Spirit’s Move to Phoenix Sky Harbor Shows Competition is Alive and Well

I hope you enjoyed the guest posts last week. Our baby is happy and healthy, so it’s time for me to get back to work. Today, I want to talk about the news last week that Spirit would move all service from Phoenix-Mesa Gateway airport to the main Phoenix Sky Harbor airport. While this particular move may not interest people without ties to the Valley of the Sun, it should. It shows that competition is alive and well when there’s an opportunity.

For those not familiar with the dynamics of the region, there has long been one main commercial airport to serve the area and that’s Sky Harbor.

Phoenix Airports

Sky Harbor, besides having an awesome name, also has an awesome location. It’s just east of downtown Phoenix, west of Tempe, and close by freeway to pretty much everywhere in the area. But as we all know, the Valley, as its called, has grown by leaps and bounds over the last couple decades. As people moved further out from the center, Sky Harbor became less convenient for those on the fringes.

In 1993, Williams Air Force Base was shut down. Its location way on the southeast side of Mesa seemed pretty far out there at the time, but there has been a ton of growth that way. The decision was made to turn Williams into a commercial airport, and the name was eventually changed to Phoenix-Mesa Gateway. The most natural fit was Allegiant, and Allegiant did in fact come to the airport in 2007, establishing a base there that has done well for the airline. After a few years of watching Allegiant’s service, Spirit announced it would start flying from Phoenix-Mesa Gateway to Vegas on February 9, 2012 with Dallas/Ft Worth and Ft Lauderdale following shortly after.

Spirit was a less obvious fit since it had really decided to focus more on providing very low fare service from primary airports than from secondary ones, but the airport was hungry for service and the costs to operate were incredibly low. Spirit came in but didn’t really sit still, shifting its service a lot over the last couple of years. Now it has finally decided to give up and move to Phoenix Sky Harbor where it will maintain one daily flight to Chicago/O’Hare, one to Denver, and one to Dallas/Ft Worth.

Why would Spirit make a move like this? It’s always a question of economics. Where can Spirit draw in the most profit by maximizing revenue and minimizing costs? Historically, low cost carriers have gravitated toward secondary airports because they’re cheaper. The assumption was always that low fares would get people to drive to a less convenient airport. Southwest did this and still does, but it has made a big move into major airports as well. Why? Because it’s where the higher-paying travelers are.

That doesn’t mean there is no use for alternate airports. They are still lower cost but some don’t provide nearly the same cost advantage as others. Sky Harbor hovers around the $5 to $6 per enplaned passenger range but it will climb up toward $8 thanks to all the money they’re spending right now on things like inter-terminal trains. But $8 is still very low when it comes to big city airports where a single digit number is a rarity. (You aren’t going to see Spirit moving its Ft Lauderdale operation to the extremely expensive Miami Airport anytime soon.0

So let’s look at the Phoenix area. Even if Mesa’s operating costs were nothing (and I imagine that’s not far off), could Spirit go over to Sky Harbor and make $8 more per ticket than it could in Mesa? If so, the move makes sense.

One of the reasons not to make this move is for competitive reasons. There are a ton of airlines flying from Phoenix to Denver, Chicago, and Dallas multiple times a day. While Phoenix-Mesa isn’t convenient for nearly as many people as Sky Harbor is, there are still those who prefer it and Spirit had those passengers locked up. By moving to Sky Harbor, it just ends up competing with the other guys. Why would you do that if you were an airline?

The good news for Spirit is that fares in those markets have climbed significantly over the last four years. Take a look at this chart which shows the change in one way fare for travelers going nonstop between these airports.

Fare Growth in New Spirit Markets at Sky Harbor

When fares climb like that, it creates a fare canopy that makes it much more attractive for low cost carriers to consider stepping in underneath. I can only assume that Spirit looked at the market, saw relatively high fares compared to what it would charge, and figured it could step in and fill its planes with much lower fares quite profitably. And it figured it could make more money doing it at Sky Harbor than it can in Mesa because fares will be higher.

So why should people outside the Valley care about this? Well, it’s proof once again that if airlines push fares high enough, there are other airlines waiting in the wings to take advantage. Why haven’t we seen a lot of startups lately? It’s because fuel prices have been so high that there just aren’t as many opportunities (and there are fewer dumb people who like throwing money away). But if fares get too high, then opportunity will arise once again. And when a real opportunity presents itself, someone will take advantage.

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