allows the airline to sell a lower fare. And lower fares mean more people are willing to fly. As long as the disclosure is clear, then why not have this as an alternative? I can’t imagine myself ever wanting to take advantage of this option, but if others want to, then great. It lets Allegiant better match revenues with costs, and it gives customers the chance to decide if they want to play the game or not.