Spirit’s Changes CEOs, Hopefully Not So It Can Push for a Merger

Spirit

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.

Spirit and Frontier Merger

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.

Slow Down
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.

[Original photos via Tupungato / Shutterstock.com and Carlos Yudica / Shutterstock.com]

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32 comments on “Spirit’s Changes CEOs, Hopefully Not So It Can Push for a Merger

  1. Spirit iass hitting the same problems of all ULSCs — ultra low service carriers — that once they run out of neophites to fleece, they no longer have profitable customers. Ryanair went through this as well, and Spirit is hitting this hurdle now. Too many people flying Spirit for the first time say “never again”.

    1. Too many people flying any airline say “never again”, but the next time they need to fly they go on Orbitz and book the cheapest flight.

    2. Are you basing this comment on the fact that Ryanair has a history of unmatched, year-on-year profitability, and has grown into the largest European carrier by number of scheduled passengers? Or do you base this statement on any fact at all?

  2. Spirit mergers with Frontier have been a constant rumor. Here is my issue with it, If Indigo wanted to merger Sprit and Frontier, they would have done it while they still controlled Spirit, and when Frontier could be purchased for pennies. That time is long gone. What would be the point of merger the two post IPO? Certainly their wouldn’t be any money to be made.

    1. It is said that William Franke (Indigo) did try to persuade Spirit to buy Frontier when he was Chairman and Frontier was on the market for peanuts, but Spirit didn’t want to know.

      So Franke, sold out of Spirit and took Frontier all on his own. Now he seems to be giving the finger to Spirit, while he concentrates on getting Frontier ready for an IPO. It’s an old pattern with Franke.

  3. Only time will tell. The other airlines I read as possible merger partners was Virgin America and Jetblue. None of those are close to being a Spirit type airline so unless it’s just to get airbus aircraft quickly, there would be no reason to merger with those two.

  4. All this C-suite drama is certainly intriguing. There are rumblings that BB will be nominated for a post with the FAA or DOT. Others say he wants to go where the real power in DC resides…..on K street. Whatever the reason his departure was quick but orderly.

    Now….the merger mania chatter is on blast. We’ve seen this before when Richard A ‘moved on’ from NWA to placehold United Health then popped up in ATL less than 2 years later. He framed the template and people are drawing conclusions.

    I think we all agree there is a storm brewing un FLL and it’s not just summer convection. B6 has been in growth mode for a while and WN hasn’t been shy about their designs for expansion. NK has had a considerable foot print in FLL for nearly a decade and will feel the squeeze from 2 operationally superior competitors. We saw this movie years ago in DEN and it was F9 who blinked.

    Forano is a deal guy but he’s also an operations man. I think his mission is to turn NK into a formidable competitor. While their soft product may be brutal to consumers; running a solid operation unlocks asset value and makes the Company more attractive to potential partners.

  5. The operational issues certainly ring true. Both FR and U2, from an operational standpoint, are excellent. We don’t see that in the U.S., and that’s very problematic for the ULCCs here.

  6. Re Spirit – Recently booked two seats, ORD to ATL and return. Once I got on line for check in procedure, I found that all the unbundled but necessary add-ons were going to cost $320 additional, more than the original fare. $35 per bag, $40 per carry on, $5 per seat selected, each way, times two passengers. I was highly annoyed, to say the least. I got on to the AA website to see what was available, and booked two round trips for $100 more than the Spirit “extras” were going to cost. In addition, Spirit informed me that since cancellation charges exceeded my original fare already paid at time of booking, there would be no refunds. I was happy to cancel Spirit, pay the $100 over what Spirit was going to charge me for “add-ons”, and have a hassle-free trip. I can’t imagine why anyone would put up with this kind of pricing and customer treatment, unless they only want to go from Point A to Point B with no dignity left intact and travel naked. You seem to be positively inclined toward Spirit – I would love to hear the argument in favor of this kind of operation. (Forget the fact that the actual execution of the trip sucks. The whole thing sucks, right from the moment of getting on line to see what they offer.) I for one would be very happy to see them fail.

    1. Did you buy your ticket at an online travel agent or did you get it from Spirit’s website?

      If it was the latter, perhaps you should’ve paid more attention during the booking process.

    2. Sprit’s business model is simple: Charge the lowest possible fare to get you from point A to point B. That’s it. Just you. Everything else is extra. Your carry on bag bigger than the space under the seat in front of you and needs to go in the overhead bin? Extra charge. Want to check it? Extra charge. Want to pick your own seat? Extra charge (if you don’t pay it, they’ll assign you one). Want something to eat or drink? Extra charge.

      The other way to look at it is that the big airlines charge you for all this anyway, whether or not you use it. Though they’ve gotten away from this somewhat especially when it comes to bags and food (non-alcoholic drinks are still free), so the difference between Spirit and the other airlines has narrowed somewhat.

      This type of fare works for certain types of people and certain types of trips. I’ve flown both Allegiant and Frontier (but not Spirit), and both times it was quite a bit of savings verses other options. In both cases, the trips were quite short (1 night), so I could fit everything in a backpack that could fit under the seat. I ended up paying for seats on Allegiant because I didn’t want to risk being stuck in the back next to the engines on the MD-80. But even with that it was significantly cheaper than flying on another airline that would have let me pick a seat for free (actually I think Alaska matched the fare but Allegiant’s schedule worked better).

    3. “I would love to hear the argument in favor of this kind of operation.”
      Here’s one: it remains a good deal for people who don’t enter into a contract to only assess its cost when they arrive at the airport. It is true that part of a ULCC’s appeal is that the financially illiterate cross-subsidize the other passengers. I personally enjoy the option of a low fare made possible by the well nourished person next to me eating all the overpriced snack packs and creating that ancillary revenue an operation like Spirit needs to fly me for cheap.

  7. CF – “so many outsiders seem to think it’s destiny”. I’m an industry outsider and I had opined back in early 2015 that there’d be pressure from boards to stop the fight and merge. I know NKs has self-inflicted wounds, but perhaps the growth has caused bumping into each other. Anyhow, looks to me that this is the end game.

  8. I’d be curious to know what the pressures that pushed Ben out in this situation. This reeks of shareholders wanting short term profits.

    Although I can also see the operational argument as well.

    1. I think they go hand in hand Nick. NK is leaving $$$ on the table by not optimizing assets vis a vis efficient operations. If they want to arrange a merger down the road they need to make sure all cylinders are firing.

      1. Good point. But the other question if keeping efficient operations costs more than its worth? I’ve heard it said that in this industry you buy your on time rating. Give yourself longer block times to be on time more often, but that is at the cost of less flights.. Although I’m sure its more complicated than that.

    2. Nick – It’s not entirely clear that he was pushed out. He already moved up to DC, which says a lot. I was talking about this with someone else and he wondered if maybe Ben had decided to go but the Board felt it wasn’t best to heap effusive praise on him because of Wall St’s current feelings. So the PR effort looks kind of lukewarm which is what raises the red flags. Not sure, but what is clear is that Ben built something amazing from nothing and deserves a ton of praise.

      1. Ah that would make sense. Though the fact they appointed another board member doesn’t help the perception that he was pushed out. Re: UA and Smidek. Though in this case the new CEO already was an airline CEO unlike Munoz.

  9. All this talk of what Spirit wants, and what’s good for Spirit…but Frontier doesn’t want to touch their mess with a 40 ft. barge-pole. This rumor has gained way too much traction, partly because that’s what people who casually pay attention to the airline industry see on the surface of their narrow field of vision, and partly because there was a legitimate possibility of the two being acquired and merged by Indigo a few years ago. Today’s F9 and NK aren’t thinking merger, so let’s move along please, nothing to see here.

  10. Spirit is expanding fairly rapidly here at BWI. I have never flown them, nor am I likely to. I am glad that they are here though since they keep overall fares down. From what I have seen anecdotally, Spirit attracts a cross between a dollar store customer and a college kid flowing home or back to school. Does Spirit or any of the other ULCCs attract any business travel at all?

  11. > Does Spirit or any of the other ULCCs attract any business travel at all?

    I imagine they get business travel only if they are the only option or if the company is extremely cost focused.

    I have known a few business people in places like Kansas City, Dallas, and BWI to prefer Southwest, but not the others.

    1. Southwest definitely gets business travel, but they also have a much more extensive network and schedule… plus they actually cater to business customers.

      I can’t imagine the true US ULCCs (NK, F9, G4) are getting a very high % from business customers, but I’m happy to be proven wrong if someone has stats on this.

  12. In 2015 Spirit outsourced ground handling at the remaining stations, except FLL. Frontier did the same thing the year before. Frontier outsourced the DEN hub ad their Res call centers in 2015. I would expect Spirt to do the same to their FLL hub and call centers this year. The operational meltdown that hit Spirit last June was a combination of weather and crew legality issues. Their hiring process is so slow that they can’t bring new pilots and flight attendants on as fast as the planes arrive. I would expect to see more of the same from Spirit this summer.

  13. I fly Spirit all the time. I LOVE SPIRIT. They have brand new airplanes, the cabin crews are always very nice, and I can fly from DFW to LAX for about $50 each way! The only thing I say to the people that complain…Caveat Emptor! Spirit is very clear on charging for bags, seats, sodas and food, etc. FYI! I dought a duffel bag to the exact dimensions of the ‘free carry-on’ and I can actually carry more in that bag than a roller bag! I’ve just cut $70 from my round trip airfare (which I now sometimes apply to the ‘Big Front Seats’!

    It’s too bad Baldanza left. He was kind of a quirky I don’t care what the norm is type guy. I will continue to fly Spirit out of DFW. I would love to see them expand, but at 26-28 flights per day, they are probably at their equilibrium.

  14. You’re right when you say that our low cost and ultra low cost carrier airlines don’t even come close to comparing to the ones in Europe. It seems like our transportation systems in general aren’t as good as Europe. I find this weird because you’d think it would be hard to implement new transportation systems in the ancient cities that are in the continent. That being said I guess due to their poor layouts for present day commutes they have no choice but to have good transportation. Just my 2 cents lol.

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