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Spirit Airlines is having trouble raising fares as other carriers participate in a race to the bottom on pricing, according to executives during the airline’s second quarter earnings call.
Operating revenue increased 20.1 percent year-over-year to $701.7 million while net income rose 6.9 percent to $78.1 million for the June quarter. Flight volume (9.3 percent) and operating yields (7.1 percent). Despite posting solid results for the quarter, the airline has cautioned that it faces headwinds for the rest of the year due to a variety of factors.
Spirit’s stock dropped about 15 percent after the market opened Thursday morning following the release of its earnings report.
Fares are down across a portion of Spirit’s routes, putting pressure on the low-cost carrier since June.
“It is surprising to see our competitors resort to the unusual levels of discounting we’ve seen,” said Matt Klein, chief commercial officer of Spirit Airlines. “To compete we’ve had to arrest some of our efforts to push fares higher.”
The big three U.S. airlines have continued to push basic economy fares, providing flyers a cheaper alternative to traditional low-cost carriers. But Spirit executives claim this segmentation isn’t directly affecting their competitive prospects in the North American air market.
“I wouldn’t necessarily say basic economy has anything to do with this,” said Klein. “Basic economy is a pricing segmentation tool but it doesn’t have anything really to do with the [overall prices in the marketplace].”
Spirit will experiment with bundling ancillaries in the future to drive more revenue since fares are so depressed. Higher capacity overall has also led to more competition on Spirit’s routes.
“There’s no question we have higher capacity [industry-wide],” said Bob Fornaro, Spirit Airlines CEO. “For us, we’ve been growing at 15 to 20 percent for a number of years. As we’ve approached the second quarter, there is a five percent increase in domestic capacity. That’s fairly substantial compared to a year ago…
“We want fares low, but we’ve been trying to move the average number up. [Pricing] changed very quickly in June; when you hold out for higher fares, you leave more inventory open and when the dynamic environment changes you have to catch up.”
Newark, one of Spirit’s newer routes, Chicago, and Houston have been some of the markets where fares have declined, leading the airline to perform poorly. The airline is also struggling to sign a new deal with its pilots; Spirit had more than 850 pilot-related cancellations in the second quarter due to a labor dispute.
Despite changes in the marketplace and various other problems, Spirit doesn’t plan on changing its core strategy, adopting a wait-and-see approach.
“Given the cost structures in the industry its pretty clear the cost structure of a United or Delta can’t accommodate all the needs of all the customers in the industry,” said Fornaro. “This company’s been operating in Chicago profitably for 15 years and it’s in our plans.
“Fortunately if we were a higher cost carrier, it would be harder to defend, but we have the ability to compete and balance sheet to compete. So we will. We have our own plan and sometimes high-cost carriers charge a low cost and it doesn’t work. It’s happened before… our goal isn’t to go out and pick a fight… based on pricing in the last month, we’re not going to make a drastic change to our strategy.”