Interview with Spirit Airlines

Transcript

Karen Walker:Hello everyone, and thank you for joining us. It's great to be here in Puerto Rico. And for this session, I'm absolutely delighted to be joined by Matt Klein, Executive Vice President and Chief Commercial Officer at Spirit Airlines. So Matt, welcome. Yes, good morning. Great to see you. Good morning. Fort Lauderdale-based Spirit, of course, is one of the most successful ultra-low-cost airlines in the world, and Matt oversees marketing, pricing and revenue management, network planning and scheduling, and commercial and operational analytics. So there's not much you don't really do at Spirit, is there?

Matthew Klein:Yeah, commercial revenue side, yes.

Karen Walker:Okay, so looking forward to, to this conversation. Matt, can we just quickly start actually with I'm just wondering, Matthew, your outlook on summer travel demand and how, you know, I mean, we're hearing good things. Can we just hear from the Spirit perspective here?

Matthew Klein:Yeah, sure. So we, not unlike what other airlines have been talking about publicly, this demand environment is the strongest one that I've seen as well in my career. I started in 1995, so I've seen a few peaks and troughs. I think as one of the guests said earlier, it might have been Barry said, went from one of the worst environments to one of the best environments very quickly. And I think Lori had a stat up there earlier that showed the peak in bookings in the middle of March. And I, I think what that was was sort of this catch-up. We were so far behind in bookings that we took in January and February for the spring break and Easter periods that there was a rush to to book. And what's now— what we've seen now plateau is plateau at a very strong, strong level. And pricing, pricing is at— is very healthy and levels that we would not expect to see in the booking curve for weeks to come, meaning we're getting able to charge higher fares that you wouldn't normally see this far out for, say, summer travel So it's— it looks good. Search activity is strong. And I know there's a question out there that says, well, what happens after summer? What's going on? Can customers handle these high fares? They are now. Can they in the future? That's a great question. I don't think there's anything that would indicate that any issues are forming at this point. Of course, who knows what will happen. as the summer progresses, but nothing would seem to indicate right now that there's, that there's going to be a change in behavior that we can see at this point. So very, very confident and comfortable with what we're seeing right now for the summer.

Karen Walker:Excellent. So, you know, there have been— we've seen some changes in passenger flying habits through COVID, and one of those was people booking much more short-term. You know, they were really leaving it last-minute decisions. Are you Is that still the case, or are you seeing people, as they, as they realize, first of all, that the ticket they want might not be there anymore, and, and looking at prices, are people thinking a little more long-term?

Matthew Klein:They are. So what you're referencing was during the, I guess you would say, the, the onset, at least here in the United States, well, in the United States and, and, and the Caribbean and Latin America, what we saw was a shrinkage of the booking curve. It compressed down to, say, a 7-day booking curve, which was highly abnormal and was really indicative of people were traveling because they either had to or something just— something made them need to go. And, and that's what was great about keeping the airspace active. And that was a great decision by the administration to just make sure people could still move. And people needed medical supplies and all kinds of all kinds of goods and services. So what we, what we then saw was the booking curve lengthened back to normal. And then every time we'd have a wave kind of come through, the booking curve would shrink again and then come back to normal and shrink again and come back to normal. And I, I can't really speak about other airlines, what normal means for them. But for us, we're, we're back to a, I would call it a normal booking curve, which is why we're confident about what we're— what we've been seeing, because that would indicate that the fares that we're seeing have some staying power for now.

Karen Walker:So that gives you— that's another bonus there that gives you more certainty and more ability to plan against capacity.

Matthew Klein:Yes. And I would tell you what— and you mentioned capacity at the end. Yes. And that's been one of the variables is making sure that we have the right capacity that we can operate well. And also want to serve as many customers as we can in this— in any environment we would say that, but especially in this environment when a lot of people missed graduation parties or weddings or family events and now everyone wants to go, which is great. And that's why at Spirit, that's what we do. We create travel opportunities with our low fares and point-to-point service, and that's what we try to do.

Karen Walker:I'd sort of like to get your thoughts. I know this is something that you and Spirit have been thinking about a lot. It's, it's about that whole, you know, in this strange new world of, of ours, particularly in aviation, and, and that, you know, where things are changing, you know, they just change again all of a sudden, you know. And we have seen as things surged back, you know, congestion issues surging back to staff shortages. You know, we heard The conversation about the pilot issue. So, but sort of a more top line, if you like, about how do airlines keep aligned and, and keep an alignment between the sort of commercial planning, you know, you know, you're on that side of looking ahead and where you want to grow the network, etc., etc., add frequencies, and keeping that aligned with all the operational aspects.

Matthew Klein:Yeah.

Karen Walker:So that they're both there when they're needed?

Matthew Klein:Right. So that's a great question. It has a challenging answer. There is a lot of— at least I could speak for Spirit. My prior experiences at other airlines would indicate that what I saw in the past would be true for what we saw at Spirit today, which was there were things that were given. in the operation. You, you knew that you'd be able to have the right amount of staff at the airports. You knew that you'd have the right amount of staff in your crew scheduling department or in your revenue management department, you know. And, and when it comes to the operation, some of those, some of those groups really— we were having trouble filling those roles. And that was something that no one— I wouldn't say we didn't see it. Coming per se, but we thought we had mechanisms to address. We always did before. It was always done. And you might have had an issue in a certain airport or this airport or that airport, but you just tackled it and you got it done and that was fine. And that was the challenge that we saw. And, and as, as the various COVID waves came through, it became a challenge not just for being able to bring people into the operation. It was also a challenge because if our recruiters tested positive, they couldn't go to an event, or they, you know, which was, which was part of, part of some of those issues. And then we went to virtual recruiting. Well, virtual recruiting is great, but then when it comes to, you know, you're not getting the same kind of face-to-face and learning who you are and And then when it takes longer, everything takes longer. When people would then get, get to the job, it was like, oh, this isn't really what I was expecting. And part of that was so because of the recruiting was difficult and it was not— I don't think it was anyone's fault per se, if you put fault in quotes. I think it was just sort of an outcome of what's been happening. And part of, part of the challenges too, as we was talking about with also pilots, is decisions had to be made to get your infrastructure in place for this year and you had to make those decisions last year. And I would— I'm proud to say at Spirit, we did make those decisions. We knew what our growth trajectory was going to look like. We knew what our catch-up needed to be coming out of, coming out of COVID or whatever coming out of COVID means, getting back to normal, whatever that means. We knew we had to do that. So we'd made those infrastructure decisions last year. We have everything in place. Part of the challenges that we've had this year getting back to the full utilization we would like to be at is that we did have a pilot attrition issue at the beginning parts of this year. So we're probably a few months behind where we want to be, and it's not because we don't have the infrastructure in place. We do. Our hiring pipeline is great. There's no issues there. Our training is great. There's no issues there.

Karen Walker:We've—

Matthew Klein:We have now multiple training classes going on where in the past we would have had sort of one staggered class throughout the month. Now we have multiple locations doing multiple training. So none of that's an issue for us. I think some airlines may be having that issue. We, we don't. Our issue was we definitely had some attrition earlier in the year. We're overcoming that now. All of that wraps up into, well, how do we plan the network?

Karen Walker:Right.

Matthew Klein:Right. So we, we want to make sure that we have that we're not overscheduling the airline, and we want to make sure that we have the right infrastructure in place to handle everything that's out there. And I know I'm giving you a long answer to your question, but what then also came into effect are issues that we've had with some— some challenges we've had, especially for north-south travel into Florida, became an issue with air traffic control.

Karen Walker:Right.

Matthew Klein:And we had some— the industry had some great meetings with with the FAA earlier this month, and I think there was very— not I think, I know there was very good dialogue that took place between the agency and the airlines, and the airline industry was there as well. So really understanding what is the issue, acknowledging the issue is the first step towards solving the issue, and what that does is then lead to how do you adjust? And part, part of that adjustment for us, unfortunately, was we have to fly less than we would like to fly. So we made some decisions as recently as early April. We made decisions for May, June, and July. So just trying to get that pushed out as far as we can, because the last thing we want to do is disrupt a guest's vacation plans. And I also don't want to disrupt my revenue management's revenue plans. And all of that kind of comes together in the network plan.

Karen Walker:So a lot of that, it sounds simple, it isn't, as you said, is communications across everybody, you know, everyone who's involved, and transparency. Of course, with people actually sort of putting their hands up and saying, yeah, we've got shortages. And that was the issue on the air traffic control side specifically.

Matthew Klein:Yeah, that was for sure the air traffic control side. But even when you look internally at ourselves, and I'm guessing every other airline has done the same, same. We had to create new processes, things that we— that worked, and processes that were adopted from other airlines, or people brought that knowledge to Spirit when they joined Spirit. Some of those processes that have worked well for so long weren't working, and they have to adjust quickly. And you have to, again, also acknowledge your own internal issues so that you can then figure out, okay, we can solve this. There's nothing that can't be solved. It's making sure you have the right path Yeah. And, and, and plan in mind. And, and that also rolls back into my network design and how we think about the network design and making sure the network is more flexible and is able to be adjusted quickly later in the, in the planning process that you normally wouldn't, wouldn't want to see. We had— and again, we weren't alone— and during, during COVID especially in 2020, late 2020 to 2021, We were finalizing schedules 3, 4 weeks before the month would start. And we were getting our bid to the crew, to ALPA and AFA with our crew planning team the last second we possibly could to still be able to get the bids out. So that was new. And we had great work with our— with ALPA and the AFA to adjust with us so we could make sure we got all that done well. So great partners.

Karen Walker:Learning new things all the time, and not easy with the, you know, obvious regulatory and safety constraints of an airline. You know, they're very, very real, but, but learning to adapt. What about the passenger learning and doing new things? Um, you know, I'm hearing this concept more and more of the blended passenger, right? What does that mean to you? Is Is Spirit seeing, you know, more people using the low-cost carrier for business travel or for doing, you know, combining both a leisure and a business trip? What are you seeing there?

Matthew Klein:Well, it's— what we know is certainly the latter. We certainly know that guests are combining their leisure trip with work remote. Now, what we don't know, are they actually business trips or are they just choosing to work remote because they can? And that's great. So we don't know the answer to your question specifically. What, what we can see, though, is that the, the movement around the country, especially within the United States, but also into Latin America and the Caribbean, is generating— when I say the movement, I mean job movement, and people are moving around a lot. That could— there's a lot of turnover, and you could call it almost like waste on the economy while people get retrained in their new roles and switching jobs. And this is not something this country has seen before. So this is unusual, but it's great for air travel. So we're carrying all kinds of people all over the place. We're seeing We're seeing very strong ancillary revenue demand, which is great. And that gives us an idea that we think there's more business travel in there because people are wanting to book their— they want to get more advanced seat assignments or they're—

Karen Walker:Right.

Matthew Klein:Really, we have a product called Big Front Seat, and that product is driving yields that we've never seen before. Now, part of that is better revenue management techniques that we— and automation and analyses that we've been developing over the last few years, it's all come together. Is it really all of that work, or is part of it a new customer segment has been created organically that wants that product more than maybe we had demand for it in the past? We don't know those answers yet, but we are certainly seeing a lot of this travel you're speaking of. And For us, what we think is this creating more travel for everyone. It'll— everyone's going to have more travel because if you used to live in New York and now you moved to— making this up— now you move to Nashville, but your family's still in New York or your friends are still in New York. Now people are flying in both directions on flights that they only may have gone for true vacation before. Now they're doing a lot more, as we call it, VFR traffic. So all of that's, all of that's kind of rolled together.

Karen Walker:There's also talk about the people who, who've relocated and are able to work because they could work remotely, so they're living further out, but they're also now coming back at least some of the days. So that's creating a sort of, you know, that's sort of, it's commute travel, if you like, right?

Matthew Klein:Yes, yes. And that's a— but I wouldn't call that business travel either. I would just call Yeah. You're just flying, quote unquote, home, even though your home is not your home anymore. So that's what a lot of that travel is too. So yes, all these travels. And what we also don't know is, is this— is this whatever the word permanent means? How permanent are these arrangements? We don't know what the— what the work— work from home, work from office, return to office, all these different phrases. We don't— if anyone really knows, please tell me. But like, I know people have opinions. We'll just sort of see how, how it shapes up in the next— I don't know if it's going to be 1 more year, 2 more years, 3 more years. We'll just sort of see how things continue to evolve.

Karen Walker:How are you seeing people, your passengers, respond to the, you know, the dropping of the mask rule? And, and how much of an issue is it still for the testing side, you know, particularly to Caribbean destinations?

Matthew Klein:Right. So, so I can start with the testing. The testing is still an issue. And there's a lot of, a lot of people that have been caught up in a testing issue or know someone who's been caught up in a testing issue— friends, family, coworkers, etc. And it definitely has an impact on how people think about traveling internationally. What does that mean, though? That does mean that it's probably boosting up domestic travel in the U.S. to some extent because I'm still going to go show I'm just going to go somewhere else. So we're not exactly sure how much of that is a one-for-one trade. I believe that it's definitely a net negative and that when we remove the inbound testing requirement back to when you return back to the United States, it's going to help. I mean, we are— and we talked about this on our last call, which is we are seeing some issues with some VFR traffic into Central and South America. And we can only chalk it up to the fact that there's still the inbound testing requirement. Everything else is really moving, moving quite well. And it's a little bit of a penalty on our revenue production right now. And we've made some network adjustments to reflect that, that demand difference. But it's not permanent. I'm certain it's transitory and we're just waiting for the requirement, the inbound test requirement. And I think everything is going to really boom there again because it's pent up now as well. In terms of the masks coming off, I am not getting any emails from our guests directly to me via LinkedIn or direct to my Spirit email address. I'm getting none of that anymore. And that was a snap of the fingers and they went away. So my— and most of those were politically motivated emails, etc. But it's gone. It's gone. And, and we're not getting— we're not getting the same kind of issues at the airports. We're not getting the same kind of issues on board. So that's been wonderful. And keeping it optional is perfect. People can— that's great. And that's what we expect to be in place for a while.

Karen Walker:Sort of certainly what you're seeing, I think, now at the airports and on planes, this sort of just people are totally relaxed about who's wearing a mask or That's right. That's where it should be.

Matthew Klein:That's right.

Karen Walker:Yeah, so obviously Spirit has been in the news a lot.

Matthew Klein:We have. Really.

Karen Walker:Are you referencing me? And Barry talked very specifically quite on the specific Frontier proposal. I really— what I'd just like to ask you is more in the more general sense of, of what you think when you look at, you know, merge the, you know, the mergers landscape and what works for a merger, if that makes sense.

Matthew Klein:Yeah, absolutely. So, um, yeah, thank you for asking the question that way because I'm not—

Karen Walker:I—

Matthew Klein:Barry said a lot and that was great. Um, and, um, I think it's best just to leave it at the broader question for, for me. And, uh, you know, When, when networks can, can combine in a complementary way and, and, and really have cultures that mesh, that is the recipe for success. When you have divergent products or divergent viewpoints of how— philosophical viewpoints, you're going to run into issues and they can, they can take Yeah. Years to resolve. And one of the issues that can occur from time to time is if sort of the executive ranks perhaps are from one of the 2 entities, but then if the other— if the headquarters location moves, and then what ends up happening with everybody else in between? If your philosophies are aligned, it's not an issue. If your philosophies are not aligned, it can be an issue. are not aligned and all of a sudden you have this divergent thought processes, all your other employees feel that. I mean, they're adults and they understand what's happening.

Karen Walker:Right.

Matthew Klein:So my whole thing is treat everybody like adults. Make sure that you're combining with somebody that has the same philosophies as you, and then it will work. Then all of the other strategic outcomes work themselves out just like any other company. has to work out a strategic decision. Whether you're in a combination or not in a combination, you have challenges that are presented all the time. So I think for me, that's the biggest piece. What we've seen in the past at times is they eventually get worked out. That can take years and years and years. And then at the end of the day, you still have people that may be labeled, oh, you came from that airline.

Karen Walker:Right. Yeah.

Matthew Klein:I've dealt with that before, and that's toxic, and it doesn't— it does not accelerate your business. And ultimately, your guests are going to feel that because they can tell that the employees that they're working with on their transaction, whatever that is, aren't happy. And that's not— that ends up being not the way you should efficiently go through this process. Does it work at the end? Perhaps. But is that really what's best for for growing travel and making sure that customers have the best of both companies. When that happens, that I think is when the success really takes place.

Karen Walker:Thank you. Let's dig into a little bit about more detail on networks and network strategy. Like I say, with the caveat of these pinch points and issues, right, the good news is that I know that, you know, you're thinking network growth again. Give me a little idea from Spirit's perspective on, you know, what the network strategy is, growth strategy is for Spirit, and how you mesh that with where you're seeing congestion pinch points.

Matthew Klein:Great. So we, we have a few pillars, I guess you would say, within our, within our network strategy. Then we've been implementing these over the last few years. COVID kind of got in the middle of this, but it's, it's, it's basically keep focusing on our growth in Latin America and the Caribbean. We went from— we made a decision a few years ago to go from 10% of our network being international to 15%, and now we're up to 20%. So we believe that that strategy has worked well. And by the way, when I say international, what I really mean is Latin America and the Caribbean, because that would include Puerto Rico and the Virgin Islands for us. So it's really sort of Latin American Caribbean is what I mean by those percentages. And that's been a really, really good strategy for us. A lot of this traffic that we've been referencing is VFR traffic. And VFR traffic, definitely they love great product, of course, but they really want the best fare. How can I get— because you're going for a different reason. You're not going on your vacation. Maybe you're going to work.

Karen Walker:Right.

Matthew Klein:So that's important. And then we also want to make sure we are flying where people want to go. Large vacation and leisure destination focus for us— Orlando, South Florida, Las Vegas. And then you get into these other cities that are where people live as well. So, and they— and, you know, New York is the largest leisure destination in the world.

Karen Walker:Right.

Matthew Klein:leisure destination in the country also, and people like— and a lot of people obviously live there. LA, Los Angeles, LAX is the same thing for us. So that, that's where we think about where we, where we want to see our network continue to grow. Now, where— but about the pinch points question, that's where it becomes challenging for us. And we've had to— in total collaborative effort— is to Yeah. To start is to really rethink how do we think about the infrastructure. I'll call it the plumbing of the network. And the network can also be the crew network and our tech ops network and all of those pieces. We've always had great collaboration on these discussions at Spirit. We're not siloed at all. But some of those decisions were starting— we saw things, I think in retrospect we now know that we started to see things changing before COVID hit. And when once— but we didn't have enough, I think, game film to really make any adjustments. And then after COVID hit and now we're coming out of COVID and we're trying to get back to full utilization and all of a sudden all these pinch points have popped up. So great question that we're evaluating right now is, well, how many more— how many more pilot and flight attendant crew bases How many crew bases should we have? We know we need to have more. And where should they be?

Karen Walker:And where?

Matthew Klein:And how much more efficiency can we get out of our crew if we're flying from— making sure that the lines of flying are running through crew bases more often, but you need more crew bases to run them through more crew bases more often. And how much more will that unlock from less soft time that we deal with now with our crews? And if we can eliminate some of the soft time, that's more flying that we can, that we can put, put through the network with the same people that we have today. So that's how it works together with all of the networks kind of becoming— it's always been a Tetris puzzle, and now it's even, I think, more so for, at least for us right now.

Karen Walker:I'd like to touch on one other point with you. It's really innovation. It's probably what I'm trying to drive here. Spirit, of course, has been a very innovative company from the start. And these days you're always hearing about data-driven digital technology and how you're using that. Could you just give me some examples maybe of where, you know, again, how does Spirit view that and what, you know, what you're implementing along those lines?

Matthew Klein:Sure. So some of the— I think some of the consumer learning that we've been able to do over time, an infrastructure we put in place a few years ago, has really helped us well to understand even more about how does the guest want to get— I'll give you an example. How does the guest want to get through the airport experience?

Karen Walker:Mm-hmm.

Matthew Klein:And we used a lot of learnings, a lot of surveying, a lot of observations, a lot of industrial engineering work to really look at how are guests getting through the process. And one of the big things that we did also was head over to Europe, and we headed over to Europe and took a look at self-bag drop machines and that technology. And we went one step further and added biometric scanning. So now, and this was all done during COVID but it's going to be great coming out of COVID You can get to the airport, get your boarding pass on your phone, go drop your bag. It'll weigh the bag. It'll measure the bag. It'll ask you That's right. If you haven't already paid for it in your PNR already, it will ask you for payment, and the bag just goes on to the bag belt, and that's it. And the guest goes through security. And all of that— you don't even have to show your driver's license to one of our agents anymore because you show the driver's license to the screen and then the biometric scan matches it, and we do not store any of that data. None of that is stored. And that's how we— that's an example, I think.

Karen Walker:And that's speeding the process and giving control to the passenger.

Matthew Klein:And the net promoter score on the process is through the roof, off the charts. And we wish we could do it in more airports faster. And I would just add, not specific to your question, but getting this technology into airports, for example, is a challenge. is it's important to have great relationships with the airport partners. And that's what we do. We go to airports, we make statements as opposed to the— in regards to the network. We're adding these flights. We're going to be here. You know, and we have credibility and trust with airports that they— now we're getting— now we have airports asking us, hey, can we get some of that technology into our airports?

Karen Walker:It sort of turns around on itself that way.

Matthew Klein:It's wonderful.

Karen Walker:We could keep talking for— there's so much to talk about. It's fine. We are sort of pretty much out of time. I can take one or maybe 2 short questions if there's any hand— and it is hard to see from here. So just wave your hand and a mic will find you. If— can we see any questions?

Matthew Klein:Nope.

Karen Walker:I'm not, so unless I'm missing something, shout if you are. But in which case, look at that, an on-time arrival by the clock. Fantastic. Thank you so much.

Matthew Klein:Yes, thanks for having me. Appreciate it.

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