Spirit Airlines: Achieving a Competitive Advantage Through Ultra

Journal of Aviation/Aerospace
Education & Research
Volume 23
Number 1 JAAER Fall 2013
Article 6
Fall 2013
Spirit Airlines: Achieving a Competitive Advantage
Through Ultra-Low Costs
James Elian
Gerald N. Cook
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Elian and Cook: Spirit Airlines: Achieving a Competitive Advantage Through UltraSpirit Airlines
SPIRIT AIRLINES: ACHIEVING A COMPETITIVE ADVANTAGE
THROUGH ULTRA-LOW COSTS
James Elian and Gerald N. Cook
Abstract
Large losses between 2004 and 2006 brought Spirit Arrlines to the verge of failure. With capital mfustons
from two pnvate equity groups and a new cost focus strategy patterned after Europe's Ryanarr, Spirit proclatmed itself
an ultra-low-cost carrier Spirit usually offers the lowest fare m its markets, but thts base fare buys a seat with
allowance for under-seat baggage only Everythmg else, mcluding a glass of water, ts extra. Ancillary fees account
for some 40% of total revenues. Although it has developed a customer base of pnce sensitive travelers, Sptnt ts also
among the mdustry leaders m complamts. Nonetheless, Spirit should dommate the pnce sensitive U.S. arr travel
market tn the short to medium term as it has achieved a sustamable competitive advantage based on Porter's cost focus
strategy.
Since deregulation ID 1978, the U.S. airline
1Ddustry bas struggled to achieve consistent profitability. No
longer protected from competition on profitable routes,
legacy earners faced 1Dcreased competition from each other
and, more importantly, from new entrant airlines not
burdened by ngtd contract work rules and btgh labor costs
tnherited from the regulated 1Ddustry. The first decade ofthe
twenty-first century was particularly difficult for the
1Ddustry as it was buffeted by successive world events
1Dcluding the terronst attacks of September 11, 200 I and
subsequent recession, the severe acute resprratory syndrome
(SARS) epidemic, the dramatic nse and 1Dcreased volatility
of oil pnces, and, finally, the global recess10n begtnn1Dg ID
2008. By 2012, the collective toll resulted ID the bankruptcy
of all surv1vmg pre-deregulation legacy earners. Thts led to
airline consolidations and domestic capacity reduction
resulting ID much needed 1Ddustry stability. While the lowcost earners (LCCs) have generally continued to expand ID
the new millenmum, the domestic airline product offered by
the full-servtce and LCCs has converged to the extent that
many passengers view the domestic economy class seat as
a commodity (Tarry, 2010). An 1Dteresting recent
JAAER, Fall2013
Published by ERAU Scholarly Commons, 2013
development ts the emergence of the so-called ultra-lowcost carrier (ULCC) bus1Dess model first developed ID
Europe by Ryanair and more recently IDtroduced ID the U.S.
by Spirit Airlines. The ULCC bus1Dess model stnves to
obtatn a competitive advantage through a more aggressive
implementation of Porter's cost focus strategy compared to
traditional LCCs. By choos1Dg to focus almost exclusively
on mm1m1z1Dg costs, the ULCC bus1Dess model results ID a
very focused target segment of those passengers who are
concerned solely with obtatntng the lowest pnce for arr
travel (Porter, 1998).
Tbts paper ts a case study of Spirit Airlines'
aggressive implementation of Porter's cost focus strategy to
transform from a small, struggling low cost airline serv1Dg
gambling and vacation destinations ID the eastern United
States to a highly profitable and rapidly growmg ultra-lowcost earner with routes stretcbtng across the U.S. and south
to the Canbbean and Central and South Amenca.
History
Spirit Airlines traces its onglD to the Clipper
Trucktng Company established ID 1964. Twenty years later,
with a new bus1Dess plan and name, Charter One, the
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Journal of Aviation/Aerospace Education & Research, Vol. 23, No. 1 [2013], Art. 6
Spirit Airlines
company began offenng charter flights and tour packages to
entertamment destinations, pnmarily from the Midwest to
Atlantic City, New Jersey. By 1992, Charter One became
Sprrit Arrlines with scheduled service promoting low fares,
a strategy densively termed bottom feeding by some due to
havmg typical attributes of multiple extra charges and poor
customer service (Flint, 1999). Sprrit grew, pnmarily with
expanded routes from the Midwest and Northeast to Flonda,
but it struggled with low and mconsistent profits as it had
not fully committed to one of Porter's three genenc
competitive strategies: cost leaderslnp, differentiation, or
focus (Porter, 1998). Due to Sprrit's lack ofa competitive
advantage, it mcurred large losses from 2004 to 2006 that
brought the arrline to the verge of failure; it was rescued
with capital mfusions m 2004 and 2005 from the pnvate
equity mvestment firm Oak.tree Capital Management. In
2006, Indigo Investment Group purchased controlling
mterest m Sprrit, brought m new management and
unplemented a busmess plan focused solely on providing
the lowest pnce targeting a very narrow segment of the air
travel market. Sprrit thus proclauned itself as an ultra-lowcost earner (SprritArrlines, 201 la). Although first m North
Amenca, Sprrit's busmess model was patterned closely on
the highly successful European earner Ryanarr that had
itself adopted the strategy after operating for many years on
a traditional LCC model onginally developed by Southwest
Arrlines. On June 1"1, 2011, an mitial public offenng (lPO)
was completed takmg Sprrit Arrlines public (Sprrit Arrlines,
2012a). The IPO was mitially seen as a disappomtment by
many analysts; Sprrit reduced the pnce and volume of the
o:tfenng shortly before listing that resulted m a more than
thrrty percent reduction m capital raised ("Sprrit Airlines
IPO," 2011). Figirre 1 illustrates Sprrit's perilous losses
begmnmg with the recession of2001 and continwng until
the adoption of the ultra-low-cost strategy.
Spirit Airlines Net Income (In Thousands)
$20,000
s
$20,00IJ
I
·540,000
'
$60,00IJ
I
SllO.OOD
I
·$100,000
Pnor to I ransition
1'195
1'196
1'197
l'l'l'l
]000
Sl.«>84
·54.818
SSlll
·$9,918
·Sb,b9~
I
I
I
7001
SZ,838
~I
JOO]
]QM
2ms
2006
-519,4;[~
·$9~.l34
S&U01
580.6~2
I
___I
Figure I. SprritArrlines Net Income from 1995 to 2006. Adapted from Department ofTransportation Statistics and SprritArrlines'
IPO Prospectus (Sprrit Arrlines, 2011 b)
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JAAER, Fall 2013
24
Elian and Cook: Spirit Airlines: Achieving a Competitive Advantage Through Ultra-
Spirit Airlines
A revtew of recent financial and operational data mdicates
that the ultra-low-cost model has proven remarkably
successful. In 2012, Spirit was the fastest growmg U.S.
earner with revenue passenger miles mcreasmg30.6% while
available seat miles mcreased 27.5% dnvmg its load factor
to 84.8% (Hegeman, 2013). Moreover, Spirit enjoyed the
second highest profitability of all U.S. major earners for
2012 falling Just behmd fellow mche earner Allegtant Atr. 1
Strategy
Spirit's ultra-low-cost strategy IS remarkably
sunple m concept and aggressively follows Porter's cost
focus strategy for achlevmg a competitive advantage. As
CEO Ben Baldanza often explams, "We're selling low
pnces, and compete for customers on the bas1S of pnce
and pnce alone. In the retail world, we would be the
dollar store." (Satchell, 2013). Tins strategy reqwres a
very low cost structure, and Spirit has been mnovative by
unbundling many services which traditionally have been
considered standard. The result of unbundling has been
the ability to offer even lower base pnces, while also
achlevmg ancillacy revenues that compnse 40% of Spirit's
total revenues, the highest m the mdustcy (Spirit Airlines,
2012b). Spirit's base pnce is usually the lowest m the
market, but entitles the passenger to only a seat on the
flight; all else, mcluding a glass of water, is extra.
Baldanza argues that these are options that a passenger
may choose similar to the menu items at McDonalds and
that passengers should not have to pay for servtces they
do not need or value. Not all passengers are pleased, but
the model is workmg leading USA Today to ask if Spirit
ts the nation's only true low-cost airline? (Jones, 2012).
Target Market
Spirit's target market ts narrowly focused on
leisure and vtsiting mends and relatives (VFR) passenger
segments. Leisure is the pnmary domestic segment with
VFR second. Internationally, these segments are reversed
1
with VFR first followed by leisure. The product is
carefully tailored for these pnce-sensitive travelers who
are willing to sacrifice product amenities for a lower
pnce. Spirit is disciplined m mamtammg its focused
market and unlike all other domestic earners except
Allegtant Arr, does not actively target busmess and
corporate travelers reasonmg that its low frequency,
limited routes, reunbursement policy, and lack of airport
and onboard amenities have very limited appeal to the
busmess segment so pnzed by other earners (Spirit
Airlines, 2012a).
Route Architecture
The route map is thm but spans the contiguous
states and stretches south mto the Caribbean and
Amencas. Spirit lists several airlines as competitors.
Across its route system, the pnnciple competitor is
Amencan Airlines with 60% market overlap, followed by
Southwest Airlines, United Airlines, and Delta Arr Lmes
domestically, and JetBlue Airways m the Caribbean and
Latin Amencan markets (Spirit Airlines, 2012a). Spirit
pndes itself on not bemg subject to the traditional
meffic1enc1es of the hub and spoke model (Spirit Airlines,
2012a); however, an exammation of the route map (Figure
2) and timetable reveals a more complex reality. Ft.
Lauderdale serves as a directional hub with mommg
southbound flights from Northeastern and Midwest states
connecting to many Caribbean, Central and South
Amencan destinations. Flows are reversed m the
aftemoon/evenmg. Random connections are also available
m other cities such as Dallas/Ft. Worth, Chicago and
Detroit, but some routes stand alone without support of
connecting traffic. Frequencies are low, often only once
daily and not timed for peak demand. Spirit also defies the
archetypal low-cost model by servmg both highly
congested major airports mcluding Chicago O'Hare, Los
Angeles International, and New York LaGuardia, among
others, as well as secondary and low density airports such
as Latrobe Pennsylvama and Phoemx Mesa.
Author's calculation based on operating and net margm on revenue.
JAAER, Fall 2013
Published by ERAU Scholarly Commons, 2013
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Journal of Aviation/Aerospace Education & Research, Vol. 23, No. 1 [2013], Art. 6
Spirit Aulines
Figure 2. Spirit Airlines Route Network (Spirit Airlines. 2013a).
Spirit bas recently been growmg its domestic route
system after several years of developmg mtemational
markets m the Canbbean, Central and South Amenca.
Unlike many earners, Spirit JS unconcerned with market
share when evaluating potential routes (Yeo, 2012). Nor
does irugor earner competition appear to be an nnportant
consideration as Spirit bas been mcreasmg destinations and
departures from Dallas/Ft. Worth where Amencan Airlines
bas been weakened by bankruptcy but Southwest Airlines JS
a strong competitor from its Dallas- Love home. For Spuit
to consider a route for expansion there must be at least 200
passengers per day each way, the ability to reduce fares by
at least 25% below existing levels, and the potential to earn
an EBITDAR 2argm of24% to 26%. With these expansion
2
Eammgs before mterest, taxes, depreCJation, amortimion and rent.
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critena, Spirit enters markets where low pnce stimulates
demand from new passengers m addition to captmmg some
of the pnce-sensitive segment from mcumbent earners.
Spirit mamtams that more than 400 potential routes meeting
these critena have been identified (Ranson, 2012; Spirit
Airlines, 2012b).
Fleet
Spirit operates the Airbus A320 family of smgleaisle Jets. Most are the smaller A319 model, but the autine
plans to gradually standardi7.C on the larger A320, mcluding
the next generation A320neo (new engme option).
Operating a smgle fleet type confers substantial cost
effic1enc1es mcludingreduced trammg costs and accelerated
leammg curve, flexibility as crewmembers are qualified on
all aircraft models, and reduced parts mventory. As of the
end of 2012, Spirit had 45 aircraft m its fleet, with a
substantial aircraft order book allowmg for expansion to 113
JAAER, Fall 2013
26
Elian and Cook: Spirit Airlines: Achieving a Competitive Advantage Through Ultra-
Spirit A1rlines
arrcraft by the end of2021 (Sprrit Arrlines, 2013b).
Product and Fare Structure
Sprrit's ability to promote low fares IS based, ID
part, on the ultimate unbundled pnc1Dg strategy. The base
fare buys a seat with allowance for under-seat baggage only
(Yeo, 2012). All other amenities IDcluding checked and
overhead carry-on baggage can be purchased for additional
fees. Indeed, Sprrit was the IDdustry leader ID chargmg for
baggage. Table 1 shows a portion of the surpns1Dgly
complex system of baggage fees. Ancillary fees, of which
there are 74 different options, also vary with the time and
location of purchase with the highest fees charged at the
arrport Just before departure. Figure 3 proVIdes a breakdown
of Sprrit's ancillary revenues. Amenities are limited and
there are no passenger lounges or on-board entertamment;
"pre-reclined" seats are becommg standard and legroom 1s
mlDlmal. Passengers are expected to mostly handle therr
own process1Dg. Customer seMce, when needed, 1s often
rushed.
Sprrit mmmuzes customer service costs, but this
has contributed to its very high rate ofcustomer compla1Dts.
For January, 2013, Sprrit amassed 7.2 complamts per
100,000 fliers filed with the Department of Transportation,
better than Frontier with 7 .6 per 100,000 passengers, but
some 22 times that of Southwest who garnered the best
performance and more than 2.5 times that of the United
Arrlines which held the next worst position. 3 CEO Baldanza
1s largely 1Ddifferent pass1Dg offcomplamts as "an rrrelevant
statistic" (Miller, 2012). Sprrit believes that passengers will
repeatedly endure Spartan service ID return for a low fare.
As one passenger stated ID a Yelp review, "I travel on Sprrit
all the time. I know they suck! But, for a cheap ticket, I will
endure anything" (Seaney, 2012).
3
Authors' calculation.
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Journal of Aviation/Aerospace Education & Research, Vol. 23, No. 1 [2013], Art. 6
Spirit Airlines
Ancillary Revenues per Year
(In Thousands)
I 5600.ooo I
5500.000 '
.: Service Chaf'91!S fOr
Challflt!Sand
Cancellations
5400.000 : $3(1),000 I
$200,000 "
i
; $100.000 I
$-
.:Advance Seat selection
I
2010
2011
:
2012
Figure 3. Spuit Airlines Ancillary Revenue. Adapted from Spuit Airlines' Form 10-K for the penod ending 12/31/12 (Spuit
Airlines, 2013b).
Table 1
Spuit Airlines Ancillary Baggage Fees
Ony-OI ~
$35
$40
FeleMtion <Brter F\irdlase
$40
$00
Airport O>unter/l<iosk F\irdlase
Qoup Eboklng >24 hours tn Adva1a!
$35
$40
Qoup Eboklng <24 hours1n Adva1a!
Gte F\irdlase
N.Eboklng
Olline Oled<-ln
1st
2nd
3rd-3:h
Oled<ed ~ Oled<ed ~ Oled<ed ~
$40
$85
P>
$9)
$35
$45
$9)
$35
$45
$100
$45
$55
$40
$85
P>
$9)
$35
$45
$100per~
(Spuit Airlines, 2013c)
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28
Elian and Cook: Spirit Airlines: Achieving a Competitive Advantage Through UltraSpirit A 1rlines
Distribution and Promotion
Spuitmamtams three distinctdistnbutionchannels.
The website accounted for 64.2% of ticket sales m 2012.
Thtrd parties, mcluding Global Distnbution Systems (GDS),
traditional travel agents and online travel agents (OTA)
produced 27 .2% of sales, with an outsourced call center
representing the remammg at 8.6% of sales (Spuit Airlines,
2013b).
Although Sp1rit's embrace of traditional
distribution mcreases its reach and sales, it 1sn't without
problems. It distributes through Amadeus, Galileo,
Worldspan and Sabre GDSs, but the airline reserves its
lowest fares for its Spuit.com website ("Spuit Airlines, after
IPO," 2011). When customers use Spuit's website, its
additional fees and policies are prommently displayed.
OTAs, however, show only the base fare leavmg passengers
surpnsed and occasionally irate when discovermg what isn't
mcluded m the base fare. Baldanza attributes 100 percent of
passengercomplamtstosalesthroughOTAs(Snyder,2013).
This 1s certamly an overstatement, but illustrates the limited
ability of third party systems.
Spuit does not engage m general brand or product
marketing and spent only 0.2% of revenues on marketing m
2011 pnmarily emphasmng low base fares. Pnnc1ple
marketing tools mclude the $9 Fare Club, email distribution,
and viral marketing products that send customers to the
Spuit website (Spuit Airlines, 2012a).
Despite the lack ofa substantial advertising budget,
Spuit 1s well known for edgy, often off-color, advert1smg
that has generated considerable free publicity, though often
not positive. Notable are the "Hunt for Hoffa" campaign of
2006; MILF, Many Islands, Low Fares, m 2007; the "Eye of
the Tiger'' sale of 2009; and the 2010 "Check Out The Oil
On Our Beaches" promotion (Bhasm, 2011 ). Email 1s the
common method of commumcation.
Cost Structure
Any firm employmg a cost focus strategy must
mamtam unit costs lower than its competitors m its target
segment (Porter, 1998). Spuit states its cost per available
seat mile (CASM), a standard measure ofairline costs,
was 10.09 cents m 2012 (Spuit Airlines, 2013b). This
compares with 12.85 for Southwest, 11.49 at JetBlue, and
14.91 cents for Amencan A1rlines. Table 2 provides a
more detailed CASM companson between the listed
earners.
Table2
Spuit A1rlines 2012 CASM (in cents) versus competitors
s•Pin
. •t
Fuel
Salanes, wages and benefits
4.16
1.93
Aircraft rent
Landing fees and other rentals
Mamtenance, matenals and repairs
Depreciation and amortization
1.27
0.60
0.44
0.13
Other o ..... ~ eXDCDses
TotalCASM
Total CASM excluding Fuel
1.56
10.09
5.93
Southwest
4.78
3.69
0.28
0.81
0.88
0.66
A mencan
5.24
3.76
0.33
0.77
0.68
0.60
1etBIue
4.50
2.60
0.33
0.69
0.84
0.65
1.75
12.85
3.52
14.91
1.88
11.49
8.07
9.67
6.99
(Spuit Airlines, 2013b) (Southwest Airlines, 2013) (Amencan Airlines, 2013) GetBlue, 2013)
Spuit achieves low unit costs from (a) high aircraft
utilization, (b) high-density seating aircraft configuration,
(c) s1mple operations, (d) mmimal hub-and-spoke
meffic1enc1es, (e) a highly productive workforce, (t)
opportunistic outsourcmg of operating functions, (g)
operating a modern smgle fleet type of aircraft, (h) reduced
sales and distribution costs, (i) efficient flight schedule with
JAAER, Fall 2013
Published by ERAU Scholarly Commons, 2013
mm1mal ground times between flights, and G) a companywtde busmess culture that IS keenly focused on dnvmg costs
lower (Spuit Airlines, 2013b).
In a presentation to potential mvestors, Spuit boasted that its
daily aircraft utilization of 12.7 hours exceeds JetBlue's rate
of 11.9 hours per day, and Southwest's 10.5 hours per day
(Spuit, 2012b). This mcreased aircraft utilization 1s partially
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Journal of Aviation/Aerospace Education & Research, Vol. 23, No. 1 [2013], Art. 6
Spirit Aulines
aclneved through the operation of many ''red-eye" flights.
The unbundled pncmg speeds ground tum-around times as
lngh fees for carry-on baggage reduce the number of bags
brought on-board which, m turn, enables passengers to
qwckly stow therr items and take therr seats. As a result, the
standard boarding times have been reduced by 5 to 10
mmutes (McCarbtey, 2010). By chargmg for all beverages,
mcluding water, fewer beverages are consumed. Catermg
time and expenses are reduced, as ts fuel consumption due
to the reduced arrcraft operating weight.
Sprrit configures its cabms with the maximum seats
allowed by the arrcraft certification. The new A320 arrcraft
are configured at 178 seats. Tuts compares with JetBlue's
150 seats for the same Atrbus model g1vmg Sprrit a 16%
cost advantage per available seat mile. Of course, h1ghdensity seating 1s aclneved through reducmg passenger
legroom decreasmg passenger comfort. Sprrit also enjoys
substantially lower labor costs than its competitors. These
lower costs are partially due to higher employee
productivity, but are also due to a relatively Junior
workforce resulting from the recent expansion (Spirit
Arrlines, 2013b).
Financial Success
Since the mtroduct1on of the ultra-low-cost
earner busmess model m 2007, Sprrit has been
consistently profitable. Followmg a small profit that year,
profits mcreased impressively with net mcome of $33
million m 2008 and between $72 million and $108 million
from 2009 to 2012 (Sprrit Airlines, 2013b). The stock
market also reflected Sprrit's success as the stock pnce,
wlnch closed mitially at $11.48 followmg the mit1al
public offenng m May 2011, more than tnpled by
September of2013. Figure 4 illustrates the dramatic
turnaround m profits while Figures 5 compare Sprrit's net
mcome per arrcraft with some of its competitors.
Spirit Airlines Net Income (In Thousands)
590,000
540,000
-s10,ooo
-$60,000
·Sllo.ooo
Pnor to Transition
Pm.I lrdfl\ilinn
}1111
I
I
}00}
700:1
$2,838 : $19,423. $626
JIXM
I
700!1
7006
7007
JOOR
JOO'!
}010
7011
Jot}
i
$93,234 $62,101 $80,652
I
Sl,362
$33,259 $83,693 $72,481 $76,448 $108.46
Figure 4. Sprrit Arrlines Net Income - Pnor/Post busmess model change. Adapted from Department of Transportation
Statistics, Sprrit Arrlines' IPO Prospectus and Form 10-k from the period ending 12/31/12 (Sprrit Arrlines, 201 lb) (Sprrit
Arrlines, 2013b).
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30
Elian and Cook: Spirit Airlines: Achieving a Competitive Advantage Through UltraSpirit Airlines
Comparison - Net Income per Aircraft (In Thousands)
$3,000
$2,000
'
$1,000
I
---------- .......
......... __________.:.:.·;,,;;.·---~·.i:.-:."'::'::::-: .. _ ... "•:.::.:::;.::.:~:.::.:~:.:~··
sSl,000
I
$2,000
I
-$3.,000
200&
200/
21108
-$2,601
$38
$1.188
···--· ..- - - - - - - - - - - - - - - - - - - - · ·
--~irtt
$1,03/
- - - • Southwest
-··-··------·-·
-----$188
-- - Amem::an
....... jctBluc
-$'>9
$1,J48
$47<1
$'l0
$331
--------- -- -- --$2,837
-$'>97
2009
201 t
2010
JOtl
------------------·----~--··-
$1,98'1
$184
----------·-$1,656
S4D'I
Sl.265
$838
---
-s~n
$bll&
-
$1.06&
$2,410
$7'>'>
---·-----------
·-····-·--·----------
-s2.166
-s2,21<J
$'>09
$/11
$&0/
Figure 5. Sptrit Airlines Net Income by Aircraft- Comparison. Adapted from Sptrit Airlines' IPO Prospectus and from
Sptrit, Southwest Airlines, Amencan Airlines, andJetBlue's Form 10-k.
Analys1S
Cost Focus Competitive Advantage
Followmg its dec1S1on to pursue the ULCC
busmess model, Spirit sharply narrowed its targeted
passenger segments to the most pnce sensitive leisure and
VFR passengers. The timmg of the strategic shift was
fortuitous as the last decade has seen the distinction between
economy class on full-service network earners and the
LCCs blurred as both moved closer to the others product
offenng. The Great Recession of 2008 drove many
consumers m search of lower pnces. Busmess traffic
declined, but VFRand leISure passengers continued to travel
as airlines chased passengers with reduced fares. Many
passengers now vtew an economy seat as a commodity with
the choice of airlines based largely on pnce (Tarry, 2010).
Sptrit has achieved cost leadership m this narrow
segment and the resulting financial performance has been
impressive, especially given the hlstoncally dismal history
of the U.S. airline mdustry. The busmess model of
mamtammg very low costs, focusing exclusively on leISure
and VFR passengers, and the unbundling of services IS
JAAER, Fall 2013
Published by ERAU Scholarly Commons, 2013
umque to the U.S. and has earned Sptrit first mover
competitive advantages, sunilar to those expenenced by
Ryan.arr m Europe. The result 1s that Sptrit has been able to
expand the overall market for arr transport and successfully
obtamed a competitive advantage through the
implementation of a cost focus strategy (Porter, 1998).
Risks
Porter lists several nsks to companies pursumg
focus strategies: (a) the ability for other companies to
imitate the focus strategy, (b) the nsk of the target segment
becommg structurally unattractive, (c) the potential for
broadly targeted competitors to overwhelm the narrow
segment, or (d) new entrants takmg a more narrow focus and
subdivtding the chosen segment (Porter, 1998).
The nsk of imitation m the short term ts unlikely m
the U.S. as all other earners, mcluding those still labeled
LCCs, target busmess clientele who demand more services.
Allegiant IS an exception, but competition between the two
1s limited and unlikely to escalate m the short-term as there
are easier markets to enter than those which would result m
competition between two pnce-focused earners. The U.S.
Page 31
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Journal of Aviation/Aerospace Education & Research, Vol. 23, No. 1 [2013], Art. 6
Spirit Airlines
market 1s mature and fully servtced and there 1s no apparent
openmg for a new arrline. The nsk of a new entrant
choosmg a more narrow cost focus strategy and subsegmenting Sprrit's target market 1s also unlikely due to the
already narrow focus on leisure and VFR passengers.
The nsk of Sprrit's target segment becommg
structurally unattractive 1s unlikely. Boemg mdicates that
North Amencan passenger traffic should grow at an annual
rate of2.7 percent over the next 20 years and that LCCs are
currently leading capacity growth (Boemg, 2013). As the
world economy slowly recovers and the average leisure
traveler has more disposable mcome, some may abandon
Sprrit's product for other earners offenng a higher quality
product and at least some amenities mcluded m the base
pnce; however, these passengers will likely be replaced with
those who were previously unable to afford to travel by arr.
The nsk of more broadly targeted competitors
overwhelmmg the narrow segment IS also unlikely m the
short term. Existing earners are heavily mvested m therr
busmess models, which have also been profitable m recent
years. While competitors may selectively challenge its
pncmg on some routes, Sprrit's low frequency m most
markets doesn't present a senous threat, at least m the shortterm. Recent consolidation of U.S. earners with therr new
emphasis on financial returns rather than market share also
works m Sprrit's favor. Over the last several years, the
maJor network earners and Southwest have restrained
capacity and focused on higher yield passengers, largely
abandonmg the extremely pace-sensitive passengers that
Sprrit targets. Should the largest earners return to an
emphasis on expanding domestic capacity and growmg
market share, competition for low-yield passengers would
mcrease reducmg Sprrit's current competitive advantage.
One area of potential weakness that may be
exploited by a potential competitor is Sprrit's level of
servtce. The accepted wisdom m marketing holds that a firm
must meet or exceed customer expectations to succeed m a
competitive marketplace. But Sprrit fails to meet the
expectations of many passengers. Complamts to the U.S.
Department ofTransportationhave long been at multiples of
other arrlines. A search of the web for complamts about
Sprrit reveals that it has earned the enmity of a host of
passengers. One website, SprritArrlinesFacts.com (n.d.),
acknowledges that Sprrit has its fans that "have learned how
to travel withm Sprrit Arrlines rules, and because of the
perceived savmgs, they are happy to live with whatever
mconvemences and mdignities they are exposed to," but
warns that many others have expenenced rumed vacations
and destroyed busmess plans. Whether Sprrit can seemmgly
defy the established marketing wisdom m the long tenn
remams an open question.
Sustamability
Sprrit's financial performance smce completmg the
transition to the ULCC busmess model has been well above
the mdustry average. After a disappomting mitial public
offenng, Sprrit's stock has more than tnpled with analysts
generally bullish on its prospects (Turcan, 2013) (Jayson,
2013). Sprrit's target segment of passengers, focused
pnmarily on pnce, 1s structurally attractive and expecting
continued growth m the medium term. As the company
matures employee wages will nse; however, expected
growth rates should reduce some of the negative pressure as
new employees JOID the company at the lower wage levels.
Evaluating the known strategic nsks, Sprrit should not face
a senous competitive challenge m most markets. As a result,
Sprrit should dommate the pnce sensitive U.S. arr travel
market m the short to medium term as it has achieved a
sustamable competitive advantage based on Porter's cost
focus strategy (Porter, 1998). +
James Elian is vice president of operations and a pilot for a North Amencan fractional ownership provider. Mr. Elian received
his Master ofBusmess Admmistration degree from the Umversity of Calgary and is a Master of Aeronautical Science candidate
at Embry-Riddle Aeronautical Umversity.
Gerald Cook IS an adjunct professor m the College ofBusmess at Embry-Riddle Aeronautical Umversity, Worldwide Campus
and former arrline operations manager and pilot. Dr. Cook received his Bachelor and Master of Science degrees from Purdue
Umversity and Doctor ofBusmess Admmtstration from Nova Southeastern Umversity.
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Elian and Cook: Spirit Airlines: Achieving a Competitive Advantage Through Ultra-
Spirit Airlines
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