Spirit Airlines was founded in Michigan as Clipper Trucking Company in 1964, and in 1974, the company changed its name to Ground Air Transfer, Inc. The company operated this way for nine years until 1983 when it became a passenger airline called Charter One. Charter One specialized as a tour operator taking customers to such locations as Atlantic City, Las Vegas, and the Bahamas. In 1990, Charter One received its Air Carrier Certificate from the Federal Aviation Administration allowing air charter operations. In 1992, Charter One changed its name to Spirit Airlines, Inc. and increased its destinations to include such cities as Fort Lauderdale, Detroit, Myrtle Beach, Los Angeles, New York, and many more.
Spirit’s average fleet age is 4.5 years old, the third youngest airline, fleet in the Americas after Virgin America and the Mexican airline, Volaris. Big front seats are available on all Spirit aircraft, although they are sold as an upgrade and not as a distinct class of service. These seats are wider because of its two-by-two configuration, whereas the standard economy seats feature a three-by-three configuration.
Spirit added about 50 new destinations in 2012, all at rock-bottom fares. Spirit packs 178 seats on its A320 aircraft jets that usually have 150 seats. Most airlines offer at least three more inches of legroom in the aisles of their planes as compared to Spirit. Spirit is financially doing great, but it does have critics, such as Jami Counter, senior director of SeatGuru, which informs travelers about airline cabin features. Jami says “Spirit is as bare-bones as bare-bones can be, basically stripping everything from the flight experience and charging for anything they view as an add-on. And part of that is cramming as many seats in the plane as possible. The flight experience is probably the worst in the USA.”
Vision and Mission
Spirit’s president and CEO, Ben Baldanza, says: “Our vision is to make sure the customer who can’t afford to pay current airline prices has an option to still travel.” The CEO goes on to say that “Whenever we add a new market or a new service, we always try to price that market at lower than the prevailing fares in that market to bring back some people who’ve been priced out.”
Spirit does not have a mission statement, but its company slogan is: “The Ultra Low Cost Airline for the Americas.”
EXHIBIT 1 Spirit Airlines’ Organizational Chart
Source: Based on company documents.
Spirit appears to operate from a functional organizational structure as illustrated in Exhibit 1 . Note the absence of any women among top management and the absence of any divisions (segments), although the company does provide a revenue breakdown by United States versus Latin America. Perhaps executives not listed in Exhibit 1 report to the chief operations officer (COO) as division heads.
Statement of Ethics and Governance
Spirit has a detailed Code of Ethics provided on its website that pertains to all directors, officers, and employees. The code provides all the standards expected of Spirit employees and reveals how to report violations and what to do if an employee is not sure of how to address a particular problem. The code also clearly outlines acceptable conduct with employees, customers, and business suppliers, conflicts of interest, dealings with the government, and considerably more. In addition to the Code of Ethics, Spirit also provides detailed corporate governance guidelines. Issues such as the size of the board, level of independence the board should have, director-selection processes, term limits, responsibilities, compensation, access to senior management, and much more is included in the document. Spirit has standing committees to address issues such as audits, finance, violations of ethics, and compensation.
In April 2012, citing the airline’s strict refund policy, Spirit Airlines would not issue a refund to dying veteran, Jerry Meekins, who chose to purchase a nonrefundable ticket though other options were available. The 76-year-old Vietnam veteran and former Marine tried to get his $197 back after learning his esophageal cancer was terminal and being told by his doctor not to fly from Florida to Atlantic City. The decision caused outrage among veterans’ groups and the general public, some of whom threatened to boycott Spirit unless a refund and apology were issued. On May 4, Spirit CEO Ben Baldanza apologized for how the situation was handled and announced that he would personally refund Meekins’ ticket and that the airline would make a $5,000 donation to the Wounded Warrior Project in Meekins’s name.
As indicated in Exhibit 2 , Spirit provides revenue data in two categories: Domestic and Latin America. Note the 103 percent growth in the domestic segment from 2009 to 2012 compared to 29 percent growth in the Latin American segment. Spirit’s domestic revenues were 86 percent of all revenue in 2012, up from 80 percent in 2009. No single international market accounted for more than 4 percent of total revenue.
Spirit’s low cost leadership strategy, or ULCC as it is referred to in the industry, allows customers to purchase only what items they deem necessary. Spirit markets themselves as offering transparent pricing and does not consider themselves a no frills airline, but rather a frills-for-fee airline. Spirit offers the same amenities as higher cost airlines if the customer wishes to purchase the amenities. Spirit’s strategy is analogous somewhat to discount carrier Ryanair’s strategy in Europe.
EXHIBIT 2 Spirit’s Revenues by Category (in thousands)
Source: Company documents.
By charging for bags, drinks, and food, Spirit is able to keep costs low, generate extra revenue for these items, and reduce weight, which reduces fuel consumption. Charging for bags encourages customers to pack lighter and perhaps get by with less expensive carry-on bags as opposed to checked bags. This allows quicker turnaround times at airport gates. In addition to the cost savings, nonticket revenue is an important component of Spirit’s business model because customers, according to Spirit’s research, seem less price-sensitive to drinks, pillows, and even bags than ticket prices. Since 2006, Spirit’s nonticket revenue has increased 800 percent as a result in part to bag and drink fees, but also through the $9 fare club subscription service, Spirit credit card, and the sale of advertising to third parties on Spirit’s website and on-board aircraft.
Spirit’s strategic plan is to aggressively expand geographically (market development) and gain more market share (market penetration) in the United States, Caribbean, and Latin America. Many travel destinations in the Caribbean and Latin America have historically only been served by large carriers charging relatively higher prices. But many cost-minded flyers visit these areas, so there is substantial room for growth in these markets.
To support Spirit’s expansion strategy, the company has on order 106 Airbus 320 aircraft with delivery ranging from 2012 through 2021 as well as spare and replacement engines that are on order between 2012 through 2018. Spirit expects to take delivery of seven aircraft in each of 2013, and 2014, and then 10 airplanes in 2015, and an additional 75 planes between 2016 and 2021. Spirit’s use of the A320 over the A319 enables the carrier to configure the planes to hold 178 passengers as opposed to 150 on the smaller A319 that rival carrier Jet Blue primarily uses.
Spirit currently operates more than 200 flights a day to 50 different airports throughout North America, the Caribbean, and Latin America. Approximately 54 percent of all flights are to or from the home base in Fort Lauderdale, and a large percentage of the balance originate from Detroit, Las Vegas, Atlantic City, Chicago, Orlando, and Myrtle Beach. Global operations include service to Canada, Mexico, all of Central America, Colombia, Peru, and much of the Caribbean. However, many of the global flights are seasonal, and even the flights that are year round, many only fly once or twice a week to these locations. Spirit’s single largest airport is Ft. Lauderdale/Hollywood, with over 20 percent of all Spirit flights operating to or from Ft. Lauderdale.
Spirit focuses on direct marketing to price-sensitive consumers rather than focusing on higher end business travelers. Spirit actively promotes its lowest fares in the industry business model. Sprit spends a paltry 0.2 to 0.5 percent of total revenues on advertising for customers who pay their own way and spends nothing on corporations, government agencies, or other business-class travelers. Spirit relies heavily on repeat customers, word-of-mouth, and its email distribution systems that consist of more than five million e-mail addresses. In addition, Spirit also heavily markets its $9 club online, in radio and TV advertisements, in airport kiosks, and in flight promotions.
A striking weakness for Spirit is its lack of a marketing alliance within the airline industry. Competitors such as Delta, American, and US Airways all have alliances with other airlines enabling them to share codes, combine frequent-flier programs, aid in connections, and much more. Lack of affiliation with an alliance puts Spirit in a competitive disadvantage, particularly on international routes, and may partially explain why this area of the business is not growing as fast as the domestic segment.
Spirit’s recent income statements and balance sheets are provided in Exhibits 3 and 4 respectively. Note the 13.2 percent operating profit margin in 2012. Note that Spirit’s non-ticket revenue increased to 41 percent of revenues in 2012 from 36 percent the prior year.
|Spirit Airlines, Inc. Statements of Operations (In thousands, except per share data)|
|Year Ended December 31|
|Passenger||$ 782,792||$ 689,650||$ 537,969|
|Total operating revenue||1318,388||1,071,186||781,265|
|Salaries, wages and benefits||218,919||181,742||156,443|
|Landing fees and other rents||68,368||52,794||48,118|
|Maintenance, materials and repairs||49,460||34,017||27,035|
|Depreciation and amortization||15,256||7,760||5,620|
|Loss on disposal of assets||956||255||77|
|Special charges (credits)||(8,450)||3,184||621|
|Total operating expenses||1,144,398||926,804||712,392|
|Other (income) expense:|
|Total other (income) expense||(594)||21,551||48,688|
|Income before income taxes||174,584||122,831||20,185|
|Provision for income taxes||66,124||46,383||(52,296)|
|Net income||$ 108,460||$ 76,448||$ 72,481|
|Net income per share, basic||$ 1.50||$ 1.44||$ 2.77|
|Net income per share, diluted||$ 1.49||$ 1.43||$ 2.72|
Source: 2012 Form 10K, p. 60.
The airline industry is highly competitive on price, flight schedules, newness and roominess of aircraft, amenities, and frequent-flier programs just to name a few. In recent years, many airlines have participated in alliances and mergers; Southwest and AirTran merged in 2011 and United and Continental merged in 2010, allowing them greater liquidity and access to capital that smaller airlines such as Spirit and Jet Blue do not have. Alliances such as OneWorld, SkyTeam, and Star Alliance allow larger and regional airlines to share marketing relationships, increase destinations, access to restrictive markets, and provide the ability to use cheaper air craft to service small markets. Currently, Spirit does not engage any type of alliance, which gives Spirit much more flexibility in pricing, policies, and procedures. Spirit’s single largest overlap in routes is with American Airlines at 60 percent.
Southwest and JetBlue no longer have the lowest airline prices. Spirit, along with Allegiant Air and Frontier, now has the legitimate claim as the industry’s lowest-cost flyers. Spirit spokeswoman Misty Pinson says that her airline aims to have a total fare that is at least 25-percent lower than any other available ticket price for any route that Spirit serves. Not even a glass of water is free on Spirit, but no carrier in the USA beats Spirit on ticket price.
EXHIBIT 4 Spirit’s Balance Sheets
|Spirit Airlines, Inc. Balance Sheets (In thousands, except share data)|
|December 31, 2012||December 31, 2011|
|Cash and cash equivalents||$ 416,816||$ 343,328|
|Accounts receivable, net||22,740||15,425|
|Deferred income taxes||12,591||20,738|
|Other current assets||95,210||63,217|
|Total current assets||547,357||442,708|
|Property and equipment:|
|Ground and other equipment||43,580||46,608|
|Less accumulated depreciation||(17,825)||(27,580)|
|Deposits on flight equipment purchase contracts||96,692||91,450|
|Aircraft maintenance deposits||122,379||120,615|
|Deferred heavy maintenance and other long-term assets||125,053||67,830|
|Total assets||$ 919,884||$ 745,813|
|Liabilities and shareholders’ equity|
|Accounts payable||$ 24,166||$ 15,928|
|Air traffic liability||131,414||112,280|
|Other current liabilities||121,314||98,856|
|Total current liabilities||276,894||227,064|
|Long-term deferred income taxes||33,216||12,108|
|Deferred credits and other long-term liabilities||27,239||39,935|
|Common stock: Common stock, $.0001 par value, 240,000,000 shares authorized at December 31, 2012 and 2011, respectively; 70,861,822 and 61,954,576 issued and 70,801,782 and 61,946,361 outstanding as of December 31,2012 and 2011, respectively||6||6|
|Common stock: Non-Voting common stock: $.0001 par value, 50,000,000 shares authorized at December 31, 2012 and 2011, respectively; 1,669,205 and 10,576,180 issued and outstanding as of December 31, 2012 and 2011, respectively||1||1|
|Treasury stock, at cost: 60,040 and 8,215 as of December 31, 2012 and 2011, respectively||(1,151)||(129)|
|Retained earnings (deficit)||79,152||(29,308)|
|Total shareholders’ equity||582,535||466,706|
|Total liabilities and shareholders’ equity||$ 919,884||$ 745,813|
Source: 2012 Form 10K, p. 61.
The airline industry is somewhat easy to enter as airlines such as Spirit lease some or all of its aircraft. Even a restaurant company such as Hooters was able to lease planes, hire pilots, staff, and make a go at the industry. Of course, in the end, Hooters was forced to divest its airline business and stick to its niche of serving chicken wings, beer and sports.
EXHIBIT 5 A Financial Comparison of Spirit with American and JetBlue
|Market Capitalization ($)||1.61B||174M||1.6B|
|Number of Employees||3.1K||80.1K||11.9K|
Note: EPS is earnings per share; P/E, price-to-earnings ratio.
Perhaps the most competitive aspect in the airline industry is ticket price because many carriers use the same airports and customers generally have options regarding which carrier to fly with. Anyone can search various travel sites such as Orbitz and Priceline.com to easily determine the most attractive prices and routes. Despite airlines’ efforts to conserve fuel by charging for bags, thus reducing weight, airlines readily admit, albeit two-faced, that carrying extra passengers as opposed to having an empty seat does little to impact the overall fuel cost of the trip. The incremental extra cost of selling unused seats can be drastically offset by selling the seats even at a perceived steal for the customer. Spirit has its “red light sales” in which the company provides many flights for as cheap as $9 and many others for less than $50 one-way. Selling the seats even at these discounted fares can add tremendously to net profit at the end of the year as opposed to letting the seat remain vacant.
The three principle competitors for Spirit on domestic routes are American Airlines, Delta Airlines, and JetBlue Airways. Approximately 60 percent of Spirit destinations also are serviced by American and Delta; American and JetBlue are the main competitors in the Caribbean and Latin America. Note in Exhibit 5 that Spirit has fewer employees and revenue than either American or JetBlue, but Spirit has the highest earnings per share (EPS).
AMR Corporation, headquartered in Fort Worth, Texas, in conjunction with AMR Eagle Holding Corporation, operates about 3,400 daily flights to more than 250 cities and 50 different countries around the world. Once the largest airline in the world, AMR now trails both Delta and United Continental in total U.S. market share. As a result of declining market share from lack of an effective strategic response to changing market conditions, AMR entered a voluntary reorganization under Chapter 11 bankruptcy in November of 2011. Interestingly enough, US Airways stock tripled the same day AMR formally declared Chapter 11 , signaling that investors thought US Airways may now acquire AMR cheaply. As of July 2013, AMR and US Airways were still two separate companies, but a pending merger is still expected by many investors and analysts. If a successful merger takes place as expected in late 2013, the new company, American Airlines Group, will be the largest airline in the world, even larger than Delta and United Continental in U.S. market share.