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.
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.