Spirit Airlines

Airline business model transformation begins with customer segmentation

Making an active effort to understand customers’ needs and concerns will give airlines a better idea of the changes required in their business models to deliver and receive value.

The starting point for realigning business models so that they address passenger needs is to agree on which passengers to target; acquiring detailed knowledge of their travel behaviour; and designing appropriate processes and committing resources – whether it’s building new systems and facilities or training staff – to provide the right services.

This sounds fairly basic and easy. Yet, passenger frustration continues to exist and, in fact, in many cases it is increasing. Why?

Spirit exploits the new low-fare market niche in the US to achieve consistent profitability

Despite some backlash from consumers of its no-frills business model that entails selling all add-on items in the travel experience, Spirit Airlines has recorded a strong financial performance since its transition to an ultra low-cost carrier in 2007. The cost base it maintains by skewing customer behaviour in the purchasing cycle allows it to exploit a passenger base the legacy carriers and Southwest Airlines have abandoned, allowing Spirit to operate under the radar of the larger carriers who are squarely focused on expanding their share of high-yielding corporate customers.

The airline concludes that the shifting dynamics of the US market place and its relative low 2% penetration of that space support capacity growth of nearly 22% during 2013.

Recently, analysts at Raymond James recorded that US legacy carriers and Southwest Airlines have exhibited capacity constraint for roughly three years, concluding they would not sell seats which did not cover the cost of fuel, the largest expense for any airline. The company estimates that Southwest’s fares have risen approximately 25% during that time.

US airlines deliver a 0.1% profit margin as government-induced havoc looms

US airlines moved closer to the razor’s edge during 2012 after collectively recording a profit margin of 0.1%. While the 10 largest airlines in the country may be commended for sustaining a three-year profit streak amidst record high fuel prices, they could find it tough to find creative ways to continue to achieve profitability as the potential to tap ancillary revenues reaches its peak.

On top of the seemingly everlasting threat of fuel price volatility, US carriers also face various forms of pressure from the US government, with looming threats of tax increases, as well as possibly significant operational disruptions triggered by bipartisan stalemate in budget negotiations.

Data compiled by US airline trade group Airlines For America (A4A) show the country’s largest carriers earned USD152 million during 2012, a 64% slide from the USD418 million in net income recorded the year prior. ExxonMobil earned around that much each day in 2012.

The 4.7% increase in airline expenses outpaced a 4.5% rise in revenue growth as fuel prices reached an average of USD128 per barrel during 2012. A4A estimates US carriers recorded USD50 billion in fuel costs during 2012, a 28% rise year-over-year.

Spirit Airlines' network legacy market expansion continues as financial performance remains solid

Executives at Spirit Airlines believe the airline’s favourable financial performance during 4Q2012 and full year 2012 demonstrates the soundness of the carrier’s business model built on offering a comparatively lower base fare and garnering a large portion of ancillary revenue from various add-on products. At the moment the carrier holds a solid outlook for 2013, reflected by its planned supply expansion of roughly 22%. The carrier continues to move into legacy and low-cost stronghold markets in the continental US as part of its larger strategy to diversify from the lower-yielding south Florida market. Beginning in Feb-2013 and continuing over the year Spirit is introducing additional flights from Baltimore, Detroit, Denver, Houston, Minneapolis and Philadelphia.

A USD25 million hit to its revenue, resulting from operational disruptions from “superstorm” Sandy that struck the US east coast in Oct-2012, triggered an 18% drop in Spirit’s 4Q2012 profits year-over-year to USD20 million. Spirit has a large presence in Atlantic City, New Jersey, which chief marketing officer Barry Biffle stated was the epicentre of the storm. Spirit is the only carrier serving the airport, and presently (18-Feb-2013 to 24-Feb-2013) operates flights to Fort Lauderdale, Fort Myers, West Palm Beach, Orlando and Tampa, Florida and to Myrtle Beach, South Carolina.

Colombia-US open skies to usher in new era of growth, led by JetBlue and LAN Colombia

The Colombia-US market is poised for rapid growth following the implementation of open skies between the two countries on 01-Jan-2013. JetBlue and LAN Colombia have already unveiled plans to add services in the Colombia-US market during 2013 and other carriers, including market leader Avianca, will likely follow.

JetBlue Airways plans to add a third Colombian destination, Medellin, from 13-Jun-2013 while LAN Colombia plans to deploy its newly acquired fleet of 767s on US routes. JetBlue has rapidly grown in Colombia since Bogota became its first destination in South America in 2009. LAN Colombia began serving the Bogota-Miami route in early 2012 with A320s and plans to transition these flights to 767s as well as launch new US routes.

There was 8% passenger growth in the Colombia-North America market through the first 10 months of 2012 to 2.1 million passengers, according to Colombian CAA data. The average load factor in the market was 84%, which suggests the market remains undersupplied. (The Colombia-North America market includes flights to/from the US and Canada but Canada only accounts for 3% of the total market).

United ends 2012 as world's biggest airline, Emirates third. Turkish and Lion Air the biggest movers

United Airlines, following its merger with Continental, has ended 2012 as the world's biggest airline measured by available seat kilometres for the current week, ahead of second placed Delta, whose capacity fell 0.3% year on year, according to Innovata. Fast growing Dubai-based carrier Emirates is the world's third biggest airline by this measure, and could be in second place by the end of 2013 if the past year's growth rates are maintained.

Southwest Airlines remains easily the largest LCC, while Lion Air and Jetstar have each climbed the LCC top 10, to sixth and seventh places respectively, overtaking Westjet. Atlanta Airport (just) remains the world's largest, ahead of Beijing Capital Airport, in terms of seat throughput for the week, but this ranking seems certain to reverse in 2013.

The biggest movers in the overall World Top 50 list include Turkish Airlines, which jumped seven places to rank 15th globally, while Indonesian carrier Lion Air vaulted eight places to enter the global Top 40 for the first time. Iberia and India's Jet Airways fell four and seven places in the 2012 rankings, respectively.

Global Airline Alliances collectively grew capacity at higher than the world rate, with SkyTeam expanding fastest of the three majors, although Star Alliance remains easily the largest.