Dallas/Fort Worth International Airport

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.

JetBlue enjoys a cost "sweet spot" in the consolidating US market

JetBlue Airways is building on a unique position it holds between bare-bones discounters and US network carriers to sustain its profitability. Its hybrid product remains attractive to customers with a distaste for the ultra low-cost business model adopted by Spirit Airlines and the higher fares charged by US legacy airlines. The US market is moving into seemingly its final stages of maturity with three network airlines – American (once it merges with US Airways), Delta and United – and one large low-cost carrier – Southwest – dominating the landscape.

JetBlue meanwhile believes its growth plan built on expansion from Boston and the build-up of its Caribbean network will allow the carrier to forge an independent and profitable operation somewhat buffered from the waves of consolidation sweeping the country.

The airline may still have to convince some sceptics that it can turn a profit on its planned 2013 capacity growth of 5.5% to 7.5%, but JetBlue grew its 2012 net profit nearly 49% year-over-year to USD128 million on a 7.6% rise in available seat miles. Between 2009 and 2012 the carrier’s profits jumped 120%, which is a solid performance from a comparatively young carrier versus its US industry peers.

American and US Airways likely to see little competitive change in their overlap markets

American and US Airways are pressing full steam ahead to close their merger by 3Q2012, including stressing to US legislators that the combination will improve the overall health of the country’s airline industry and make the merged airline a more viable competitor with legacy and low-cost carriers alike. With just a dozen routes that overlap, the carriers should not encounter any resistance from anti-trust authorities, and given that most the markets are hub to hub pairings, few changes are likely to be made to service patterns once the 18 month integration process is complete.

Some of the arguments made by American and US Airways over increasing competition from low-cost carriers and their potential service expansion into overlap markets might be overblown as those airlines in previous mergers have been selective in grabbing the low hanging fruit created by the tie-ups between Delta-Northwest, United-Continental and Southwest-AirTran.

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.

WestJet refrains from full assault on Air Canada with Encore’s Q400 launch

Canada’s WestJet appears to be taking a predictably measured approach with the debut of its new regional subsidiary Encore in Jun-2013, keeping the majority of the new carrier’s operations close to its Calgary base until its calculus for the 78-seat Bombardier Q400 is proven out. As expected, WestJet is heightening competition with Air Canada in some of the small markets where it plans to deploy Encore’s turboprops, but is also introducing new points from some of those airports.

WestJet is also not ignoring mainline expansion, reflected in the launch during 2H2013 of two new US markets – the Dallas hub of partner American Airlines and Myrtle Beach, South Carolina.

WestJet has moved quickly in its development of Encore, disclosing plans to expand into the regional market in early 2012. After unveiling its desire to create a new carrier WestJet’s management worked to attain employee approval for the establishment of Encore, ordered 20 78-seat Bombardier Q400s and determined that Calgary (WestJet’s headquarters location) would serve as the initial base for the new carrier.

JetBlue sees an opportunity to mine Fort Lauderdale as Spirit turns its attention elsewhere

JetBlue Airways believes more opportunities exist to expand into Latin America from its southern Florida stronghold of Fort Lauderdale so it can capitalise on the short ramp-up to profitability afforded by those routes. Shifting market dynamics make the opportunity more ripe for JetBlue as Fort Lauderdale’s other major carrier Spirit Airlines has turned its attention to US domestic expansion from the airport.

At the same time JetBlue is not hesitating to increase competition with Spirit, betting that its higher-end product at an only marginally higher fare will entice some travellers away from Spirit’s bare-bones, no-frills service.

Fort Lauderdale was JetBlue’s first destination from its JFK base when it launched scheduled flights 13 years ago. Since that time Fort Lauderdale has played a key role in the carrier’s build-up of North-South passengers along the US eastern corridor. But during the last few years the airport and its geographical location in South Florida have played a particularly strategic role as the carrier worked to aggressively expand into the Caribbean and Latin America.