The Spirit Effect: One on One Q&A With Spirit Airlines CEO Ben Baldanza

Interview by: Vinay Bhaskara, Airchive.com Senior Correspondent and Business Analyst

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After we published our story on the Spirit Effect a couple of weeks ago, Spirit Airlines’ Media Team reached out and asked if we wanted to do a Q&A session with Spirit Airlines CEO Ben Baldanza to discuss the story and other parts of Spirit’s business model. The interview below discusses The Spirit Effect, Spirit’s business model, Southwest Airlines, and other topics. The text has been lightly edited for ease of reading purposes only.

Vinay: What is your comment on the Spirit Effect?

Baldanza: Well we’ve shown some data publicly before in some markets where we’ve seen generally about a 25 to 45 trade-off. Meaning that when we lower fares by 25%, we’ve seen traffic increase in the 40-45% range. And we empirically have seen that in a lot of markets we’ve done. And while that’s not true in every case; we don’t necessarily plan for that exact kind of stimulation – when we think about Spirit approaching the marketplace, versus the status quo – we tend to think of getting our prices in the 20-25% range lower than the status quo and that generating a good amount of traffic. And we decide where to fly, basically, in markets where we think enough new traffic will be created to fill our airplane; enough to justify our capacity. So we decide to fly whether to fly once a day, or 4 times per week, or 2 trips a day, whatever, based on how big the market is and how much we think we can stimulate it. Because we’re not in the game of trying to steal traffic from anyone. We’re in the game of trying to create new traffic with low fares, and using that to fill our airplanes.

We’re not in the game of trying to steal traffic from anyone. We’re in the game of trying to create new traffic with low fares

Vinay: Do you have any data on customer retention rates. I know one of the things that drove the Southwest Effect was their ability to retain customers and win repeat business. So do you have any data or empirical observations on how you do at retaining customers?

Baldanza: We have some data around the edges of that. What I don’t have for you is a survey done in the last six months that says this many percent of our customers said that “I will absolutely fly with Spirit again,” but I can give you some data around this. Number 1, the load factor on flights that we’ve flown more than a year is higher than flights that we’ve flown less than a year. And that in and of itself doesn’t tell you it’s the same people flying us again, but it does tell you that the longer we fly in a market, the busier we get. So if we were just churning through customers, that wouldn’t always be true, but it seems to always be true. So that’s one point. Another point is that we have two kinds of loyalty programs in the company. So we have our frequent flyer program called Free Spirit, that is really built around the credit card economics. Then there’s our 9 Dollar Fare Club which is a Sams Club, Costco kind of model , where you pay an annual subscription fee and in exchange for that you get to buy lower priced tickets throughout the year and you get discounts on your baggage fees. And so we have a better way to track behavior through people who are in those programs, than people who aren’t.

Why on earth would somebody be paying us $60 a year [for the 9 Dollar Fare Club] if they didn’t plan to fly us multiple times?

And the first thing I’ll tell you is that we’ve seen sustained increases in subscription to the 9 Dollar Fare Club. And so why on earth would somebody be paying us $60 a year [for the 9 Dollar Fare Club] if they didn’t plan to fly us multiple times? There’s not many cases where a single purchase pays for that club, and often you need to fly 2-3 times within the year to make it worthwhile. And yet, people keep joining, people keep renewing. And that’s another around the edge data point that tells us people keep flying us, people keep coming back. And in the frequent flyer program, the frequent flyer program continues to grow. And more and more people join. And again, why would you be building loyalty within a program if you didn’t believe in the product and were willing to use the product.

An overview of Spirit Airlines' loyalty programs - Image Credit: Spirit.com

An overview of Spirit Airlines’ loyalty programs – Image Credit: Spirit.com

The most anecdotal thing I’ll tell you, is we have a meeting quarterly with all of the station managers at Spirit. And, even in the places where we outsource the production work, meaning the workers at the ticket counter and on the ramp might work for another company that works as a contractor for Spirit – even those places we tend to have the station manager as a Spirit employee. So we have one Spirit employee in virtually every station we fly. We meet with those people regularly, and we bring them all into headquarters at Fort Lauderdale regularly, to discuss the business, and new initiatives and things. And the last couple of meetings, a couple meetings ago, and I continue to hear this now, I said – “We get questioned a lot from investors and from media about whether or not we get a lot of repeat business. Do you guys think we get a lot of repeat business?” And I was amazed at the overwhelming sort of – “Oh my god! Of course! We know everybody!” and “I work in Fort Meyers and half the people, they come up to the counter and say ‘nice to see you again’” or “I work in Atlantic City and we know everyone in the town, and they love us.” and “I work in St. Thomas and I see the same people come in at the same time every year and they say nice to see you again.” And we here those comments all over the place.

The people in our stations say they know the passengers because they see the same people all the time.

And so the people in our stations say they know the passengers because they see the same people all the time. People are increasingly joining our two different loyalty programs. The more we fly in a market, the busier we get. So all of things, while none of them directly say that I can tell you that x% of our customers fly us a second, third, or fourth time. All of them tell us that we don’t have a retention problem. We believe customers fly us, and they come back because the fare is [still] low the next time, and their experience wasn’t so miserable the first time that they say, “you know for the 20, 30, 40, or 100 bucks I’m saving, it’s absolutely worth it for the money.”

Vinay: When we posted the Spirit Effect story on Social Media, and it’s slowly spreading across the internet, the one sort of angry comment or feedback we’d get is someone saying Spirit has awful service, or something along those lines. So could you discuss the “un-bundled” business model in a little more detail and respond to passengers who complain that the Spirit Effect isn’t valid because Spirit has what they call “poor” customer service?

I’ll talk to you about the types of things customers complain about also. And some we are more concerned about than others. The types of complaints that the media tends to report on as our poor customer service tend to be mostly in a couple different areas. One is just the fact that we charge incrementally for a lot of things, and we charge for carry-on bags, we charge for baggage, and our overweight baggage fee kicks in at 40 pounds, whereas most airlines are at 50 pounds – those kinds of things. They often refer to those things as hidden fees even though they’re not hidden at all. Or they refer to them as a bait-and-switch kind of tactic. I think that’s more media hype than it is perception. And when you use DOT data, if you look by market, what Spirit customers actually pay; their fare plus optional fees – in almost every case they’re paying less on Spirit than they would have paid on another airline.

And when you use DOT data, if you look by market, what Spirit customers actually pay; their fare plus optional fees – in almost every case they’re paying less on Spirit than they would have paid on another airline.

Now that doesn’t mean that everyone who flies Southwest would save money flying on Spirit. Because if you’re flying with a family of four carrying 6 bags, you’re probably better of flying Southwest because you probably would have too many bag fees at Spirit which would make it too expensive. But if you’re a family of four who’s carrying 3 bags or 2 bags, your fare’s going be cheaper on Spirit because 2 of the 4 of you aren’t paying for 2 bags, and at Southwest you’re all paying for 2 bags in your fare. So the customers who fly Spirit, select Spirit because they pay less than on other carriers. So the average fare they pay tends to be less than your next best option. So in that sense, the whole hidden fees bother us thing, is more just noise – in that, the customer that’s really bothered by that can do something else. They don’t have to fly us – they [our passengers] buy us because they save money. And that’s the reason they buy us. They don’t buy us [Spirit] because it’s a palatial experience or a deluxe experience – they buy us because they save money.

They don’t buy us [Spirit] because it’s a palatial experience or a deluxe experience – they buy us because they save money.

The second thing they complain about is about our seat pitch – our seats don’t recline, they’re fairly tight in the sense that the seat in front of you is fairly close to you. And we don’t give you anything to eat or drink on board unless you buy it. So the on board service is thought of as relatively severe in that sense. But to that end, we’ve got to do a better job of explaining to people how those things get you the really cheap low fares. Let me use kind of an obnoxious analogy for you. You know what Chik-Fil-A restaurants are? No one walks into Chik-Fil-A and complains that they don’t sell Hamburgers. If you want a hamburger for lunch, you don’t go to Chik-Fil-A. People love Spirit because our fares are so low. One of the reasons our fares are so low is we put more seats on the plane, so that allows us to spread our fixed costs over more seats so everybody pays less. So to complain about tight seats on Spirit, but wanting the fare – is like going into Chik-Fil-A and complaining that they don’t sell hamburgers. If you want more legroom – go pay for it at another airline that offers it.

So to complain about tight seats on Spirit, but wanting the fare – is like going into Chik-Fil-A and complaining that they don’t sell hamburgers.

There are other airlines out there, JetBlue being a big one, that sell legroom. They’re offering lots of legroom, more legroom in coach than anyone. Their fares are also about $50 higher than ours on average. If you want legroom, go buy legroom. If you want a hamburger, go to Five Guys. If you want chicken, go to Chik-Fil-A. What we sell is a low fare, they sell legroom. That’s a complaint like – I want Spirit’s price but I want JetBlue’s product. The world doesn’t work that way. You don’t get a Mercedes S Class for a Ford Fusion Price. And so, it’s not that we don’t care about those complaints, we care about them. What it tells us is that we’ve got to do a better and better job in the first case of making sure we’re as transparent as possible. We want to be a super-transparency leader – we want you to know exactly what you’re buying when you buy Spirit. Not be surprised when you have to buy a bottle of water on board when you’re thirsty. Not be surprised when you have to pay for your bags and things like that. We want to be completely transparent on that.

Seat map showing a Spirit A319 versus a Southwest 737-700. The Spirit A319 offers 28-31 inches of seat pitch, while the 737-700 offers 32-33.

Seat map showing a Spirit A319 versus a Southwest 737-700. The Spirit A319 offers 28-31 inches of seat pitch, while the 737-700 offers 32-33.

We want to be a super-transparency leader – we want you to know exactly what you’re buying when you buy Spirit.

And we want to do a better job of explaining how we get you fares so low. That means we do put more seats in the plane than other people. And we do un-bundle everything, so that for people who are willing to behave in ways that are less costly for Spirit – you buy on our website, you print your own boarding pass, you eat your own food, you let us pick where you sit on the plane. You pay in all those ways and your fare is ridiculously cheap. If you want better service on any of those aspects, you pay incrementally for those. And we just want people to understand that idea better.The people who actually fly Spirit, we believe, get that – which is why we don’t have problem with retention of the customer base. But the media really likes picking on these things, and when you see complaints about bad service at Spirit – it tends to fall in those two categories; lots of fees and tight seats.

Now there’s another vein of complaint saying that Spirit was rude to me, or they were really late and I missed my cruise ship. Those are complaints that we care enormously about. And we try to apologize and compensate customers as best we can for those kind of problems – and we as a company are trying to eliminate those kinds of complaints. Because those are the things that are not delivering what we promised. And when we don’t deliver what we promised we would deliver, we consider that a big problem. And we work really hard at the company to try and eradicate those kind of complaints.

Vinay: Looking at the data and the idea that passengers know what they’re getting into when they buy Spirit, one of the interesting thing that I noticed when I was working with the raw data on the Spirit effect, was that competing carriers in mid-haul markets around your average stage length tended to match their average fares to around $125 – almost the same as your average revenue per passenger of $126.50. So that to me signals that customers understand generally what their total out of pocket cost will be when flying Spirit. Am I reading that correctly?

Baldanza: I think that’s generally right. I think you’ve interpreted those facts correctly. The problem with that is that there isn’t an average customer exactly. Everyone picks different things. So you can say that every customer checks a bag and carries on a bag, but that’s not true. Some carry a lot less and some carry a lot more – it’s all across the map. So when they match our fare with some sort of premium for what they think the average customer would buy extra, it still leaves a whole world of people who save money flying Spirit because they don’t behave that way. And what we tend to see is that the rate at which competitors match our pricing is generally a function of time to departure. And you know, 60 days out, their fares will likely be about the same as ours, although they’ll limit the amount of inventory they sell at that fare where we may sell, up to or the whole plan at that fare.

But as you get closer and closer to departure they tend to walk away more and more. And the dilution in revenue they would take by matching our fares inside 14 and inside 7 days is just enormous. So they tend to walk away from the fares at that point. And if you were to fly 2 days from now, and you were to look days ago from La Guardia to Chicago, or Chicago to LA, or Dallas to LA, or Dallas to Chicago, or Dallas to Washington, or something like that – I’m guessing you’d see an enormous fare advantage for Spirit versus the legacy carriers for a flight 2 days from now. Even though that same market 60 days out, they’ve probably matched our pricing. That’s kind of the way they tend to react to us. Don’t let them get a lot of traction early and for the amount of seats on the plane we’re willing to sell at the fare, don’t lose those customers. But don’t dilute the hell out of our core business, they [Spirit] only have one flight in the market. They react like that.

Vinay: So what kind of premium do you drive for those Big, Comfy seats up front?

The fact is that the price point on those Big Front Seats is higher than it is on other seats. And they tend to sell quickly, and they tend to sell very well.

Baldanza: We only call them Big Front Seats, we don’t call them Big Comfy Seats but I like the fact that you called them that. That might be a better name in fact. We don’t sell those as a fare. It’s only sold as a seat assignment. So you pay whatever you pay to fly from X to Y, and then after you buy your ticket, you’ll see a seat-map of the airplane, and it’ll say do you want to pick where you sit on the plane. And you can choose not to pay anything at that point, and just go to the airport, and you’ll get a seat assignment for free. But it’ll be where we sit you, not where you pick. We still try to get couples together and families together when we can. We don’t punish you if you don’t buy the boarding pass by forcing you to sit apart if you don’t have to. But the fact is that the price point on those Big Front Seats is higher than it is on other seats. And they tend to sell quickly, and they tend to sell very well. And the price premium is anywhere from $20 on a short flight from Fort Lauderdale to Orlando or Las Vegas to San Diego. Or as much as $150 on a 5 hour flight to Lima or Los Angeles from Fort Lauderdale, or from Baltimore to Vegas, or something like that. We price the seats fairly dynamically. So if they’re priced at a 70 dollar premium and you’re not seeing the seats selling, the price will come down. And if they’re priced at 70 dollars, and 4 of the 10 sell really quickly, the next few might cost 90 dollars.

Spirit flies a fleet of A319s, A320s, and A321s with a predominantly economy class configuration, yet like AirTran has a quasi-Business Class set of seats called "Big Front Seats" available at extra cost.

Spirit flies a fleet of A319s, A320s, and A321s with a predominantly economy class configuration, yet like AirTran has a quasi-Business Class set of seats called “Big Comfy Seats” (not pictured) available at extra cost. All seats are appointed in leather, not so much for luxury, but for durability.

Vinay: Looking at the business model more generally, what was its origin? Because you weren’t always an ultra-low cost carrier. How did you guys really go about driving this switch to an un-bundled model? Was Ryanair maybe an inspiration in Europe?

Baldanza: So you go back to 2006, when the company made the decision to switch to this model. At that point, Spirit as a business, which started in 1980, had lost $350 million dollars since its inception. And it only existed in 2005 because individuals and private equity firms put equity into the company and made it survive. But there was never any business success at the company in terms of being a self-sustaining enterprise. And at that point Spirit was competing with this myth of a low fares, full service concept. Which no one has every successfully been able to do. And so, what we did, is we did a little study. And some of this is before I came to work here; it helped me make the decision to work here. We did this study that said, let’s put every airline in the world into two buckets. Airlines that make money all the time. And airlines that make money in good times and give it all back in bad times. And we found a couple of things that were interesting. Number one, most of the airlines in the world were in the second bucket, where their earnings were volatile. Good years and terrible years; and in a ten year period, make money in 3 of the 4 years, and lose money in 6 or 7 of the years.

So you go back to 2006, when the company made the decision to switch to this model. At that point, Spirit as a business, which started in 1980, had lost $350 million dollars since its inception.

And the airlines that weren’t like that really bifurcated to extreme ranges. Either they were super-high end airlines like Singapore [Airlines] or Emirates that have an enormously expensive product. And they invest heavily in the airport, the airplane, the on-board product, picking you up at your house, all kinds of service, and charges exorbitant fees. But there’s a demographic that pays for that and is willing to do that. And those airlines are confident enough in their businesses and in their differentiation. They don’t get rattled if somebody runs a fare sale, and they don’t get rattled if someone under-prices their product because some charter enters the market and offers cheap fares. And at the other end of the market you had Ryanair, you had Southwest, at least Southwest in the 80s, 90s, and mid-2000s. The current Southwest isn’t the same thing as you have directly pointed out. But clearly Southwest from 1985 to 2005 was that airline, or maybe 1985-2000 at least. And you had AirAsia in Asia. So there was clearly this world of product-centric airlines that have a better product than everyone else and charge a premium for it. And do it well enough that they have a sustainable market. And then you have this other end of the world where they built the airline to have price drive the customer, rather than product, and built the airline to have lower prices.

And so for the first couple years we copied everything Ryanair did. And then after a couple of years we ran out of things to copy so we started innovating on our own.

So we’re sitting there in 2005-6, with an airline that had no business reason to exist but had a lot of airplanes and said, so which airline do we want to be? Because we don’t want to be an airline that makes money sometimes and loses money other times. So we’re clearly going to be Ryanair in the United States. And so for the first couple years we copied everything Ryanair did. And then after a couple of years we ran out of things to copy so we started innovating on our own. Things like the Big Front Seats, and the 9 Dollar Fare Club, and charging for carry-ons, those are all things that we do that Ryanair doesn’t do. But we think they’re better for our model than what Ryanair does. So we adopted the strategy as a way to make the business successful. Because clearly, if you look over the past 20-30 years, and the airlines that have provided a continual investor return. It’s airlines like Ryanair. It’s not airlines like JetBlue or American. And so we said we’re going to build the airline to be a strong investor return vehicle. And the airlines that do that are airlines that compete for customers on the basis of price. The way they win competing for price, is they design the airline to offer the lowest price possible.

Spirit timetable and route map from 2003 when the airline's business model had a bit of an "identity crisis".

Spirit timetable and route map from 2003 when the airline’s business model had a bit of an “identity crisis”.

A Spirit Airbus A319, seen in the livery before the airline rebranded as an ULCC, takes off from Tampa/St. Petersburg International Airport.

A Spirit Airbus A319, seen in the livery before the airline rebranded as an ULCC, takes off from Tampa/St. Petersburg International Airport.

A series of Ryanair 737-800s on the ramp at one of the carrier's European focus cities. Ryanair is Europe's largest airline by passengers carried, and consistently one of the world's most profitable airlines - Image Credit: Ryanair

A series of Ryanair 737-800s on the ramp at one of the carrier’s European focus cities. Ryanair is Europe’s largest airline by passengers carried, and consistently one of the world’s most profitable airlines – Image Credit: Ryanair

And once we made that decision that we’re going to compete for price in 2006, rather than on the basis of any kind of experience we’re going to have, a lot of decisions came easy. All of a sudden, why put fewer seats on the plane than the plane can hold? The more seats you have, the lower your price can be. Why sell your products through third parties if it costs more to sell through third parties? Make the customer pay that difference. You can buy Spirit through a third party but you pay a fee, whereas if you book on our website, it’s free. It’s cheaper for us if you buy us through our website, so we let you save that money. The more of our product we un-bundle, the more pricing power we can put in the hands of our consumer because they get to pay for what they care about. And 2007 was the first year we operated fully in this model, and in 2007 the airline made a little money for the first time in a long time. And in 2008 oil went through the roof to $147/barrel and we made money when the industry lost $10 billion. In 2009, there was a major recession for business travel, industry unit revenues dropped double digits in the first half of the year. Our industry unit revenues barely dropped at all, because we weren’t carrying business travel.

The more of our product we un-bundle, the more pricing power we can put in the hands of our consumer because they get to pay for what they care about.

And in 2009, we had up to that point the highest margin in our history. In 2010, we had a pilot strike, and we didn’t operate for 5 days. And despite not operating for 5 days, and despite pissing off a lot of customers, because they had bought tickets and we couldn’t fly them anywhere – despite that we still had the highest margin in the industry that year. Even without flying for 5 days. And so what that proved to us by the time of the IPO was that the business model was just incredibly resilient. High fuel prices, internal labor issues, macroeconomic business recession. None of those things hurt the profitability of the airline. The airline was profitable in all of those environments. That was the basis on which we IPO-ed. And since the IPO, the airline has been profitable every quarter, and has been either the #1 or #2 margin airline every quarter since this IPO. And the business model just works very well. It’s not for everyone. It’s not for a corporate business traveler. If somebody else is buying the ticket, you’ll probably ask them to pay more to fly another airline. But if you’re paying yourself. And you want to save the money and have a nicer hotel. Or you want to have a nicer vacation once you get there, we’re an awesome buy. And that’s why customers fly us.

Vinay: So you mentioned Southwest… Do you have any comment on their business model evolution since the middle of the decade, and whether the idea that they’re a low cost carrier still holds?

Baldanza: They don’t talk about costs any more it seems. They used to be proud of the fact, and they used to promote the fact that the highest fare in their system was $299. Now I think it’s $999; or it may be more, I don’t know. They stopped talking about costs a while ago. There were a few years where they operated with an enormous cost advantage because they had all of the fuel hedging in place that the rest of the industry didn’t. But I actually think that that hid an underlying problem with the airline itself. Where I think for a couple of those years they were losing money flying people on the airplanes, but their commodity trading business was making more money than the company was losing. So as an enterprise they made money. And I think when they lost the advantage of the fuel hedge, they weren’t generating near enough revenue to cover their cost structure – their ever increasing cost structure with labor and other things. And that’s when they started going into Philadelphia, La Guardia, Boston.

Southwest Airlines is the world's largest operator of the Boeing 737-700, with 384 in service at Press time

A Southwest 737-700 at Hobby Airport. Southwest Airlines is the world’s largest operator of the Boeing 737-700, with 384 in service at press time

Now its not cheap fares any more, it’s Bags Fly Free, it’s no change fees, it’s all this other kind of high frequency, we’re the business man’s airline. And you know it’s different. It’s not the Southwest of the 1980s and 90s. There used to be an airline industry analyst named Gary Chase; Gary’s now an employee at Delta Air Lines. Gary once said to me, when he was analyst on Wall Street – When an airline CEO starts talking about how revenue is the solution to his profit problem, that’s when you start selling the airline. You want the CEOs to be talking about how to get costs down. And Southwest doesn’t talk about that anymore. They’re clearly a different company today than the company they were through the first 30 years of their existence. They used to be an extremely cost focused, lowest price to get from A to B, airline. They are often now, not the lowest price to get from A to B, as your [Spirit Effect] story pointed out. So they’re a different company. Now I’m not being critical in saying that. I’m a 51 year old guy,  and my body can’t do what it did when it was 19 either. So I get it. And I get that when Spirit has 200 or 300 airplanes, we may have some of those same problems too. But at 50 airplanes we don’t. And at 50 airplanes Southwest didn’t, and at 50 airplanes Ryanair didn’t. And Ryanair has gotten to a couple hundred airplanes and hasn’t seen those problems. And we’ve got a lot of runway ahead of us before we start seeing the kind of issues that Southwest has seen.

I’m a 51 year old guy,  and my body can’t do what it did when it was 19 either.

Vinay: FlightStats.com said that you guys had 43.47% on-time performance in June. Was that something that was temporary [localized to June], or was that something you’re seeing across multiple months? Do you see any pressure building on your operations because of the rapid growth you’re under-going.

Baldanza: Let me tackle the on-time performance first. We don’t think 43% on time is an acceptable number; we don’t like it. We’re not operating at that today; we’re operating in the 60s today – but we still don’t like that number. And we clearly believe that the airline should operate more in the 70 at least if not 80 percent on time range. When we were operating that [the 43.47% in June] it was sort of the result of a bit of a perfect storm of weather, some mechanical issues, some changes in procedures at the airport that caused some delays –  a lot of things. And we didn’t like that number at all.

Spirit is doing something that no other airline in the US is doing. We’re running a very high utilization airline.

Now I will tell you something. Spirit is doing something that no other airline in the US is doing. We’re running a very high utilization airline, meaning we’re flying our airplanes for many hours a day. – over 14 hours a day in a month like July. Most of the industry flies 9-11 hours a day. We’re also flying a very thin schedule – our average frequency in a market is just over 1 frequency a day. So in most cases we’re just once a day, in some cases we’re less than once a day, and in a minority of cases we’re more than once a day. What that does is when we have an operational disruption, because of weather or maintenance or something like that, we have a couple of really bad choices. We can cancel the flight and tell you that we’re going to get you out on Spirit sometime over the next week and a half, because we fly very full. So with 150 people there, we say we can get 15 of you out each day over the next 10 days. That’s obviously a miserable terrible thing to offer to your customers.

The second thing we can do is we can buy them tickets on another airline, in which case, because their walk-up fares are high, we tend to end up paying anywhere from 5 to 10 times what the customer paid us. They paid us 70 bucks and we’re paying 700 dollars to get them where they want to go. That’s a real bad decision for the airline because it costs us a lot of money and if we do that too much, we go out of business. So given that when we cancel our flights, we have two really bad choices to make, we try to do the thing that’s actually best for the customer and for our investors, and we run the flight late.

So given that when we cancel our flights, we have two really bad choices to make, we try to do the thing that’s actually best for the customer and for our investors, and we run the flight late.

And so we don’t run that on time. And so if you look at on-time as the only metric, you can say that Spirit’s operations are not that reliable. But, if you look at a more complete picture and you look at our completion percentage, we actually complete a higher percentage of our flights than everyone else in the industry. Because everyone else in the industry, when they have a disruption they cancel the flight, and then they re-accommodate you on another one of their flights 2 hours later. We don’t have that ability. Or they put you on another airline, because they have a preferential, pro-rate exchange deal with that airline that they don’t give to Spirit. United, Delta, American all help each other when their customers are disrupted but they won’t do that with Spirit. They won’t give us that deal. We ask them every week and they keep saying no. So what we do is we sacrifice on-time for high completion. And in certain times, that results in lower on-time than we’d like.

So I’m not telling you it’s okay to have low on-time, but I’m telling you that arriving 2 hours late is a lot better than cancelling and telling you that you can’t go until tomorrow. So given that choice, we pick the better of the two choices for the customer and we choose to run late rather than not run at all. That’s why you see sometimes our on-time performance isn’t as high as the others – because we actually think that the better performance metric to look at is completion percentage, and that number, our number looks better than the rest of the industry because we’re not cancelling you, we’re just running you late. Now we don’t want to do that a lot, and I’m not saying it’s ok to run late. I’m not saying that at all. What I am saying is that when the proverbial “shit” hits the fan, running late is better than cancelling. And we’ve made that decision.

Now as we’ve grown, we’ve shot ourselves in the foot a little bit in the sense that maybe our growth got ahead of our infrastructure. So we were flying planes out West before we had our maintenance bases and our crew bases fully funded in Chicago and Las Vegas. And that ended up creating some operational disruptions because, we didn’t have a pilot available, or the plane had to be fixed and the mechanic wasn’t there; stuff like that. But most of that has been flushed out of the system, we’ve long since caught up to that. There was a period where I would had to have answered yes to “has your growth created some operational problems?”. I don’t think today, July 2013, that’s an issue, but it was an issue at points in the previous 18 months.

A Spirit A319 in the present-day livery at LAX where Spirit has entered the legacy airline fray with non-stop flights to Las Vegas, Chicago O'Hare, and Ft. Lauderdale

A Spirit A319 in the present-day branding adopted when they became a ULCC leisure oriented carrier. This A319 is seen at LAX where Spirit has entered the legacy airline fray with non-stop flights to Las Vegas, Chicago O’Hare, and Ft. Lauderdale

We’re also evaluating a lot of things in our operation; in terms of sparing ratio, where the airplanes are over-nighting so that they can get the maintenance that they need. The layout of how our schedule basically runs and such. While we still plan to run as a high-utilization company, we’re not suggesting we’re going to fly less, we think there are things we can do to improve the on-time performance, and improve the overall operational reliability and we’re doing those things. We care about running a reliable shop. Our view is that you come to Spirit because we offer a low fare and you come back because we were reliable and nice to you. That creates the retention. And when people buy, that’s why they say it’s worth it. Because they still got there reasonably on time and it was a nice experience. A good price and a bad deal is still a bad deal. And we don’t want to give any of our customers a bad deal.

A good price and a bad deal is still a bad deal. And we don’t want to give any of our customers a bad deal.

Vinay: Moving forward, from a revenue growth perspective, do you think there are additional ancillary revenue opportunities that you guys haven’t tapped. Or do you think that the growth in revenue is going to come from expanding into new markets.

Baldanza: We think our ancillary revenue will grow. There are other businesses, not airlines I mean, that have a similar structure in terms of one price to enter, and other revenues for other things, that suggest to us that we could, aspirationally, move towards 50% of our revenue coming from ancillary. Today it’s in the low 40%. The slope of the growth is clearly slower than when we were only $5 per passenger. Now, we are $53 a passenger. But there are a couple of areas we can do. We can be smarter about the way we price things. It’s still the same price to check a bag at Christmas as it is on the weakest travel day of the year in September and that another opportunity. It should probably be cheaper in September and pricier at Christmas. So getting more dynamic with the ancillary pricing, thinking of things like bags and seat assignments more like fares in terms of the way that prices vary based on supply and demand, we believe has real upside for us on the ancillary side.

It’s still the same price to check a bag at Christmas as it is on the weakest travel day of the year in September and that another opportunity. It should probably be cheaper in September and pricier at Christmas.

Spirit Infographic Updated

An info-graphic outlining Spirit Airlines’ ancillary revenues

We also have more products we can sell customers. We’re new into the packaging business; where we can sell you your hotel, and your car, and your show in Vegas, and things like that. Right now we’re getting $4 per passenger in that space, and getting a little revenue from that on the dollar because we’ve just started. And customers spend on a lot of things when they travel. And the airline is just one part of it, and so the more we can be involved in the customer’s total travel through commissions and such, the better we can do on the ancillary side and correspondingly the lower our fares can be. So we see a lot of ways to grow ancillary revenue and we see a lot of ways in the pipeline to do that, and we expect it to grow. I will say that we manage to total revenue; we don’t manage base fares separately. So the more we can get from ancillary revenue, the lower our base fares are going to back. If our ancillary revenue doesn’t rise as quickly, our fares don’t drop as quickly, because we think about total fare for consumer as the economic driver for the airline – so with higher ancillary revenue, the base fare will be that much lower.

Airchive wishes to thank Spirit Airlines’ CEO Ben Baldanza for his time and the Spirit Airlines’ media team for setting up the Q&A.

Be sure to read our analysis of The Spirit Effect here.

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About Vinay Bhaskara

A photograph of myself standing in front of the CFM 56-5B engine of the Airbus A319. Much smaller than the A380 engine I saw earlier in the day.

A photograph of Vinay standing in front of the CFM 56-5B engine of the Airbus A319.

Vinay Bhaskara is a Senior Correspondent and Business Analyst for Airchive.com based in Chicago, Illinois. He has been covering the industry in some form since 2008, and currently covers the industry for Bangalore Aviation and Aspire Aviation in addition to his duties for Airchive. His area of specialty lies in airline finance and business practices, as well in data analysis. Bhaskara has been an avgeek since his first long haul flight, when his fascination with Delta’s route map birthed a lifelong passion. In his life beyond aviation, Bhaskara is the co-founder of Admissions Hero, a college consulting service tailored towards students seeking acceptance to elite American universities. He also co-authored an SAT prep book and 2 ebooks related to aviation. In what little free time he has, he enjoys watching and playing all types of sports, as well as binge-watching USA Network television shows and Bollywood films. Follow him on Twitter @TheABVinay, connect with him via his Facebook page,  or reach him via email at vinay.bhaskara@airchive.com.

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