Where Spirit’s New CEO Is Taking the Company

If you missed yesterday’s post, the new logo you see above is just a part of something bigger happening at Cranky Concierge. Read more.

Spirit has been an extremely consistent company since former CEO Ben Baldanza piloted it into being an ultra low cost carrier last decade. But with Ben leaving and former AirTran CEO Bob Fornaro stepping into the role, I (and many others) wondered what that would mean for the company. During the airline’s fourth quarter earnings call, Bob gave us a good look at where the airline is going. It sounds like Spirit wants to be more predictable operationally and “less predictable” from a route selection perspective.

Spirit is Crazy

If you’d like to follow along, here’s the Seeking Alpha transcript from Spirit’s earnings call.

It didn’t take long for Bob to starting getting to the point.

I know many of you are anxious to hear my vision for Spirit and changes that maybe forthcoming. I do not feel I need to make sweeping changes, but I do have a few ideas and how we can further improve. One of the primary areas we are focused on is improving the overall customer experience and we have made this a top priority for 2016.

When I hear “improving the overall customer experience,” I generally throw up in my mouth a little bit. More often than not, that’s lip service and doesn’t actually mean improving any customer experience. That’s especially true with ultra low cost carriers. But fortunately he went on to explain in greater detail.

This includes improving our on-time performance and maintaining a high completion factor as well as improving our customer service metrics.

Ok, now we’re talking. The operation is Spirit’s Achilles heel. The airline just doesn’t run a reliably on-time airline. While in most months it does keep completion factor on the high side, which is good, the chronic delays are still hugely problematic for a lot of existing and potential customers. I know at Cranky Concierge, we’ve pushed people away from Spirit when we knew there were any time constraints. It’s good to see this getting attention. More importantly, it’s good to see it being seriously acknowledged as a problem.

Sure Spirit admitted it had a bad June last year, but overall it stuck by its general sub-par operation. Why? Well, the argument was that delays don’t matter that much as long as flights don’t cancel. That is true, canceling is worse. But that doesn’t mean it’s ok to have such awful delay stats. Spirit doesn’t need to be at the top of the industry. That can get expensive. But it should be at least in the middle of the pack.

But I want specifics. It’s easy to say you want to improve your operation; it’s harder to actually do it. That often means raising costs and Spirit is not an airline that likes to do that.

As discussed last quarter, we are slightly reducing our utilization in the peak period in 2016 towards the goal of improving our operations and we have made a number of adjustments to our staffing and operating system since June that have already helped us with a number of events including the most recent storms on the east coast.

Alright, this is good. Reducing utilization will help. I’m not convinced it will solve all the problems though. The way Spirit routes its airplanes across the country is just asking for delays. So unless scheduling practices change as well, I’ll be skeptical until I see real improvement.

What else is the airline doing? It’s slowing down from completely insane growth to just mildly insane growth.

We do not expect to repeat a 30% growth rate in the future, but we are very comfortable with the growth rate in the range of 15% to 20%.

But there’s another interesting piece here about market selection.

…over the last couple of years, we focused on mostly big markets to other big markets which really put us in legacy carrier hubs…. And I think over time, we will be just as interested in looking at mid-size markets and small markets….

Hmm, flying smaller markets will also help with operational performance, but I get the feeling this is more of an AirTran-ification of Spirit. AirTran loved going into some of these smaller markets from bigger cities. (These are all the markets that Southwest dropped when it bought the airline.) So it’s not a surprise that the former CEO of AirTran would like some of the markets he had been in before.

But there’s an issue there. Allegiant has really stepped in to a lot of those, and it’s ramped up in mid-size markets as well. So there’s more competition from lower-cost airlines than there was when AirTran was in there. Does that mean I think this is a bad idea? No, not really. I think there’s plenty of opportunity all around.

But you know who really likes this plan? Legacy airlines. After all, this will mean less of a focus on their bread-and-butter markets and more of a focus on smaller markets. They shouldn’t get too excited, however.

So, again as the fleet size – the airplane size gets bigger, and we are not a carrier that’s really focused on tariff, it naturally keeps us in this one flight a day environment, but if we dial that back, and start focusing on other markets, perhaps shorter haul markets, you may see a corresponding increase in frequencies. But again, as bigger gauge takes us away from that.

Like most airlines, Spirit learned that bigger airplanes help reduce unit costs by spreading out the costs over more bodies. But that also means many of these markets can only support one flight a day. Spirit says it may have to hold on to some more A319s so it can serve smaller markets and increase frequency. That’s good news for people who like more options, but it also means a hit to unit costs. Of course, A319s aren’t the most desirable airplanes these days, so if Spirit can get them for cheap, then that could change the math.

More importantly, an increase in frequency does catch the attention the legacy carriers much more quickly. Yet not long after talking about increasing frequency, Bob talks about decreasing it.

We are capable of flying less than daily operations and we have the ability to set those up.

In other words, Spirit wants to be that crazy ex-girlfriend of yours – completely unpredictable. It wants to continue to serve leisure customers, but it also sees value in small business travelers who aren’t on expense accounts. If it really wants to have broad appeal like that, it needs to fix its operation and it probably does need to broaden its view of potential routes. That sounds like what Bob is planning.

In general, this seems like a good plan. But it’s easy to make good plans. It’s hard to execute them. Bob certainly has the background for this, so hopefully he can pull it all off.

[ Original photo via Shutterstock]

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19 Responses to Where Spirit’s New CEO Is Taking the Company

  1. TRB says:

    New medium to small markets you say?

    How bout XNA? I think they would thrive here and the market continues it’s hellaious growth. Over 500,000 with projections of 800,000 in 15 yeARs and that doean’t include nearby MSAs of Ft. Smith and Joplin.

  2. Eric says:

    The route planning strategy shift isnt a suprise. Legacies have rolled out Y minus minus and contained the poaching that NK and F9 survive on.
    IMHO that big take away is that they are looking at the non-corporate biz traveler as an untapped customer base. WN used to chase those folks but their route and fare structure changes over the past 10 years have left many behind. It will be interesting to see how they implement a “biz friendly” product with the ULCC overlay.

  3. Dan says:

    CF,

    You write: “Of course, A319s aren’t the most desirable airplanes these days.”

    I haven’t heard that. What’s up? Is it the size of the aircraft, given that the 100-ish size has always been a tough one to serve economically?

    • CF says:

      Dan – It’s just a cost issue. The A318 and 737-600s were long ago considered to be too much airplane for too few seats. Shrinks like that don’t give great cost performance. While the A319/737-700 used to be more in the sweet spot, they long ago lost favor compared to the bigger airplanes in the family.

      American ordered some A319s pre-merger because it had unique needs for long routes with lower demand, and it didn’t have any in the fleet. But the bulk of the order is on the A321. US Airways was the same. It had a bunch of A319s, and it still likes them as niche aircraft, but the growth is all in the A321. (The A320 is out of favor because American is using the 737-800 for that segment.) Delta is also adding its first A321s and United loves its 737-900ERs. Southwest is taking used 737-700s but the bulk of its orders are on the 737-800 now. Even Frontier, an airline which shed its A318s awhile back, is taking A321s. The unit costs are just better.

      But when that happens, ownership costs drop. Allegiant proudly picked up A319s second-hand because they were cheap. And United ordered some 737-700s recently. I’m sure that’s because they were cheap. Spirit probably sees the same thing. And with fuel costs sinking, everything looks better.

      • David M says:

        And of course, in Spirit and Allegiant service, the A319’s costs aren’t quite as bad as the legacy carriers because they stuff so many seats in them. Sure, the A321 is even better, but the A319 in NK/G4 service generally looks more attractive than it does for AA/DL/UA.

        • CF says:

          David M – They actually aren’t as good as you might hope. There were a few A319s that were built with two overwing exits, and Allegiant has scooped those up. That allows them to put in a mind-numbing 156 seats onboard.
          But you can’t put 156 seats on aircraft with 2 overwing exits because it wouldn’t meet evacuation criteria. So Spirit has only 145 on its A319s.
          That’s not to say that 145 is bad, but it’s not as good as it could be given the real estate on that airplane.

          • I smell an STC retrofit with an additional over wing exit.

            Doubt it’d happen, but it would breath more life into the A319s in the ULCC land. Though not sure it’s worth it for 11 more seats and one more FA

  4. MarylandDavid says:

    There is a place for Spirit on the no frills, leisure end of the market. I actually thought the strategy of going into fortress hubs and picking off a few flights a day was sound. Those markets are presumably large enough that picking up some of the crumbs that fall off of the big table are still worth having. As CF correctly points out, Allegiant has gone after the small market / secondary airport business. It will be interesting to see how the new CEO’s vision actually ends up playing out.

    • David M says:

      Allegiant feels vulnerable. They’ve been in the news recently quite a bit with mechanical problems leading to cancelled flights and emergency landings. Safety is starting to be a big question around them. I think Spirit with a similar product and without the safety questions, could make a play for Allegiant’s niche and do reasonably well.

  5. Georjet says:

    I just priced out a Spirit Air ticket from Seattle to Lax same days one month advanced for 156.00. That does not include a thing. I also, same route near the same time, priced Alaska, a full service carrier with partners, a decent mileage plan, a strong culture, a decent product for 186.00. It seems to me that Spirit is not even close to a good deal given the add on fees for seat assignments, carry on luggage, the cost of a glass of water, non reclining seats, and the very real chance your flight will be delayed or cancelled and you will have zero recourse because of their non existent customer service. I really don’t understand why anyone would fly on such a garbage airline like Spirit, Frontier or Allegiant. It boggles my mind.

    • TRB says:

      That’s major market to major market with competition.

      A month out from now, I can fly to SanFran/Oak for under 500 bucks R/T out of XNA . That’s a change at DWF via American, United’s nonstop is right at 600 R/T. I can drive 6 hours to Dallas, park in long term and fly nonstop Virgin American for 250 F/T nonstop or pay Spirit anywhere from 40 to 80 bucks each way. Now, if I was driving to Dallas as a leasure flier to save big dollars, I would be all over Virgin America’s price. A 1000 bucks for 4 of us if we sacrifice 12 hours to the pavement. But, if Spirit offered me a connecting flight from XNA via Dallas for less than 250 r/t. I’d bite. Add in the wife and kids and we are talking savings in the thousands without the hassle of driving 12hours r/t to Dallas or to Tulsa and Little Rock for Southwest flights at a little less money than out of XNA. I’m 10 minutes from XNA and rat her just fly from here. XNA officials just this last week said it’s losing between 200,000 and 300,000 passengers a year to other airports because of this lack of a LCC here. If anything, it would lower the prices of the legacies to more typical levels for economy instead of some of the highest in the country while still getting their business class dollars. The lack of Allegiant’s connecting only helps the prices on their limited directs from here.

      • TRB says:

        Sorry, can not fly for under 500 r/t to the Bay area from XNA.

      • Georjet says:

        Factor in the very real possiblity that on the return flight Spirit might cancel because of “weather” , then imagine standing in line for three hours to speak to an agent only to be told you’ll have to find lodging for two days until they can put you on the next flight. I can appreciate the idea of saving for a family of four. That does make sense, saving money. I travel solo most of the time so I have a different perspective. Still, there is a lot of information about Spirit’s uncanny ability to delay or cancel flights because of “weather” when other airlines are flying that same route at the same time. Spirit often then leaves those people high and dry, forcing them to pay a walk up fare on a legacy to get home. This seems to be a common occurrence on Spirit.

    • Opie Taylor says:

      I think for the same reason people fly Southwest and not get a reserved seat, upgrades, etc versus AA, DL or UA. Plus out of Austin they are consistently higher that AA to Chicago.

  6. Arthur Hirschfeld says:

    I have always thought ELP would be a good market for Spirit. Several open gates and ticket counter space. WN has reduced flights there since the Wright Amendment went buh-bye.Also it is a fairly large medium sized city with Ciudad Juarez just across the border.

  7. Jim says:

    Nothing profound here, but a telling anecdote — We had to fly from Las Vegas to Portland last month and had limited scheduling flexibility. Spirit had a direct flight at a time that would have been almost ideal. Previous experience with Spirit has been poor and we intentionally chose a Seattle connection on Alaska vs. the direct flight on Spirit. Sure enough, on the way back, the Spirit flight that we would have been on was cancelled. All of our Alaska flights were right on time.

  8. AJ says:

    A good read as always, CF.

    I really don’t understand the big-picture genesis of this which is “We have industry-leading margins, so I think we should change it up.” I loved AirTran dearly, but they never had the financial performance that NK does, so I’m not sure about adding aspects of their business model to NK’s. Sure there are former FL routes that could work, but I don’t think there’s a lot of low-hanging fruit left with all of the growing G4 has done.

    Spirit does only have 145 in the A319, but keep in mind that 10 of those are “big front seats” which they generate more revenue from than an average seat… so I don’t think the lack of the 2nd over-wing exit is a huge crutch in the big picture. 156 on that thing is some kind of human-rights violation, and I’m pretty sure there’s a constitutional amendment that bans such a configuration.

    Some have mentioned Spirit making a play for Allegiant’s niche, but that’s a REALLY small niche for two airlines to both pursue and compete for. Allegiant has so many 2x weekly markets, and I’d bet my own money that if NK went to those it would be a bloodbath. Even in some of the larger (small) markets, these airlines have already created a few bloodbaths of their own.

    Operationally, lowering utilization should ( in theory) raise operating costs. That seems like a step in the wrong direction. Their aircraft routings aren’t any worse than WN’s, except the planes move much much more overnight.

  9. Jim says:

    I couldn’t help but laugh at myself this week. There was an article headlined “At world’s worst carrier, change is in the air” in Bloomberg BusinessWeek this week. Based on what I’ve been reading, I assumed it was about Spirit’s shake-up. Turns out the article is about Air Koryo …

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