We had a little surprise to start the new year when Spirit announced that the architect of its low cost strategy, Ben Baldanza, was leaving his perch. In his place, former AirTran chief Bob Fornaro will be stepping in as President and CEO. There are a lot of reasons for this change to have occurred, but one that many are focusing on is the potential for future merger activity. I really hope that’s not the case.
The announcement of Ben’s departure was kind of odd. It seemed quite sudden, yet there were clues that this had been coming for a long time. For example, in the release, Spirit says Ben “recently moved his family to the Washington D.C. area.” That’s where he was previously, but it would seem pretty strange for him to do that if he weren’t planning on joining them at some point. (You can only do long distance commuting for so long, unless you’re David Neeleman, but he’s not human.)
The release makes it sound like this was entirely Ben’s decision, but I wouldn’t be so sure about that. There’s no question he’s been under fire for quite some time. Despite having built one of the most successful airlines from the ashes of a perennial money-loser, there has been growing criticism lately.
It’s not a surprise to see Bob Fornaro as the board’s choice to succeed Ben. First off, he’s on the board already. He joined Spirit’s board back in 2014, and he’ll retain his seat now along with the President and CEO titles. Bob is someone who is very familiar with Spirit, and I’m guessing he’s pretty bored.
Bob’s been in the industry for years, but you might remember him most recently as the Chairman, CEO, and President at AirTran. He led that company into its merger with Southwest. Bob has undoubtedly enjoyed some time off, but I can imagine he’s ready to sink his teeth into something new, and Spirit would certainly be a fun challenge. What’s funny is that AirTran could have been Spirit-like with its extremely low costs, but it never quite figured out that model. Still, AirTran was very successful in its own right until Southwest acquired and effectively dismantled it.
With Bob stepping into the Spirit job, he’ll want to put his stamp on things. What does he need to change? I see two glaring issues with Spirit.
The Operation Sucks
We got ultra low cost carriers (ULCCs) all wrong here in the US. Europe had them first with Ryanair as the patron saint, so you’d think that in the US we’d have been able to build on that. But when it came to operations, our ULCCs dropped the ball.
Ryanair may not have treated people like honored guests back in the day, but it respected its customers and their time. It ran a great operation. In the US, neither Spirit (nor Allegiant) saw any value in actually doing that. Instead, they operate anywhere from mediocre to terrible operations depending upon the day.
Frontier saw the opportunity to fix that and has tried to focus on the operation, but Spirit makes only excuses. With any luck, Bob will be asked to fix that.
The other problem, and the one that has preoccupied Wall Street, is that the airline has not put the brakes on its growth. This does make those operational problems worse, but more importantly to Wall Street, it also cuts into margins. Despite still making great profits, Wall Street has soured on the airline. It wants to see less growth, and Spirit’s stock reflects that.
If this is what Bob focuses on, then I and all of Spirit’s customers will be happy campers. But there’s this other nagging issue that seems to be getting some attention. Many are convinced this removes the only barrier to a merger with Frontier. Just see what Wall Street is saying.
It should also be noted that Mr. Fornaro has a history of M&A, selling AirTran to Southwest. Spirit could look to participate in further industry consolidation, with Frontier Airlines coming to mind. – Helane Becker, Cowen and Company
Mr Bob Fornaro is also a seasoned CEO well-known to most on the Street, who could potentially be more open to M&A… – Dan McKenzie, Buckingham Research
While nobody is suggesting this will happen tomorrow, (Dan McKenzie, to be fair, believes it’s probably 2+ years away), the story is too compelling for anyone to ignore. The pieces fit together well: similar model, aircraft commonality, little route overlap, and more. This all makes people start to drool. Yes, Frontier is owned by private equity and they’ll want to make their money back soon. But that could be an IPO, something that’s been rumored for some time. A merger isn’t a foregone conclusion even though so many outsiders seem to think it’s destiny.
If I’m Spirit, a merger is the last thing I want. The airline has its own issues to fix first. But even once those are fixed, a merger isn’t what Spirit needs. It has plenty of room to grow on its own. It doesn’t need to resort to merging with another airline in order to get bigger. All that will do is bog it down in integration issues and probably impact its cost performance. The other airlines would be thrilled to see Spirit distracted for so long.
For me, the idea of a new CEO is exciting, but not for merger-related reasons. I really hope this is someone who sees value in slowing things down and running a stellar operation. That would be a big change, but it’s one that everyone would welcome.