Spirit Airlines: flying high on excessive fees and terrible customer service
Spirit's ultra low cost operations and crappy customer service yield surprising financial dividends
As America’s most profitable, notorious airline, Spirit Airlines is obsessively focused on one value proposition for customers: flying from point A to point B safely at the lowest price. The company’s operating margins regularly top all other US carriers by 8%+, and profit per plane can be 40% greater. For the ultra-price-sensitive customer, Spirit makes flying possible when the only affordable alternatives are long bus rides or not traveling at all. These “discretionary” flyers are not easy to attract, but Spirit does so by driving a near-perfect alignment between its business and operating models. Spirit runs a ruthlessly low-cost business through 3 key operational elements: unbundled fares, minimal customer service, and aircraft design.
Flying is usually an all-inclusive experience: pay for the ticket upfront, and proceed to “enjoy your flight.” Spirit’s unbundled fares means its ticket price only includes an unspecified seat in the plane and room for one personal carry-on item. Everything else costs extra. Unbundling the fare adds value on both the revenue and cost side of the business. The base fare generates demand among consumers by offering them the lowest price possible for a 100% “no-frills” experience. Additional fees on top of the base fee certainly boost revenue, but more importantly, they incentivize changes in customer behavior that enhance operational efficiency.
For example, when water is free, ~100% of passengers ask for it. At Spirit’s $3 price tag, demand for water is much lower than 100%, so Spirit saves on costs in storing and serving beverages. Charging passengers to print boarding passes reduces demand to print at the airport and in turn, reduces the need for investment in building and staffing printing kiosks. Charging passengers for both carry-on and checked bags reduces total flight freight and in turn, reduces passenger boarding time and baggage handling cost while increasing fuel efficiency. Charging customers to join its loyalty program means fewer people join and in turn, less customer service support (i.e. labor) is required.
In fact, terrible minimal customer service is a tenet of Spirit’s price-focused business strategy. Not maintaining adequate service employees obviously reduces labor cost, but a more interesting side effect is that the deficiency generates free publicity, thereby reducing marketing expense. When ConsumerReports ranked Spirit as the worst airline, CBS invited Spirit CEO Ben Baldanza for an interview to discuss its bad ratings. As the reporter says to Baldanza, “I gotta hand it to you for being here because most CEOs, if they had been rated at the bottom of the list, wouldn’t say ‘let’s go on CBS this morning.’” But since Spirit’s strategy is to compete on price alone, publicity about anything other than “high base fares” is good publicity. High-quality journalistic pieces and YouTube rants about the awfulness of Spirit abound all over the web, with only two things in common: no mention of high base fares and lots of views. When the company refused to issue a refund to a dying veteran who no longer needed to fly Spirit for a medical procedure, every major news outlet, from Fox News to the Economist, covered the story for days, eliciting thousands of Tweets and comments from potential future Spirit customers who’d never heard of the company before.
At its core, Spirit has made several aircraft selection/customization decisions to further create value. Its fleet consists of only one type of plane, so it has a fully interchangeable flight crew without any cross-training expense. Spirit’s planes also refitted for greater capacity to increase profitability per flight; its A320s contain 178 unreclinable seats vs. the standard 150. None are upgraded with in-flight entertainment systems or wifi capability. And to generate just a tad more revenue, overhead cabins and seat-back trays are plastered with advertisements. In fact, only a huge union protest stopped management from picking ad-covered uniforms for the crew.
All these operational strategies have yielded impressive profitability that has enabled Spirit to expand aggressively, as the fastest-growing North American airline. From servicing mostly the Southeast, Spirit has doubled capacity since 2010 and added cross-continental flights (see route maps below).
Naturally, expansion to new markets entails both business and operating model adaptations. Customers may care only about price on sub-3-hour flights, but they will demand better service on anything longer. Still, considering how this guy got 29,000 views on YouTube for teaching people to “hack” Spirit for even lower fares, and this lady got 68,000 for “How to fly without fees,” we can safely assume that the ultra-price-sensitive Spirit customer base is not shrinking anytime soon.
Do you think their ultra-low cost model is more or less sensitive to changes in fuel prices compared to other airlines?
Also, other airlines benefit from gaining and then keeping customers (including business customers) for a long time. Do you think Spirit ends up spending more to continually gain new customers as opposed to developing loyal customers?
Great questions @Pete. Spirit has been profitable regardless of fuel prices in the last 5 years, so I’d say they’re less sensitive than others, who are only profitable now post-fuel price crash. I would also guess that Spirit’s customer retention is comparable to other airlines for its core customers, who truly only care about price. Given the company’s negative publicity, people who cared about service probably wouldn’t book it in the first place.
Insightful write-up, Lynn!
I wanted to highlight the reduced boarding times that result from fewer carry-on items, which you touched on briefly. My understanding is that this is critical to increasing capacity utilization because the longer that passengers take to deplane/board, the more idle time per plane and hence less time actually flying. I wonder how these capacity rates compare to other less profitable airlines.
I’m also curious about safety. To my knowledge, there have been no major safety issues on Spirit flights. However, I can imagine if there ever is an accident, people might assume that Spirit was skimping on taking the appropriate safety precautions since they skimp on everything else. Though this may not be the case, such perception amongst customers could be devastating.
Do you believe that the negative publicity Spirit has received benefits them on the long term?
Awesome post Lynn!
As I read through the post I could not help but think about all the ways that Spirit has been able to essentially incentivize customer to self-select and further support its dynamic pricing. I bet that the information they’ve collected with respects to the value customers derive from water vs. how many customers would actually buy water at $3 a bottle would be information that other carriers would likely benefit from (assuming the customers are somewhat similar). I wonder how much of Spirits operating model other airlines’ would be willing to experiment with during tough economic times when cost cutting and opening up creative revenue streams would seems to keep them afloat. Would they move closer to this unbundling if it meant keeping the business alive?
Lynn this is great! I really hate Spirit Airlines but I think I love the business. This is the first one of these that I’ve read where I could really see how the operations model actually changes customer behavior and supports the business model. Awesome profile, really learned a lot!
Spirit has caused me many headaches. Including re-booking a whole flight because their systems were hacked the day of my departure/return. When everything is up and running I never mind the trouble. But, when Spirit has any hiccup, the operations shortfalls are magnified. I can not say I will never fly spirit again because, when the price is right, I might just risk it.