Spirit CEO Bob Fornaro on Price Competition and Doing What Spirit Does Best (Across the Aisle)

Across the Aisle Interviews, Spirit

Spirit’s current President, Bob Fornaro, has seen a lot in this industry. After stints at TWA and Northwest, he spent much of the 1990s at USAir. At the end of the decade, he joined AirTran as President and ran that airline until Southwest bought it a dozen years later. Apparently unable to pry himself away from the industry, he joined Spirit’s board in 2014. Last year he took over as President and CEO. I had the chance to sit down with him at the Boyd Conference/International Aviation Forecast Summit at the end of August to talk shop.

Our discussion was wide-ranging, and despite editing for length and clarity, I still found it long enough to break into two posts. Today, we start with the hot topic at the time of the interview and something that’s still relevant today: price competition. United had just been in the news for launching a public pricing battle with Spirit and other low cost carriers.

Brett Snyder, Cranky Flier: I just want to start with this discussion about pricing. What’s your take? Do you think we are in a world that’s a new normal for pricing in terms of the competition we’re seeing? Or do you think this is more cyclical?

Bob Fornaro, President and CEO, Spirit Airlines: If you think about it in terms of the pricing environment, I think it is cyclical. I’ve been around in planning departments and on all different sides. When I joined the Spirit board in 2014, I thought it was an anomaly then. [There were] three years of no capacity growth which means a few carriers were growing and a couple big ones were shrinking. Some thought that was the new airline environment, but I think fundamentally it’s a competitive business. That doesn’t mean it’s competitive like the old days. No question [airlines] are much more profit-minded, and the investors will hold people accountable. But after years of restructuring, every airline has a number of things it wants to accomplish, and it is an ebb and flow. It’s a combination of [overall industry financial] improvement and, in a situation like United, they’re just trying to make changes. That merger was done almost 7 years ago, and it never quite fulfilled its promise, and they’ve made changes to try and go out there and do that.

We’re trying to do the same thing. We’ve made changes on our own. You can talk about today, in terms of the way the old Spirit worked, that won’t work today. You have to run well. You have to assume there will always be competition, and it always changes form. And it’s also a service business. The cost of failure is very high for all carriers but higher for us because we’re low frequency. We actually started out, in terms of my goals, to make sure we run better which will help us from a revenue standpoint. And there is a revenue benefit to running better. Bad news gets around.

Cranky: It does indeed.

Bob: In terms of preparing this airline [for stronger price competition], we’re no longer 30 airplanes. We have 106, 107 airplanes and we’re not gonna fold. We expected this. We’re not going to necessarily run from anything, but we’re not necessarily going to take the hardest path as well. In terms of expansion, we want to be diverse, and an important part of our diversity is to play a role in some of the biggest cities in the country. If we don’t, somebody else will. We’re not going to build 100 [daily] flights in Chicago or Dallas but they’re important cities for us. And also, take advantage of the opportunities where we’re exceptionally qualified – Ft Lauderdale, Orlando, Las Vegas. It’s a mix of routes.

We need a mix of skills. You talked about revenue management. We’ve gotta be better. When your prices are being matched, you do things a certain way. You know that. You need more data, you need more things to find those opportunities. And so the environment is really kind of what I expected. It got better going from last summer…. Now there’s been a deterioration, but eventually it’ll improve.

Cranky: I assume the diversity thing is important, right? Something you took from your AirTran days? All your eggs were in your Atlanta basket and if Delta all of a sudden decides to pay attention to you, that’s a problem.

Bob: You have to remember, Delta always paid attention, they matched our prices.

Cranky: Well, ok, but at some point they started turning up the heat and giving more inventory to sell more at lower fares.

Bob: Sure, that’s right.

Cranky: But you’re saying this is something similar to that where an airline has taken a specific position and eventually it’ll change again in the future?

Bob: Yeah, I think it does. Again, we don’t have the size, but we’ve got money in the bank. Still very profitable. And we have an exceptionally low cost structure. That’s internal focus. A competitor can’t change that. We’re uniquely qualified to compete in a low-fare environment. We’re not a legacy carrier, we’re not a Southwest or a JetBlue. We don’t have some of that turf. The company needs to be nimble and needs to be flexible.

Cranky: There’s talk about Basic Economy and what that means for low-cost carriers, but I’m more interested in the densification on aircraft and what that means. Even though Spirit has a lower cost structure, the other guys have enough diversity in revenue where they can put a bunch of these seats in the back with maybe 29 or 30 inch pitch, they can pull frills out. They can focus on ancillaries. They can do something like Basic Economy, which is a bit counter-intuitive because there’s no ancillary involved with that because you’re blocked from buying up. But if you think about the ability to sell row 50 profitably, they can do that because of the changes they’ve made to have diversity of product. Is that something that is of concern to you?

Bob: What we’re seeing is mostly due to traditional industry price-matching. It’s got nothing to do with Basic Economy or any of that stuff. It’s capacity. It’s price-matching, and it’s wide open. Wide-open price-matching rarely stays contained over time. But here’s the most important thing. At the end of the day, we’re focused on what we do, and I think we know how to do what we do better than what somebody else does. You spend all your time focusing on us, you’re not gonna get close to Delta. [Ed note: He’s presumably referring to United’s public quest to close the margin gap with Delta.] And at the end of the day they’re going to get judged by how close they get to Delta. And they’re not getting close.

Cranky: Well United seems to judge themselves on that metric too.

Bob: Well they put out a marker that “this is where we’re gonna get to” and all the conversation is about Frontier and Spirit or Southwest, whatever it happens to be. Ultimately it’s hard to do both those. At the end of the day the guys are talking about us but they’re paid to run a quality airline.

Cranky: I know in the past, Spirit has said “we have almost endless opportunities.” Are you still feeling that blue-sky optimism or are you seeing slight narrowing because of not only the legacy guys but growth from the other [ultra low cost carriers]?

Bob: I see a lot of opportunity, but I expected more competition. If you had a view that no-one would ever match you, you could have viewed the opportunity as broader in the past…. A lot of people who have been around for a long time have always believed the reason why smaller carriers exist is because [legacies] didn’t compete aggressively with them on the way up. But the reality is that one of the reasons why we exist is because to do what United does and Delta does, you can’t have our cost structure. You can’t carry the blue-chip customers from IBM or Morgan Stanley with our business. What they’re doing is try to adapt to everybody and it’s very, very hard to do.

I’ll have the second half of my interview with Spirit President and CEO Bob Fornaro tomorrow.

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23 comments on “Spirit CEO Bob Fornaro on Price Competition and Doing What Spirit Does Best (Across the Aisle)

  1. Sounds like Bob wants Spirit to be very opportunistic and grab opportunities as they come. I hope communities don’t expect much loyalty from Spirit or expect them to hang around for long if the numbers don’t justify the service.

    Also, to head off the inevitable complaints that come up with almost every “Across the Aisle” post… Yes, in the logo for this series the man is smoking a cigarette, and yes the man has his hand resting in his lap. The “smoking on planes” bit is a bit anachronistic, but in the past Brett has said that he’ll be keeping the logo for this series, and it’s become a bit of an inside joke to those of us who have read the blog for years, kind of like the “home of Godzilla” image that gets used every time there is a post involving Tokyo.

    1. It may not be on airplanes, but a certain kind of smoking IS on the rise.
      As for Spirit’s plan, it seems sensible for dogs to eat dogs in a dog-eat-dog world.

      1. > It may not be on airplanes, but a certain kind of smoking IS on the rise.

        I’d hate to be a FA on PDX – AMS (which apparently has a nonstop flight) or DEN – AMS (which apparently does not) during spring break time… Wonder what the nickname is for the PDX – AMS route.

  2. Spirit Airlines has horrible service ,there Jets are Extremely uncomfortable with seating very tight with seats ? The jet seats don’t even move back, you feel like a sardine in the sardine can on a SPIRIT JET !! The airline industry is starting to put the customer last, and Spirit Airlines is the leader in putting the customer LAST , if you have a problem ,it is extremely hard to get someone on the phone and when you do ,there is someone from another country ,which is a sad case the for the American worker, I will NEVER fly in SPIRIT AIRLINES AGAIN . My advice to the air travelers, DO NOT FLY ON THIS AIRLINE!!!

    1. That’s all true, but if you pay any attention, you know that before you buy a ticket on NK. It’s also the same with F9 and G4. You get a cheap fair with absolutely nothing included and no ability to interline for IROPS. I would never fly the ULCCs because I’m willing to pay for creature comforts, but there are people who buy solely on price and are happy they did.

  3. Fornaro makes a compelling case. In many ways, market share growth and margin growth are contradictory goals, at least in the short term. United arguably already faces structural challenges in the domestic market compared to their Big 4 competitors considering how their hubs are more competitive and their network is less optimized for domestic connections. Fighting for share and pouring capacity in already crowded markets like Chicago won’t help endear them to investors.

  4. Maybe I’m missing something, but it looks like he said a whole lot without really saying anything. Lots of bullet points but few actual details.

    1. Very much agreed. I appreciate the post, but Mr. Fornaro’s responses read like Spirit’s company talking points got thrown into a lotto machine and he’s just rehashing them as different ones come up.

  5. I fly NK frequently, and love them! I will say one thing about Basic Economy and other carrier’s version of discount economy. I doubt UA, AA, and DL feel they can compete with NK. Example – DFW-LAX, all the legacies fly for a specific reason. DL and UA feed LAX hubs, AA feeds hubs at DFW and LAX. Although they match NKs fares, it’s most likely to keep the “price conscious” legacy flyer on their respective carriers, instead of defecting to NK. Much like Shuttle by United was created in the 90s to keep UA traffic from shifting to WN. The legacies prefer connecting traffic over local traffic, that’s why Spirit can go to a place like DFW and become the number 2 domestic carrier!

    1. Huh? The legacies prefer connecting traffic?

      That makes no sense. They have little to no pricing power on connecting traffic. They do have pricing power on local traffic, thus the perennial complaint that airlines take advantage of those who live at and fly from their hubs.

      1. As someone who worked for a major legacy carrier, there were markets discontinued because there was too much local traffic. I couldn’t understand it either, my view is traffic is traffic. But a view in upper management explained (the legacies) invest in a network. Maybe saying they don’t care about local traffic isn’t totally correct – they much prefer connecting traffic of local traffic to support the network.

        That’s why Braniff went out of business. They had created flights all over the country from DFW. However, there wasn’t enough local traffic. When Crandall and AA came to DFW, he realized there wasn’t enough traffic, so he brought traffic from other cities to connect at DFW to fly to their destination. Almost 85% of the pax on AA flight to/from DFW are connecting.

        They actually have lots of power managing connecting traffic. They will match local fares (DFDW-LAX), but they won’t fill up with it. In fact, the computer systems are so sophisticated now – if Basic Economy inventory is NOT available DFW-LAX (say “K”) for $75, and there is another fare LGA-DFW-LAX (on the same DFW-LAX flight) in K inventory for $200, the computer system can block the availability on the DFW-LAX local segment, but make it available on the LGA-DFW-LAX connecting segment.

        The airline yield management system is very complicated and sophisticated! AA will let NK fill up with the low yield local traffic, that’s not AA’s main traffic – Again, they want traffic connecting over DFW and/or over LAX. While AA carries local traffic, their main core is connecting business – they (and the legacies) are “network carriers” they depend on the hub and spoke to survive – it’s their business model!

  6. “You have to run well. You have to assume there will always be competition, and it always changes form. And it’s also a service business. The cost of failure is very high for all carriers but higher for us because we’re low frequency. We actually started out, in terms of my goals, to make sure we run better” – Bob’s message may not resonate with some but his competition understands. As Spirit gets better operationally, their cost advantage will result in more opportunities. He did it slow and steady at AirTran and he’s doing it again at Spirit.

      1. Unfortunately, one of its planes raced to the bottom of the Everglades, which helped hasten its demise.

        > Air-Tran is another ,race to the bottom airline .

        1. When ,I go on a business trip or a vacation trip ,the last I want is a delayed flight ,a uncomfortable flight and most of all ,a flight with stripped down services on the jet! Modern flight travel in this day in age ,should have comfortable roomy ? seating ,better amenities and on time flights , but it seems like the airlines have taken the lazy way out in customer services and offering under the a false pretense that they are saving the consumers money with leaving the travelers a stripped down ,bare bone, inconvenient, horrible and sometimes a nightmarish travel experience!! SPIRIT AIRLINES is on the top of the list ,for stripped down customer services and support and they should be ashamed of themselves.

          1. I’ll give you the on time performance thing with some airlines but if you want “comfortable roomy ? seating” and “better amenities,” there is a product for that- it’s called First Class. Pay up or shut up.
            The general public complains about how air travel “isn’t what it used to be” and it’s all a “race to the bottom” and blah blah blah. But you, my friend, are part of reason why the airline industry is what it is today. Why did you book a flight on Spirit? Because it was cheap! Air travel has never been more affordable for more people and this is why things are the way they are now. I think it’s great. We all need to get out and see what’s beyond our own comfortable little hamlets!
            So, if you want the premium travel experience then buy a seat up front or charter your own jet. But if you want to pay $200 round trip, pack your favorite book or look out the window and marvel at the fact that you’re getting from one end of the continent to the other in a matter of hours.

            1. You sound like you work for the Airline ,you are in the Minority in public opinion about pay up or shut up “ By the way I fly first class when I can .

        2. Sorry, please get your facts straight, the accident happened when it was ValuJet,. They actually expanded and became a bigger airline after that crash, to the point it was competing against Delta in the Southeast USA. Also to the point the Southwest saw it as the best way to get into the Atlanta market by acquiring it versus trying to wait to get it’s own gates as Delta’s influence was making it hard to get.

  7. There are multiple facets to this thing called “service quality,” and we don’t all care about it in the same way. I do pay attention to price, naturally. And I don’t need a snack or a drink (I can bring my own, thanks) nor any kind of electronic entertainment (there are wonderful things called books and magazines). On the other hand, being just 5’10”, I think I should be able to get a bit of knee room without paying extra (looking at you, Frontier). And if the flight is canceled, I don’t want to be told to come back tomorrow, or the day after. So price is an important variable, but not the only variable.
    The airline that figures out what’s most important to most of us, will prosper… at least until the others copy it.

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