Spirit Tries to Get Back on Track

Spirit

Spirit has been an airline on a mission. After years of forcing travelers to suffer through a poor operation and customer service indifference, the airline turned itself around. Under now-former CEO Bob Fornaro, Spirit became a top performer operationally and it improved customer service and amenities. Recently, however, it took a step back. At the Boyd Conference in late August, I sat with new CEO Ted Christie to learn more about the plan to fix things once again.

When I spoke to Bob and Ted at Boyd last year (Bob was on his way toward retirement as Ted prepared to take over), we talked about Spirit’s operational turnaround. At the end of the interview, Bob explained:

I think the plan will be to increase the utilization a bit going forward. If we can do that and maintain the quality, that’ll reduce the costs even more. So that’s kind of the way we’re thinking about it.

Ted obviously agreed since Spirit made several moves to try to increase utilization further. As Ted put it to me, they challenged the team to say “What would we do to perhaps improve the efficiency, the throughput of the business, without damaging operational results?” According to Ted, the team came up with a “couple of things around the way the network was scheduled and designed and the way we staffed reserves.”

He still thinks the decisions that were made were “smart” despite the damage done to the operation. Not only did the operation suffer, but costs for the third quarter are predicted to spiral up 7 to 8 percent excluding fuel. “The problem,” as analyst Helane Becker at Cowen succinctly put it, “is the higher operating costs that are not being recovered by higher revenues.”

The reason Ted still thinks it was smart is that much of this was caused by worse-than-expected weather. A good chunk of the cost increase is due to having less capacity due to irregular operations and another chunk is from higher costs of flight disruptions. That old problem of a costly, less-reliable operation is coming back to hurt the airline once again.

Ted says that Spirit confirmed with the Federal Aviation Administration that “the number of ground stops, ground delay programs… flow programs in the United States [is] around three or four times higher than they were at the same time last year.” He did say that they “overreached” on a few things as well, but if the weather had been the same as in 2018, this wouldn’t be a topic of discussion.

The bigger issue for Spirit, at least in Wall Street’s eyes, is that it didn’t do a good job of guiding until it dropped this bomb during second quarter earnings. The stock tanked. After cresting over $55 a share on July 24 (and as high as $65 before that), it has been a downhill ride. The stock now sits shy of $40 and it’s going down further. Just this week, Spirit updated guidance again. Buried in the helpful update that Hurricane Dorian was causing problems, Spirit let it slip that its revenue forecast had dropped a point or two even without that impact.

What Ted and Spirit now have to do is properly guide the analysts and show that they can deliver. This should mean laying off the aggressive steps that were taken to ratchet up utilization, and that’s good for travelers. Spirit has already made tweaks that will improve performance through the end of the year, but Ted says that when they hit the peak season in spring, things should be back to where they want them to be.

Ted says that beyond the “execution missteps,” he’s focusing on diversifying the network (the airline is feeling bullish about moves into fast-growing cities like Austin and Nashville, for example) and finalizing the long-term fleet strategy.

Beyond that, product improvements are in the works. High speed wifi is coming, and a new self-bag drop system is rolling out. Yesterday at the APEX Expo, Spirit rolled out a brand new seat.

You can see my thoughts on that along with more photos here.

Improving the product is helpful, but Spirit apparently has a long way to go until it can actually sell it properly. The airline continues to ramp up what it calls being a successful e-tailer. The way Ted speaks, it sounds like they’ve barely scratched the surface. There has been progress in better monetizing paid seat assignments. That includes Big Front Seat, a product they had trouble monetizing before. Ted says that has now “been working.”

So once again, Spirit finds itself trying to fix… itself. It feels like the airline got too aggressive at wringing out costs and is now paying the price. Ted says he’s focused on fixing that problem, as he should be. We’ll have to see next year how it all worked out.

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16 comments on “Spirit Tries to Get Back on Track

  1. Well done, Brett.
    SAVE (using NK’s stock ticker since that is a major discussion of your blog post) is the worst performing US airline stock to date, displacing AAL for that title once SAVE’s first guidance revision came out.

    Given that the FLL airport has been a hot mess of construction for several years, it isn’t a surprise that there have been impacts to operational reliability.

    The US’ largest coastal airports have little to no room for additional runways and space for terminal expansion is decreasing. When facilities and runways have to be taken out of service for rehab and rebuilding, airline operations are negatively impacted.

    While NK and B6 have both seen their system on-time performance impacted because of operational restraints at major airports, larger airlines have been able to offset some of the negative impact either because of their size or because they have adjusted schedules to minimize impact.

    NK tried to push its margins up and ended up pushing them down because there are hard limits to how much you can push the operation. With a heavily leveraged fleet, they can’t afford to keep planes sitting around as standby aircraft, something that DL can do with its higher revenue generating ability.
    NK is trying to find the balance between ultra low costs and a level of reliability that customers will accept. However, UA is struggling w/ the same thing so it isn’t just an ULCC thing. Both UA and NK made commitments to improved operations and then have slipped backward.

    SAVE’s business model is fundamentally strong. They will find the balance but they likely will not be as low cost as they would like.

    1. Hmm, let me try.

      Trump pulled back on regulations designed to reduce carbon emissions (pulling out of Paris, fighting with California over tailpipe emissions requirements), which essentially increases climate change. Increased climate change shows a correlation with more frequent and more severe weather events, which Spirit blamed for some of its recent operational problems.

      So Spirit’s problems are Trump’s fault. Q.E.D.

      ;)

  2. As a somewhat regular business traveler (4-5 transcon flights/year, but not enough to be worth chasing status), I would preferentially book the Spirit Big Front Seat if they flew the routes I typically fly, especially for West Coast->East Coast red eye flights. The price point is low enough that my firm would pay for it, while domestic first/business class normally costs too much for me to expense.

    WiFi (don’t care if I have to pay for it) is also a prerequisite for daytime business flights, but that’s on its way.

  3. The article is fine and the details good. However tell the analysts to go stuff it. A company is not run for analysts. If they were so good they would be running companies.
    Companies should not even show up at their conferences and stop all podcasts for them. Announcement should be for the gerneral investing public only.

    1. US airlines – and much of corporate America – is held by institutional investors – retirement funds etc.

      The amount of capital that could be possible solely from individual investors is minimal.

      All publicly traded companies including SAVE which is traded on the NYSE has to provide significant financial information to all investors. Analysts simply interpret that information and provide guidance, predominantly to large institutional investors.

      The issue is for SAVE to meet its guidance or, as CF notes, let Wall Street in a little earlier so that their stock doesn’t lose double digit percent in a single day.

  4. Just curious, have any of you actually flown Spirit? I ask in all sincerity – I never have and they have an almost mini hub at my airport (BWI). I will be booking a few flights soon and their fares are very competitive.

    1. Do yourself a favor and skip the headache. Terrible airline and only a little bit better than the other terrible US based airlines. I say this after much world travel. ymmv

    2. I’ve never flown Spirit, and don’t plan to unless all other options cost an arm and a leg. I’m normally pretty price sensitive, but Spirit is one of the few airlines that I do my utmost to avoid, for several reasons:

      * Infrequent flights (often sub-daily frequencies) + very tight schedules for their planes + few spares mean that when something goes wrong, you could be stuck for DAYS (witness the people that Sun Country, with similar practices, left stranded in Mexico in April). This is a big one for me, as I can’t afford to lose half of a vacation because Spirit’s plane broke down.

      * 28″ pitch is not my idea of fun (an extra 2″ or so matter a lot to me, and I’m not even 6′ tall, with only a 32″ inseam, and I’m willing to pay a bit more for a seat with greater pitch)

      * Prices with Spirit are usually similar (in my experience) to legacy airlines, once you add in things like a carryon bag, possibly a seat assignment, etc

      * Quality of customers… I’m being snobbish/elitist here, especially for someone who flies economy, but I’d much rather be on a flight with experienced travelers (especially business travelers) who know what they are doing than with leisure travelers who fly infrequently. I have no problem with families traveling or with people doing occasional leisure trips, but I’d wager good money that the proportion of travelers who are crying babies or hyper kids is much higher on Spirit flights than it is on, say, Delta flights. The reduction of those headaches (literally) is something I’ll pay a little more for.

      For the same reasons, I largely avoid many other ULCCs, especially Allegiant (add concerns about quality of maintenance to the list above for Allegiant) and Sun Country. Southwest I’ll fly, but Southwest is rarely competitive on price or schedule for the routes I fly.

      Those are just my opinions, though, and airlines like Spirit clearly have their fans. As with everything, it’s a matter of figuring out your priorities, especially what you’re willing to pay extra for (including the intangible factors, not just the add-on fees and options) and what you’re not.

      1. RE: quality of customer. I see the qeue line at my airport and it seems to be like you describe….not many regular travelers, especially business travelers. A lot of leisure and families. A friend flew from BWI to FLL on Spirit recently and he said his experience was fine. He only had a carry on and it was a relatively quick flight. The fare was very competitive considering no checked bag.

    3. I’ve flown them a few times. You get what you pay for, but as long as you know what you’re getting into, Spirit can be useful. Planes are clean. Flight crews and ground staff have all been friendly and helpful. Flights have been consistently a little late, but not obnoxiously so. Yes, you pay for everything, but at least you have a choice to pay up for extras, unlike Basic Economy on the legacies. I scored a Big Front Seat plus a checked bag ORD-DFW for $131 last fall. I’ll take that over Economy Minus with Group 9 boarding and a guaranteed confiscated carry-on any day.

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