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Spirit Airlines, Research Paper Example

Pages: 7

Words: 2045

Research Paper

Running an airline is a difficult and complicated endeavor. Over the years, many airlines have failed due to competition, economic pressures and even global events. In the current era of aviation where consolidation of airlines has become common, it is an anomaly when a relatively small airline is not only able to compete, but in many ways set a new standard of profitability that has made the entire industry take notice. The purpose of this paper is to provide an overview of Spirit Airlines, briefly study the approach of Spirit Airlines from a historical perspective, and provide insights on the viability of its business model.

Overview: Spirit airlines was a pioneer in the concept of ultra-low-cost carriers, making it the leader of this fast growing niche in aviation. They are also considered among the most profitable airlines, raking in $76.4 million in net profit during 2011 (Yeo, 2012). Their business model largely conforms to the dimensions of competitive scope, but there are some caveats.

The product scope is unabashedly no frills, as Spirit focuses completely on reduction of costs to ensure the lowest fares possible. Their geographic scope is harder to compartmentalize, as the overarching focus is to produce profitable routes in 100% of their destinations. That being said, they are currently providing service in the United States, Caribbean, and South America. Their CEO is consistent in his assertion that market share is not part of their business strategy (Yeo, 2012).

This lack of market share approach defines how they address network design, which bases low and high frequency rates on route profitability. Spirit is quick to claim Ft. Lauderdale as a hub, but try to disavow other hub locations even though Dallas/Ft. Worth handles 14 daily routes (Yeo, 2012). The business model emphasizes point to point design as preferable to a hub approach.

Like all other aspects of their business, fleet selection is designed to minimize expense by utilizing modern, single fleet type selection over a more varied fleet model. Spirit uses exclusively Airbus, focusing on A320s with a plan to phase out A319s and A321s models that currently exist in its fleet (Yeo, 2012).

History: one article titled “A stingy Spirit lifts airline’s profits” (2012) describes how Spirit’s strategy came out of desperation. The original company was not an airline, but titled Clipper Trucking Co. at its founding in 1964. Twenty years later, it morphed into a tiny commercial airline within a few years of deregulation of the airline industry in the United States. Spirit initially struggled with their air services, and was near bankruptcy when Bill Franke purchased the carrier in 2006 (Nicas, 2012).

Since that time, the turnaround at Spirit produced by Mr. Franke and CEO Mr. Baldanza has been nothing short of remarkable. Spirit brought the ultra-low-cost carrier concept to life, drastically reducing expenditures while also producing a significant amount of ancillary revenue that no other carrier can match. Ancillary revenue is generated through add-on charges provided in an al-la-carte fashion. Although often maligned by consumers and the press, Spirit sums up their business culture on their website: “Spirit Airlines empowers customers to save money on air travel by offering ultra low base fares with a range of optional services for a fee, allowing customers the freedom to choose only the extras they value.”

These additional fees have proven both successful and controversial. Spirit was the first U.S. airline to charge for all checked baggage, and also charges for carry-on luggage that must be placed in overhead bins. They charge for such basics as a printed boarding pass and water. The only complimentary item in the cabin is ice (Nicas, 2012). However, the same stinginess also produces results for consumers and the company. For example, when Spirit began charging $5 for boarding passes, it also reduced all fares by $5 in order to show consumer value (Carey, 2011). The company gains because it utilizes this policy to reduce cost. By charging this fee, they expect more people to show up with their own printed pass, reducing needs for staffing and saving time at the gate.

In summary, having a route architecture with emphasis on profitability and a lack of reliance on hubs, Spirit’s fleet of Airbus aircraft provides low cost, no frills service to many destinations in the United States, Caribbean and South America. As stated previously, their cost structure is focused on both elimination of non-core services and on ancillary revenue driven by their al-la-carte approach to additional services that include fees. Their fare structure is simple: keep costs as low as possible to consumers while empowering them to decide what ancillary services are worth their investment. Promotion is edgy and controversial, and target passenger segments exclude the business class that most airlines prioritizes covet, opting instead to focus on value seekers who simply wish to find a cheap ticket. Competition is focused on price point based on those who can compete with the ultra-low-cost carrier model, and recent profit history has far outpaced the commercial aviation category.

Success or failure? Clearly Spirit has succeeded in creating a new segment of the airline industry, capitalizing on the success of Southwest’s strategy after the deregulation of the American aviation industry in 1978. The ultra-low-cost carrier model has proved at present that it can be both affordable and in demand to the existing consumer. In order to truly evaluate the long term viability of the business model, several questions should be addressed.

  1. Is the business model sound, or is it inherently flawed? Spirit offers an array of contrasts that make this a complex query to answer. According to an article based on an interview with CEO Ben Baldanza, after making a profit of $76.4 million and raising $150 million in an initial public offering in 2011, Spirit announced it would grow capacity by 23% in 2012 by adding seven aircraft to its fleet of 44. Spirit plans to add another seven aircraft in both 2013 and 2014, followed by 10 in 2015. This amounts to an annual increase in capacity of 15%-20% every year for the next several years (Yeo, 2012). Additionally, Spirit earned 40% more per airplane than any other U.S. airline in 2011, and is valued at approximately the same amount as U.S. Airways. This is impressive given that U.S. Airways runs approximately nine times the air traffic as Spirit (Nicas, 2012). With all of this recent success, it appears that the Spirit business model is highly effective over a span of at least multiple years.

But is it sustainable? For every supporter there seems to be a detractor, and it is clear that a segment of consumers have developed strong feeling towards Spirit in both positive and negative ways. The lack of amenities and the expense to include some services thought previously to be basic is an initial critique. The charging of ancillary fees does produce a third of the airline’s revenue (Yeo, 2012), leading to a sense of customers feeling like they are always being nickeled and dimed for basic services. Some defend this approach saying it is part of the Spirit brand, but it also generates strong negativity such as when they became the first major U.S. airline to charge for carry-on bags (Carey, 2011). In order to increase capacity on their flights, they have introduced pre-reclined seats that are incapable of reclining. They are also reputed to lack effective customer service which has produced many highly publicized negative news events (Seaney, 2012).

One perspective would be that Spirit is approaching flight in a way that is not dissimilar to how Wal-Mart has utilized its business model to dominate retail. Spirit is currently winning with its business model and providing significant return on investment to its stockholders by being the lowest price point to its consumers, and these consumers are responding by flying with Spirit. As with Wal-Mart, such a business model is proven to be possible, but dangerous. When you consider some of their challenges such as customer service issues and an increasingly negative perception with the public, Spirit provides few incentives to fly with them if any airline becomes capable of beating their prices.

  1. Does the airline enjoy any competitive advantage? Spirit has shown remarkable boldness in its approach to creating the first American ultra-low-cost airline, producing benefits to its business through creating what many consider the most cost conscious airline, with the additional benefit of ancillary revenue that far exceeds all other airlines. While fast growing, they are relatively small, comprising about 1% of U.S. fliers. Spirit’s advertising has garnered much attention due to its provocative nature, increasing recognition and attention to its message but also producing negative and controversial aspects (Nicas, 2012).

Spirit has shown competitive advantages in its boldness, innovation and creativity. This approach is supported by their focus on their business model that places low cost at its center. Other airlines have taken note, and several have adopted some of Spirit’s tactics. If Spirit wishes to keep this competitive advantage, they must continue to stay ahead of the other airlines, many of which are much larger and capable of competing with Spirit in order to preserve their market share.

  1. Has the airline successfully adapted to the changing environment? When it comes to price, Spirit has found a niche that carries broad appeal. It is a notable difference to other airlines Greyhound Lines Inc. is viewed as a competitor (Nicas, 2012), and it speaks volumes to how Spirit views their business. It is also notable when a spokesperson for Spirit states that they do not try to capture market share from other competing airlines, but instead appeal to a market that would otherwise not fly if not for the extremely low rates Spirit charges for their tickets (Seaney, 2012).

An area of concern for the airline and the changing environment is growing dissent from the traveling public for its business practices, and a level of perception that Spirit is ambivalent to such concerns that appears to be growing. During a recent negative customer service experience that produced media attention, the CEO was quoted to refer to Spirit’s industry leading percentage of customers who complain statistic as “irrelevant” (Miller, 2012).

  1. What are its future prospects? The growth potential of Spirit is considerable. Given its relatively small size and the number of additional potential markets it could service, Spirit could venture into dozens of new markets in the coming years at its current growth rate. As its stated goal is profitability, the airline is currently expanding, launching many new domestic routes this year, and international service between Dallas/Ft. Worth and Mexico City (Yeo, 2012).

In order to maintain the potential of future prospects, Spirit should address the negative backlash for their pricing and service policies, which seems to have room for improvement. With the lowest on-time performance, least legroom in an airline cabin, and the most customer complaints, Spirit leads in a list of categories that will deter future growth potential. Ancillary revenue will need to be protected from an increasingly savvy flying public who are assisted by articles expressly designed to instruct them on how to avoid additional costs. One such article lists many tips, including how to buy your ticket, print your ticket, and how to select your seat (Sachs, 2012). A recent news event was credited for publicizing what appears to be a callous attitude displayed by Spirit towards a disabled vet. This resulted in a “Boycott Spirit Airlines” Facebook page increasing its “likes” from 700 to 21,000 over Spirit’s refusal to refund $197.00 for flier’s insurance (Miller, 2012). In order for Spirit to reach its full growth potential, it would be advisable for them to explore ways of avoiding such media issues in the future.

References

Carey, S. (2011, June 22). Spirit Air’s new first: levying fee for passes. Wall Street  Journal. Retrieved from http://online.wsj.com/article/ SB10001424052702303936704576400210833335244.html

Miller, J.R. (2012, May 3). Spirit Airlines’ boss calls industry-high complaint rate “Irrelevant,” says dying veteran should’ve bought insurance. Foxnews.com. Retrieved from http://www.foxnews.com/us/2012/05/03/spirit-airlines-outpaces-competitors-regarding-passenger-complaints-statistics/

Nicas, J. (2012, May 11). A stingy Spirit lifts airline’s profit. Wall Street Journal. Retrieved from http://online.wsj.com/article/SB10001424052702304749904577384383044911796.html

Sachs, A. (2012, February 24). Spirit Airlines: cheap flights, but can you avoid fees?  Washington Post. Retrieved from http://www.washingtonpost.com/lifestyle/travel/spirit-airlines-cheap-flights-but-can-you-avoid-fees/2012/02/15/     gIQAh0BFYR_story.html

Seaney, R. (2012, August 3). Spirit Airlines: hated by some, making money just the  same. Abcnews.com. Retrieved from http://abcnews.go.com/Travel/spirit-airlines-crazy-airline-taking-world/story?id=16921444

Yeo, G. (2012, April 26). Interview: Spirit Airlines Chief Executive Ben Baldanza. Flightglobal. Retrieved from http://www.flightglobal.com/news/articles/interview-spirit-airlines-chief-executive-ben-baldanza-371158/

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