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Spirit Airlines: maturing markets could create upside in 2020

Spirit Airlines has been one of the fastest growing US airlines during the past decade, and over the past three years its ASM growth has averaged nearly 20%. The company expects capacity growth of 17% to 19% in 2020 as it expands both domestically and internationally. 

Spirit has also worked to ensure that its expansion includes international destinations to diversify its network, and expects international markets to make up approximately 15% of its total capacity. 

Cancún has been a centrepiece of Spirit’s latest international push after the airline concluded that it is a ripe market for the company’s specific product offering. The airline also believes that some of the new markets it has added during the past year should reach a certain level of maturity, which should create some unit revenue benefit for Spirit in 2020. 

Summary

  • Spirit works to reach its target: international markets representing approximately 15% of its international capacity. 
  • The airline is making a push into Cancún after determining there are opportunities in that market to drive up non-ticket revenue. 
  • Spirit concludes that its ancillary growth targets, and having fewer maturing markets, should create some financial upside in 2020. 

Spirit has developed a level of diversity in its network development 

During the past couple of years Spirit has adopted a diverse network strategy that includes adding new flights to large US leisure destinations, to medium sized markets and to some larger origin markets, as well as inaugurating new international flights to Latin America.

See related report: Spirit Airlines deploys a multi-faceted network growth plan

Orlando has served as Spirit’s springboard for most of its new international growth. During 2018 the airline added 12 new international routes from Orlando International, many of which were existing markets the airline served from its headquarters and largest base in Fort Lauderdale

See related report: Spirit & Frontier Airlines in 2019: contrast in int’l expansion 

For a period of time now Spirit’s management has stated that international routes would represent approximately 15% of its total capacity deployment, and data from CAPA and OAG show that, as of early Nov-2019, 14.3% of Spirit ASKs were deployed in its international markets. 

Spirit Airlines' breakdown of intentional and domestic ASKs, as of mid-Nov-2019

More recently, Cancún has emerged as a focal point for Spirit’s international growth.

Spirit presently operates flights to Cancún from Fort Lauderdale, Detroit, Chicago O’Hare, Dallas/Fort Worth, Houston Intercontinental and Baltimore Washington International. Data from CAPA and OAG show that (as of early Nov-2019) Spirit represented approximately 5.5% of weekly seats deployed between Cancún and the United States.

The largest operators were United, with a 26.8% seat share, American, whose share was 22.7%, and Southwest, with a 16.2% share. Delta was the fourth largest operator, with a 14.7% seat share. 

In 2020 Spirit is adding new flights to Cancún from Pittsburgh, Cleveland, Austin, Nashville and Philadelphia

Spirit faces numerous competitors in most of it markets from Cancún, ranging from full service airlines to fellow ultra low cost carriers, but the airline is undeterred by the competition. Recently, Spirit chief commercial officer Matt Klein said “our unbundled product and focus on international leisure markets makes Cancún a perfect destination for us to grow”. 

Spirit has been working to bolster its non-ticket revenue through various initiatives that have included a revamped website and more functionality to its app, as well as improvements to its vacation packaging content. The airline expects non-ticket revenue per flight segment to increase 3% year-on-year in 2020, from a range of USD56 to USD57 in 2019. 

Spirit Airlines' non-ticket revenue performance per flight segment from 2016 to 2020(E) 

Mr Klein said that the company’s international capacity as a total of its overall supply could move up or down, based on seasonality.

“…And depending on the time of year, especially around peak periods, it gives us the ability to flex our non-ticket profile even stronger for a lot of the international markets”, he said. 

Spirit needs aircraft to meet its mid-teen growth targets 

Spirit’s management routinely touts numerous route opportunities for growth and recently forged a memorandum of understanding (MOU) with Airbus for 100 A320neo narrowbodies, plus options for 50 additional aircraft to support its expansion targets. 

Spirit’s average annual capacity growth rate from 2015 to 2018 was approximately 19.8%, peaking at 30% in 2015. The company’s management has stated its latest aircraft orders along with supplemental leased aircraft would allow Spirit to ensure the airline reaches its annual mid-teens growth targets during the delivery timeframe of 2022 to 2027.

Spirit Airlines' annual ASM growth from 2010 to 2019 (Q1-Q3 YTD) 

For 2020, Spirit anticipates capacity growth of 17% to 19%, with approximately 100 basis points of that increase attributable to a lower completion factor in 2019, company executives recently explained. 

Spirit is expressing optimism for 2020 as new routes continue to mature 

Spirit has recently retimed some flights for its international markets from Orlando and those changes, coupled with the maturing of new international routes recently launched from the airport, are creating a sense of optimism among the airline’s executives about the future performance of those markets. 

Overall, the airline plans to add fewer new cities to its network in 2020 than it has during the past two years.

In 2018 it added nine new cities, followed by seven in 2019.  “…When you add those new cities, the spool increased, and that spool percentage of our overall network does matter. It matters in the short run”, Mr Klein explained. “In the long run, the opportunities are great, and we’re very pleased with where we’ve been growing and the results we have seen”. 

However, Mr Klein did acknowledge that having fewer cities spooling up should be a tailwind to Spirit’s unit revenue in 2020. 

The company is facing some cost creep in 2020 and is experiencing some downward trends on its average fare per flight segment. But executives believe that its projected performance in non-ticket revenue and its network maturity should provide some upside to its margins. 

Maturing markets give Spirit confidence heading into 2020 

Like airlines worldwide, Spirit is constantly examining the contribution that each route makes to its network and overall profitability. After introducing a raft of new international routes, Spirit can now take stock of which markets are performing up to expectations. 

It seems as if most of those markets are maturing at the airline’s preferred pace, and Spirit believes that will create a level of revenue upside as the company embarks on 2020. 

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