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.