Across the Aisle from Frontier’s SVP Commercial on Lowering Costs and Building the Brand (Part 2)

Tuesday, I spoke with Frontier’s SVP – Commercial, Daniel Shurz about the airline’s network strategy. Today we’ll tackle the issues of lowering costs and building the brand.

Cranky: You’re talking about getting the costs down to where they need to be. How much further do you need to go? And how do you get there?

Daniel: The benchmark is there are two ULCCs in this country, if you normalize costs, between 5.5 and 6 cents CASM [unit costs] excluding fuel on stage lenths of around 950 miles. We’d like to get the Frontier business into that same ballpark.

Cranky: And where are you today, normalized?

Daniel: There’s a bit of noise in the way it’s reported, but I’d say slightly north of 7. We don’t have the seat density that Allegiant and Spirit have on their aircraft, as an obvious observation. We are more complicated from an IT perspective than either Allegiant or Spirit are. Those are two big examples of opportunity for us. But managing costs is in a lot of ways, managing everything. It’s managing many relatively small opportunities.

Cranky: For example, something like LiveTV? I assume there is some cost to that. If nothing else, the cost of fuel to fly it around. Is that something you’re evaluating?

Daniel: That’s a good example of something we’re evaluating and trying to figure out what the right solution is. A 2002 product with its weight is probably not the right long term solution. We’re still working on the right solution.

There’s the decision we took to make significant changes to our catering product. Customers imagine that a can of Coke costs 10 cents. Maybe it does in a large pack in the grocery store, but delivering a can of Coke on an airplane costs rather more. Catering we think should be a breakeven or better proposition. It was a significantly worse than breakeven proposition in 2012. And charging for beverages has advantages in multiple layers. We give customers a choice.

If you want to drink, you can buy a drink. If you don’t, you can save money by not buying a drink. And because many customers choose not to buy a drink, we can carry less inventory on the aircraft. There’s less inventory carrying cost in the system and less fuel burn because we’re not carrying around as many drinks that nobody used. This is a good example of how you get costs out of the business: Absolutely change the product, but make what I think is the right decision. Some of these changes are more surprising to American customers at the moment, but in the rest of the world, they’ve been the standard way of doing business in the low cost sector. For us, it’s a transition but we’re catching up.

Cranky: Talking about the American perspective, I think there’s a negative view of the sector for a couple reasons. One, I think the current players have had pretty poor on-time performance. Some of it is just an American unwillingness to want to see this type of change. We don’t want to pay fees, even though the fare is lower. Going forward with Frontier, how do you position yourselves to the customer? How do you separate yourselves from the other competitors from a marketing and product perspective?

Daniel: It’s a great question, and there are a combination of issues. For a lot of customers in a lot of places we fly, they don’t have exposure to the other ULCCS. But you’ve raised an interesting point about operational performance. I look to Europe, and Ryanair has made a virtue, I know they do it in some interesting ways some times, of how good their on-time performance is. We’re providing a basic good value service, and part of that is providing what you promised the customer that the plane was going to leave at 10 and not at 2. I think we get it. To be fair, I think our ULCC competitors are also beginning to understand the importance.

But we do today run a reliable business. We’re not aiming to be the most on time airline in America, but…

Cranky: Why is that?

Daniel: Partly because Hawaiian has a big advantage of flying short flights in a beautiful climate, but more seriously there are costs to running an extremely reliable airline in terms of how many spare aircraft you have and how much backup you provide. But we want to operate at a good level of reliability. We want to be middle of the pack of the [airlines that report to the DOT]. I think we can show customers that they get equivalent reliability compared to airlines to which they pay hundreds of dollars more. But we also need to communicate the value.

The difference in Europe was that prior to the ULCCs, intra-Europe air travel was expensive and as a result, most people didn’t do it. The charter business was quite significant in Europe. The US customers have gotten used to flying in large volumes. Yes, once upon a time, I’ve been interested in this industry for a long time, I can remember when Southwest was considered a mediocre product because they only gave you peanuts, not meals.

Cranky: It’s a premium product now.

Daniel: Right, the world’s changed. But I think the difference is that it’s what customers have become used to. It’s not going live as a campaign tomorrow, but we know we deliver a great value product. We are giving customers choices. We’re going to educate customers on how to pay the least for the ancillary products we offer. And we don’t want to be charging people $100 for a carry on at the gate. But we’re trying to make it clear that there’s a behavior we want them to engage in and the fees will be designed to encourage that.

The European airlines have been very good at encouraging ancillaries at the time of booking by offering big discounts. I think we have the advantage. It’s harder in our home market where customers know what we were. But we do have a fun brand. We’re pushing a message, working with the employees on the idea that we want to deliver good service. It doesn’t mean giving things for free, but it does mean being friendly and being available. It’s a transition we have to get through, but we think the brand strength is actually an advantage.

Frontier is seen as a good friendly company enjoyable to fly. Although we had a good product, that was never what the brand was all about. And I think if we can deliver the reliable service, if we can deliver a good experience, the more times that customers find they’re saving a lot of money, of course they’d rather save a lot of money and not pay any fees, but the more experiences they have where they save $200 and pay $70 in fees an remember that’s still a savings of $130, the easier it becomes to get customers to accept that this is a good model.

Cranky: You have taken some flak over going into a market and then pulling out when it doesn’t work. You get a lot of angry people. Even if you give them a refund, now the other options are much more expensive. Are you looking at some of these issues? Is there a better way you can handle this?

Daniel: It’s something we’re definitely conscious of. One of the reasons we no longer issue schedules for 12 months in advance is that by the time we load the schedule, we have more certainty in what we’re doing. If we’re not certain about a market, we try to be better about not putting them into the schedule. Our general approach is still to re-protect customers when we can. And our preferred approach to canceling flying is when the schedule gets extended, just don’t extend the market.

We’ve taken heat over certain situations. Yes, it’s a downside. Customers get really low fares on us, and if we find that the service isn’t meeting our expectations and we cancel it, fares go up. But we will do less of this. But it’s a great reminder that when these low fare options exist, customers need to take advantage of them. Low fare carriers make bets on markets working. We’ve got a lot of data to help us, but we see some markets where customer support is incredibly good and others where it isn’t. And where it isn’t, the service doesn’t continue.

If you missed part 1 where we talked about network strategy, you’ll find it here.