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When Vietnam War veteran Jerry Meekins learned five years ago he was dying and should not travel, he contacted Spirit Airlines and asked for a refund for an upcoming flight. That’s against the rules — how many passengers don’t know what “non-refundable” means? — but brands often make exceptions to save themselves from public embarrassment.
Not Spirit. Its former CEO, Ben Baldanza, noted that Meekins, who would die four months later, had not bought travel insurance. “This is a country and society where we kind of play by the rules,” Baldanza said in one television interview.
Eventually, Baldanza apologized. But in the decade he led Spirit, until January 2016, Baldanza repeatedly criticized passengers who complained about poor service, late flights, and lost bags. Once, he accidentally replied to a customer’s email by writing, “Let him tell the world how bad we are. He’s never flown us before anyway and will be back when we save him a penny.”
Baldanza had a point. Until 2015, Spirit was in a class of its own. No other airline in the United States could — or would — sell one-way fares for $30 or $40 between major cities. Yes, Spirit charged for carry-on bags, drinks (even water), and advance seat assignments, but people who never thought they could afford airfare had an option, so long as they didn’t mind cramped seats that did not recline. In a cheeky web spot, Spirit advertised itself as a “cheap seat for a cheap ass.”
Passengers tolerated it, and Wall Street loved it. The airline’s stock price increased from about $12 per share on July 1, 2011 to almost $83 on Dec. 1, 2014.
The good times could only last so long. Spirit still makes money, but it’s under pressure from Southwest, American, United, and Delta. Now, in many cases, the Big Four sell discounted seats to match Spirit, meaning “cheap asses” have other options. Plus, Spirit has a new direct competitor: Frontier Airlines, which adopted Spirit’s ultra-low-cost model a couple of years ago, with the tagline “Low Fares Done Right.” Its CEO used to run Spirit’s marketing.
To win (or win back) customers, Spirit’s current CEO, Bob Fornaro, wants to create a kinder airline. It remains obsessively cost-focused, offers little legroom, and still charges for everything — because if it didn’t, it would probably go bust. Passengers paid about $53 in fees for each Spirit segment in the second quarter, only about $7 less than they paid for fares.
But Fornaro, who led AirTran Airways until it merged with Southwest in 2011, wants Spirit to stop angering customers. And when it does make them mad, he’ll apologize.
“We ran a very successful financial business, but we ran a very poor consumer business,” Fornaro said in an interview last week in Las Vegas, where he was speaking at the Boyd Group’s International Aviation Forecast Summit. “For the most part, you can only do that for a short period of time. We almost went out of our way to poke the customer in the eye. And once a business gets more competitive, you can’t do that anymore.”
Some wonder if it’s too late. Perhaps the Big Four finally have an advantage — something legacy European airlines never achieved against upstarts like Ryanair and EasyJet. Others suspect Spirit will be fine, but argue it should merge with Frontier, giving it better scale. Spirit has about 100 airplanes, more than 800 fewer than American, not counting American Eagle.
Spirit is not the only discounter emphasizing service — Frontier and Allegiant Air are also trying to improve — but Spirit may have more work to do than the others.
“The difference was, we didn’t treat customers well,” Lukas Johnson, senior vice president for commericial at Allegiant Air, told Skift. “But Ben was unapologetic about spitting in their face. And you can’t do that.”
Baldanza, who teaches at George Mason University and serves on the board of Wow Air, a Icelandic airline with a similar model, told Skift he does not regret Spirit’s service record. He noted customers agree to terms and conditions before buying tickets.
“When I was the CEO, we held firm to these rules in order to keep fares as low as possible for all,” Baldanza said in an email. “Waiving rules means that those who follow the rules pay for those who don’t. If asking people to follow rules they agreed to before buying is considered ‘spitting in their face,’ that seems completely wrong to me. If you are pulled over for running a red light, are the police ‘spitting in your face’ if you are asking to be let off even though you knew you broke the rules?”
Changing Market Dynamics
Spirit and Baldanza could get away with a lot because the airline had little competition.
For most of Spirit’s surge, American, United, and Delta were all in bankruptcy, emerging from it, or merging with another airline. Because big legacy airlines had high costs and other priorities, they rarely discounted as much as Spirit. And low-cost airlines, including Alaska Airlines and Southwest, had relatively little overlap with Spirit, so they let it grow.
Spirit’s strategy worked. Spirit entered American’s Dallas/Fort Worth hub in 2011, adding flights to many of American’s larger markets, including San Diego, Fort Lauderdale, Las Vegas, Chicago, Atlanta, Boston, New York LaGuardia, and Orlando.
For about four years, American chose to let its frugal passengers fly Spirit. American might charge a couple of hundred dollars for a one-way fare, while Spirit would want $40. But American, led by its then-new president, Scott Kirby, decided in 2015 to fight for everyone.
American’s strategy diluted its revenue, but the airline succeeded. Spirit remains in Dallas, but it’s no longer growing, with new management preferring cities like New Orleans that lack a dominant airline. Now, Kirby has moved to United, where he’s acting similarly. In July, on Spirit’s second-quarter earnings call, Spirit executives said they saw the most discounting in three United hubs — Newark, Chicago, and Houston.
United even has a new product to sell to price-conscious customers. This year, it followed American and Delta to introduce Basic Economy — a product that roughly mimics Spirit’s unbundled fares.
On all three major airlines, Basic Economy customers cannot choose seats in advance, nor can they change their tickets. They board last, and, if they’re frequent flyers, they’re not eligible for first class upgrades. On American and United, most customers may not bring large carry-on bags. (Southwest also often matches Spirit but gives passengers all the goodies — including two checked bags — for free.)
Even in their worst seats, the Big Four offer about two more inches of legroom, with seats that recline. They also give passengers free drinks and light snacks, and unlike Spirit, often have in-flight entertainment. There’s Wi-Fi too, though passengers pay for it.
“The problem is, customers do not want to fly [an ultra-low-cost carrier] if they can get the same price on a different carrier,” Kirby said at the Las Vegas conference. “As United or anyone else starts to get more price competitive, the business just doesn’t work in my opinion. It’s not because of United or what anyone else is doing to them. It’s because they have created a product that people don’t want to buy.”
A gentler Spirit
Perhaps Basic Economy isn’t beloved by customers either, but it makes United, American, and Delta better competitors, so Spirit is focused on improving its product and softening its image.
Spirit no longer charges military members for bags. And passengers who forget to pay for a carry-on in advance are no longer hit with a punitive $100 fee at the gate. It’s now a more manageable $65 — enough to persuade passengers to pre-pay at a cost of roughly $35 but not so much as to be ridiculous. And when passengers tell Spirit they need to postpone a trip for a medical emergency, the airline works with them.
The old hard-ass routine is over. “That was just part of the way the company wanted to portray itself,” Fornaro said. “It wasn’t necessarily good business. There wasn’t a whole lot of money in it. We just got rid of those things.”
Meanwhile, the airline is emphasizing personal touches. Flight attendants attend service training — something that never happened before. And Spirit recently turned over its Twitter feed to humans. It had been run by an irreverent robot, who shared witty responses but couldn’t help irate customers.
Advertisements evolved, too. Before, Spirit often ran tawdry ones, like one coinciding with delivery of the airline’s 69th plane. “It’s our favorite number – ever since we were 12 and found that magazine under our brother’s bed (the one with the fantastic articles),” the copy read.
Now, when adds a new plane, Spirit is more likely to use it as an opportunity to tell customers it has one of the world’s youngest fleet, a positive message the company rarely communicated before. “It was almost as if they were almost ashamed of saying something nice,” Fornaro said.
On-time performance had also lagged. Spirit is now in the middle of the pack for timely arrivals, after regularly finishing last or near the bottom a few years ago. A few years ago, frugal passengers might have tolerated tardiness for huge savings, but not anymore.
“The company got away with it very nicely, but the world doesn’t stay the same,” Fornaro said. (In his email to Skift, Baldanza said: “I applaud Bob Fornaro for improving Spirit’s operational performance.”)
More changes will come. Wi-Fi, which Spirit hadn’t installed because of its cost, is on its way, since many frugal millennial customers the airline wants to attract demand it. It’ll support video streaming.
Next, the airline will improve its website — Fornaro called navigating it “painful” — and its mobile app. As for why the airline didn’t invest in digital tools sooner, he said, “We were satisfied. Maybe we thought were were living in a world that wouldn’t change that much.”
The emphasis on improvement, Fornaro said, has improved employee morale, which may spur better service. “No one like to be last in every service category,” he said.
One outlier is Spirit’s pilots, who seek a new contract and a major raise. In April, pilots staged an informal work slow down, forcing Spirit to cancel about 850 flights. Spirit obtained a court order requiring pilots to work normally. Things have improved, but the issue still looms. Fornaro said he is hopeful a deal can be reached soon.
Spirit’s stock is now about $34 per share, less than half its price in December 2014. Analysts generally like the company, but not as much as a couple of years ago.
After Spirit’s second quarter earnings call in July, when executives said other carriers were undercutting them on price, Hunter Keay, an analyst with Wolfe Research, wrote: “In that regard, things may only get worse for [Spirit] unless [it] finds new places to grow.” Keay has said he favors a Frontier merger.
Jamie Baker, an analyst with J.P. Morgan, said in a recent report that Spirit probably must “strike a balance” between competing in big cities and adding flights elsewhere. Baker has also recommended Spirit raise fares, arguing it probably wouldn’t lose customers, since other airlines would increase prices, too.
There’s some question about where Spirit should fly next. Under Baldanza, Spirit was obsessed with adding routes in Chicago, Los Angeles, and Dallas/Fort Worth. But it’s now expanding in markets like New Orleans, Hartford, Pittsburgh, and Baltimore.
Lukas Johnson, of Allegiant, said he suspects Baldanza would still favor big cities — if only to prove a point. He said he wonders if big airlines will be more aggressive since Spirit has shown weakness.
“They drew down Dallas last year with the pressure from American,” Johnson said. “Guess what? Once you pull down when somebody pressures you, it’s going to happen again and again and again and again. To me, that’s different. Ben wouldn’t back down. Right or wrong, he just wouldn’t.”
Spirit has one major advantage: Its costs are considerably lower than the competition. Not including fuel, it costs Spirit about 5.83 cents to carry one passenger one mile, about five cents less than American. That means Spirit can make money more easily at lower fares than other airlines.
In his note, Baker said Spirit’s model is viable.
“We believe the U.S. airline industry will continue to take steps to ensure profitability and continued balance sheet repair,” he said. “We believe that this environment is generally more favorable to the large legacy carriers, but Spirit’s ultra-low-cost business model is compelling in its own right.”