Hey Spirit, The Water’s a Lot Warmer in Puerto Rico Than Niagara Falls (Guest Post)

Cardinal, Spirit

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.

American's Change in Seats in San Juan

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].

    Get Cranky in Your Inbox!

    The airline industry moves fast. Sign up and get every Cranky post in your inbox for free.

21 comments on “Hey Spirit, The Water’s a Lot Warmer in Puerto Rico Than Niagara Falls (Guest Post)

  1. It’s annoying that VFR has two meanings in the aviation industry. Since Visual Flight Rules came first, people should avoid the Visiting Friends & Relatives usage. It’s just confusing, and really “leisure travel” more-or-less means the same thing using actual words.

    1. Just as long as you don’t use “VFR” for “visiting friends and relatives” while on the radio with ATC, I think we’ll be OK. ;-)

  2. You can get to SJU via a lot of carriers so why should Spirit really get big in SJU? People have been visiting family in Puerto Rico for decades when there was less air travel avaiable, so should have no problem now. Non-family travel is on the weekend to catch the cruise ships in/out of SJU, and I haven’t heard anything about the cruiselines saying they are having problems getting people to SJU. You can travel to the other islands from the USA without needing to go to SJU first.

    With AA cutting back, it’s mostly downgrading SJU as a hub between the USA and other islands which don’t lack service anyway.

    Spirit isn’t about to do anything that doesn’t make money, so flying from some smaller U.S. cities could make more money for them, then building up SJU.

    1. I think you missed a significant component of his point. It’s not to serve SJU from a lot of US cities; it’s to build up service from SJU to surrounding islands, connecting them to the existing US cities Spirit serves from SJU. In that manner, you build an intra-island service base, and enhance your connecting options for the pasty whities coming down from the states. Win win.

  3. i think low fare carriers have already started bulking up in SJU, the vast majority of which commenced during the past year or two (or three).

    FL has multiple daily flights to four cities, BWI (2x), TPA (2x), MCO (3x) and ATL (3x), plus the HUGE wildcard of what they will do there once they are integrated into WN.

    B6 has daily service to four cities in florida, TPA (2x), MCO (5x), JAX and FLL (2-3x), as well as BOS (3x) and JFK (6x).

    spirit also flies from FLL (3-4x) and it looks like the combo of spirit and B6 has chased AA off this route.

    AA still has daily service to the following cities: BWI, BOS, ORD (2-3x), DFW (2-3x), BDL, LAX, MIA (multiple), JFK (2-3x), PHL, TPA, IAD.

    without looking, i am pretty sure the other major airlines fly to SJU at least daily from their east coast and middle america hubs.

    aside from opening up some additional secondary markets, perhaps similar to JAX and BDL, i don’t see a ton of underserved cities or routes nonstop to SJU, especially given that this is predominantly a vacation and friends/relatives route. that being said, i wouldn’t mind a US flight from DCA!

    1. I think that AA has announced that, come April, daily service from SJU to BWI, BOS, PHL, IAD and TPA is cancelled. LAX goes to weekends only (from daily), and ORD goes from 2 to 1 daily.

      1. not surprising is that all of those airports have one or two other airlines flying nonstop to SJU; US at PHL, B6 at BOS, FL at BWI, B6/FL at TPA, UA at IAD. not sure about LAX and ORD but I am guessing UA also flies to SJU from ORD. IMO the greater washington area will be underserved to SJU and may represent an opportunity for somebody. also, much of the recent expansion of service to SJU by B6 and FL was initiated with these reductions in mind.

        connections to other islands is far less important than in previous years. legacy carriers have significantly ramped up service from their hubs to many other caribbean islands. check out how many islands you can fly to nonstop from places like ATL, CLT, PHL, BOS and NY. once again, however, the greater DC area falls short here as UA has very little caribbean service from IAD, especially relative to other airlines’ east coast hubs.

  4. The Caribbean is a tricky market when it comes to the inter-island traffic. There aren’t _that_ many island-hopping tourists, and a lot of the traffic from the mainland is still going to be served by hubs like AA’s MIA and frequent flights from US and DL. So ultimately, so you’re going to need local demand. That poses two issues.

    1) most of the islands are either really small in population (under a million) or pretty poor (and the biggest island is subject to a US travel ban, of course)

    2) The english-speaking islands don’t have a ton of links to the (larger) spanish speaking ones, including PR. There are some, but enough to support service (with MD-80s no less)? I doubt it. Since most of the english-speaking markets are in the eastern half of the island chain, SJU’s position is far from ideal for serving that traffic, which is why I don’t think AA carried much of those folks before. LIAT and Caribbean tend to dominate.

    That said, there are certainly some niche opportunities for a ULCC, like PR to the DR, or perhaps linking Jamaica to the southeastern Caribbean or South America. Spirit actually tried to buy Air Jamaica a couple years back before getting blocked by the Trinidadian govt, so maybe they’ll jump in. As a West Indian, I’m always happy to see more entrants down there, so here’s hoping.

    1. Good comment, Ed. I think that most people commenting here are missing that this is about interisland flying, not mainland US. I have to think there’s enough traffic to support a couple of flights per week to a few destinations. It would be a better way to build up than something like flying Vegas-LA (which was just announced). In fact, I may be writing about that one later this week.

  5. The Niagara Falls flights are actually smart. They tap into the Toronto and southern Ontario market that is already flying out of Buffalo in large numbers.

    1. The problem is that Buffalo has a lot more flights on a bunch of low cost airlines already. Niagara Falls doesn’t provide much of an advantage, just a few minutes closer to the border. So it’s not as useful as say, Bellingham for Vancouver.

  6. from what I have heard…the recession has hurt P.R. pretty strong. a better strategy for NK is to expand the FLL as a latin american gateway…by adding toluca and san salvador..if they can increase frequency in many of those markets they will continue to capture market share from AA and mia…i say add more frecuency in central/south america…add venezuela and ecuador and bring lima to 7x week offer good conections out of fll to nyc,ord,,dfw,dtw,acy,bos etc and they will be succesfull

  7. Cardinal
    Great analyze of Spirit! I totally agree that San Juan is ripe for the picking. However, Spirit does not really have the means to do this. They serve precisely the wrong airports in the major VFR markets such as New York LaGuardia and Washington National whose perimeter restrictions prohibit San Juan flights. Plus, the presence of that blue colored airline is an impediment to Spirit growth. Jetblue fancies San Juan as its latest focus city, already competes with Spirit at Fort Lauderdale, and responded quickly to Airtran’s announcement of double daily flights to Tampa with two of their own. Bill from DC is right, San Juan is already being filled in by other LCCs.

    Instead of focusing on San Juan, Spirit should continue to focus on Fort Lauderdale and developing new markets from there. Instead of Latrobe, Cincinnati is crying out for LCC service and of all carriers, Spirit is a top hub buster (so it appears on their route map, ORD, DFW, ATL etc). They should continue to keep throwing darts at the wall in terms of new/underserved FLL markets, failing to do so at Columbia SC, Grand Cayman, Islip/Long Island, Port of Spain, Providence, Providenciales, San Antonio but succeeding at others such as Cartagena, Armenia etc. New markets such as Key West and Greensboro in the US and Quito, Guayaquil, Belize City, Chicolayo (Peru), Georgetown (Guyana), Paramaribo, Fort de France, Pointe A Pitre, La Romana, Samara, Cozumel, Merida, Tegucigalpa, Roatan, San Andres, Liberia and may more would do well with some level of Spirit service although the loss is relatively minimal if Spirit should fail to fill its planes. Caribbean destinations are cheap markets to start/stop service.

    PS Dan Powers, you beat me to my thought!

  8. Forget SJU, Spirit wants into the already over crowed LAX-LAS market. They announced today starting in May they will have 5 flights a day between the two cities.

    Between US/UA/DL/AA/WN plus from living in Los Angeles I know a lot of people just drive, adding NK should make it interesting. At least L.A. folks going off to gamble have a chance of winning back all the fees NK will charge them……lol

    1. re LA area to LAS, don’t forget 5x B6 flights at LGB and 11-12x WN flights at BUR. i cannot think of one reason for spirit to get into this market that isn’t categorically insane.

  9. AA has lost the SJU market due to some high level AA MIA managers wanting to move more business to the MIA hub. They have done so and the senior officials at AA headquarters have given their blessing. Giving up this market to better operators such as Jet Blue is how AA is moving in the direction of others such as Pan AM, Eastern, etc. If AA can’t compete in SJU, it won’t compete in other markets with very aggressive more open minded competitors. SJU is very competitive but traveled by many and flights are mostly full. AA should not give up the SJU market as easily as it has. Those responsible for moving the SJU business to MIA will be responsible for the continued decline of what is one of the best airlines.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Cranky Flier