Spirit believes price still reigns supreme

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No-frills, bare-bones carrier Spirit Airlines remains bullish on the longevity of its business model even as ever-increasing passenger sophistication pushes some airlines to craft strategies to compete on customer amenities.

In the most basic sense, Spirit’s strategy encapsulates offering the lowest fare in order to target cost conscious travelers, and then allowing those passengers to flesh-out their air travel experience through the purchase of add-ons. Some of elements that Spirit opts to levy charges on have drawn ire from the traveling public, including carry-on bag fees and printed boarding passes at the airport.

But the carrier argues that charging for those items allows it to keep its costs low, and offer attractive fare prices to a passenger segment that otherwise could not afford to travel. Its model is holding steady as Spirit’s traffic grew 24% during 2013 and its profits jumped 62% to $262 million.

Recently Spirit CEO Ben Baladanza was queried about whether the carrier’s price advantage would need to get wider in order for the carrier to maintain its passenger base as other airlines add amenities.

Baladanza used the economic term ‘intermediate good’ to describe the airline business. “People fly on airplanes to go do something else, to go on vacation, to go on a business trip, to see family, to get home…and so there’s a group out there, and I don’t know how big it is as a percentage of the flying public, but there is a group of people out there who are always going to want to spend as little as they can getting there and spend more money actually being where they want to go.”

Spirit’s chief believes that the carrier’s model “is well attuned to what most customers, when surveyed, actually care about when they pick the airline and that’s how do I get there for the lowest price?” He also comments that in some cases those carriers expanding their amenities “will ultimately need to charge higher fares over time” in order “to make those things work in an economic sense”.

Baldanza does admit that “at price equal” a passenger might choose an airline with more legroom, inflight entertainment or food on onboard “when we don’t”. However, he adds, “price tends to be the winner when it comes to the majority of the flying public.”

From a business standpoint, Spirit is marching towards an aspirational goal of ancillary revenue accounting for 50% of its total revenue. During 2013, Spirit grew its non-ticket revenues by nearly 25% to $668 million. The carrier’s ancillary revenue represented roughly 40% of its total $1.7 billion in revenue for the year.

Spirit’s non-ticket revenue per passenger segment in 2013 grew 4.8% to $53.84. Baldanza admits it is tougher to move from $54 to $60 in non-ticket revenue per passenger segment. “We’re in a shallower part of the curve for sure.” But the carrier is optimistic in growing ancillary revenue as Baldanza concludes some of the biggest chunks of ancillary revenue – bag fees, change fees and convenience fees – “have the ability to be more scaled to supply and demand, which creates some revenue upside in the same way ticket prices have been managed the last number of years.”

Many carriers working to increase their ancillary revenues are migrating toward pricing models for their unbundled products that mirror high and low-demand travel periods. Ultimately what this means for passengers is paying more for a checked bag when travelling on a peak travel day. For carriers like Spirit, higher ancillary revenues “gives us the ability to charge even lower fares for customers and that creates more stimulation,” Baldanza declares.

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