When we spoke to the affable CEO of Spirit Airlines, Ben Baldanza, about how his company has persuaded so many passengers that the worst pain in air travel is the ache in the wallet, he took time with us to share what he learned after decades of working in key positions at what are now his top competitors.
“A big part of my job at other airlines was in the revenue space, and I would go to bed every night thinking about how I could raise the fare tomorrow and not lose my customers, and have them not feel bad about it, but get my average fares up. At Spirit, I go to bed at night thinking how can I lower the fare tomorrow.”
Knowing how the other side of the skies flies helps him sleep pretty well at night, if you’re wondering.
Skift: You’ve held key executive positions at virtually all of your competitors, how has that knowledge of what goes on in those operations helped you drive growth at Spirit?
Baldanza: I actually think it’s both been a help and a little bit of a burden in thinking about propelling the Spirit model. On the one hand, working at the legacy airlines, especially on the revenue side where I spent half of my career before Spirit, you realize a couple of things. You realize how price sensitive customers are, and how relatively small changes in price drive big differences in behavior. You realize that working at big airlines.
You realize how difficult it is to compete against carriers who can profitably offer lower fares than you want to be able to sell.
You realize that the things customers complain about and the way they behave drives certain kind of behavior. How incredibly evasive the quest for the higher fare paying business customer is.
At a big airline, like an American or a Delta, it affects everything they do. It affects how the marketing people think about the product. It affects how their schedulers can schedule the airplane. It affects how much real estate they buy at the airport. It affects the way they distribute their product broadly. It affects everything, even though that might only be a minority of the traffic that they carry it affects–or should I say infects–the entire cost structure. I learned all those things working for larger airlines.
By coming to Spirit, I realized that, if we were willing to forego that higher fare paying customers; saying we don’t need to carry that traveller, is there a way to create a profitable growing airline that is not predicated on carrying that higher fare paying customer.
That’s exactly what we’ve done at Spirit, and we’re very proud of that. But we recognize that the decisions we’ve made really shut off that higher fare paying or average fare paying customer from us. Customers who are willing to pay more for a nicer product are not going to choose Spirit.
We understand that and we’re OK with that. That would be difficult for many airlines to sort of come to.
At Spirit we want to own that space and we love that space. At the same time, it’s allowing us to be much lower costs, not just because we’re young and we have a young fleet, but because no part of our organization is focused on trying to attract that higher fare paying customer. I’ll give you an example.
When I was responsible for the schedule working for Continental airlines in Houston, I can promise you that we needed an early morning flight from Houston to New York and Washington and Chicago and L.A. and places that Houston businesses needed to go. We needed an early morning flight even if those flights were 50% full. We couldn’t cancel that flight because we had all kinds of corporate contracts tied into the fact that we would have a good service and you could make a trip to New York on that flight. So our 6am trip to LGA, it almost didn’t matter if that trip was profitable or not as long as the total LGA Houston market was profitable, which might have been twelve flights a day.
At Spirit none of that happens. If the flight is profitable, we keep it. If it’s really profitable, we add more. If it’s not really profitable we pull it back a little bit, and if it starts to not meet our hurdles we pull it. We don’t have to think about the time channel, what customers we’re disenfranchising by not doing this and will that disproportionally affect our revenue.
We don’t have to have any of those conversations at Spirit. So, in that sense, I learned a ton working at the legacy airlines and I’ve been able to use that experience both to help make Spirit different from them by knowing somethings not to do that they did.
At the same time, it certainly put some road blocks in own mind. I went through a process..about what’s really right for Spirit and what’s not. Is it OK to have seats that don’t recline? Is OK to put 180 seats in an airplane that I used to think was right with 150 seats. It’s a process you go through. My sense is that—and I’ve never been a smoker—but my sense is that it’s almost like someone who finally kicked the habit and they become a fervent anti-smoker when they finally learn to quit versus being a legacy airline guy.
Skift: But the majors are taking cues from your strategy too, introducing unbundled fares. Take Delta’s Basic Economy fare, for example.
Baldanza: We really like that fare. Delta carry roughly 20% of the traffic in the United States and they’re sending out a very strong message to customers which is that if you pay more you should expect more and if you pay less maybe your expectations shouldn’t be so high.
We like that message a lot, because that’s very consistent with our own education effort of telling customers: ‘We know you really like the low fare. We want you to understand what it takes to get you that low fare.’
Delta saying: ‘If you’re only going to pay the Basic Economy, I’m not going to give you the full Delta product,’ we think is very consistent with our own efforts to educate the broader traveling customer base to be sensitive that if they pay a lot of money they should have great expectations and if they don’t pay very much then maybe they should temper those expectations a little bit—not in terms of safety, of course, and not in terms of friendliness–I don’t mean that–but in terms of the physical product features.
Skift: But has the low-cost model become diluted with majors marketing unbundled products and some of the low-cost carriers offering upgraded products?
Baldanza: What’s happening is that there’s an older narrative—an outdated narrative—that there are these legacy airlines in North America, American, United, Delta, so on, and there are these low-cost carriers like Southwest and JetBlue, and there is this new breed like Spirit and Allegiant that are even cheaper.
I think that’s a very old view of the world. I think a more realistic view of the world is that you have very large network carriers, American, United, and Delta, with world-wide partners and such, and then you have a group of carriers, that I would put both Southwest and JetBlue in, which are essentially trying to attract the same customer base, more of business oriented customer base, that are investing in their product and trying to appeal to a higher average paying customer, but because of their operating model, their costs are a little lower than the legacies so their fares can be a little bit lower.
But they’re not really that low-cost any more. Then you have the new world of the true low-cost carriers, which are known as ULCCs, which are really just us and Allegiant, and Frontier certainly with an aspiration to become that. The reality is that, if you look at the way that Southwest and JetBlue behave today and Virgin America, the way they distribute their product, the way they message to their customers, the way they operate–their physical operations–makes them look much more like a traditional legacy airline than what people think of as a low-cost airline.
A big part of my job at other airlines was in the revenue space, and I would go to bed every night thinking about how I could raise the fare tomorrow and not lose my customers, and have them not feel bad about it, but get my average fares up. At Spirit, I go to bed at night thinking how can I lower the fare tomorrow. I think of getting more ancillary revenue or I can find a way to shave some more cost—in an area that isn’t safety related, of course—and thinking about things like that. That’s just a much more relaxing and exciting way to go to bed every night: thinking about how can I do the #1 thing customers want, which is making their fare lower tomorrow—instead of thinking of how I can leverage the traveller who really doesn’t have any choice and charge them even more; because that’s a big piece of the revenue game at big airlines.