Spirit Airlines Is Cheapening an Industry, Part 1: The New Discounter in Town

Before the deregulation of the airline industry in 1978, air travel was typically considered a treat for the well off. Passengers put on their best clothes to fly and were served an extensive meal with real plates and silverware. But over three decades and many bankruptcies later, the airline industry is now one where the everyday person can afford to travel. And some airlines are taking this to the next level, forming a new category of ultra-discount airlines.

The first discounters
When discount carriers are mentioned, people normally think of airlines like Southwest Airlines (NYSE: LUV  ) and WestJet Airlines (TSX: WJA  ) . Carriers like these have been able to gain a foothold as they serve up an alternative to full-service carriers.

Founded in 1967, Southwest actually existed prior to deregulation but was able to avoid being regulated at the federal level by only flying flights within the state of Texas. After the legacy carriers were allowed to fly where and when they wanted, Southwest expanded out of Texas but took on a discounter business model, choosing to operate point-to-point flights in contrast to the legacy carriers' hub-and-spoke systems.

Nearly three decades after Southwest's founding, Canadian airline WestJet sought to move into the Canadian air market by adopting the Southwest business model and competing with the two dominant carriers, Canadian Airlines and Air Canada. Even with the merger of Canadian and Air Canada a few years later, WestJet was able to expand while the newly merged Air Canada filed for reorganization in 2003.

Based on the airlines' histories, Southwest and WestJet have been remarkably successful. While Southwest has provided nearly four decades of straight profitability and WestJet shares have provided multi-bagger returns since the beginning of the century, all the legacy carriers have filed for bankruptcy wiping out their shareholders (the only exception being AMR, parent company of American Airlines, which did file for bankruptcy but shareholders could realize some value if the airline's merger with US Airways is successful.)

It can be cheaper
Southwest and WestJet have expanded well across their respective markets, with each carrier now on solid financial footing and paying a dividend to shareholders. But Spirit Airlines (NASDAQ: SAVE  ) has decided to make flying even cheaper.

With less legroom and a plethora of extra fees, Spirit is making a business model of driving down airfare. For the base price, at least. Those extra fees could boost a ticket price back near that of an ordinary discount carrier, especially if one decides to not pay in advance and carry on a bag at the gate for $100.

Like Southwest expanding out of Texas and WestJet growing its Canadian network, Spirit is setting itself up for growth. In May, Sun Sentinel reported Spirit CEO Ben Baldanza noted that consolidation trends in the industry have left Spirit room for expansion, with Baldanza also saying that he is "bullish about the growth of the company and where we can go." Clearly, Spirit does not have any plans to slow down and travelers looking for cheap airfare may be excited to see Spirit come to an airport near them.

More to the story
With shares of Spirit up more than 90% year to date and continued earnings growth expected, Spirit's investors have had one great flight. But as the ultra-discount airline expands, should legacy carriers be worried about Spirit igniting the price wars of the past or have the biggest airlines built themselves enough of a moat to fend of low-priced competition? In part 2 of this series, we will look at whether Spirit poses a major threat to full-service airlines or whether these two types of carriers can co-exist.

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  • Report this Comment On September 26, 2013, at 9:28 PM, davidl9821 wrote:

    Thats all well and good, but southwest is not the budget carrier that people think it is. No, they don't charge for two bags of luggage, but the third bag can be expensive. Further, they make up for the free luggage by adding cost onto the price of a ticket. Every time I have checked a flight on southwest, it has been more expensive than any other flight. Last week, I broke down and took a southwest flight and it was the worst flying experience i have ever had. I have done a considerable bit of flying and they are clearly the worst.

  • Report this Comment On September 26, 2013, at 9:31 PM, Albert0Knox wrote:

    At some point it is worth a dollar or two for room to actually sit in a seat that has at some point been cleaned in a plane that doesn't smell like vomit and not have to endure a constant sales pitch.

    If you HAVE to fly and you are dirt poor, by all means fly Spirit. If you can afford a real airline and have so little regard for your surroundings that you use spirit... I feel sorry for your children.

  • Report this Comment On September 26, 2013, at 9:36 PM, notlyfool1 wrote:

    Spirit is one airline I will NEVER fly. Their prices are a come on to get to the top of the Kayak list. However, it's very simple to uncheck the box next to Spirit.

    By the time you add all their absurd fees, it's more money than the other airlines.

  • Report this Comment On September 26, 2013, at 9:55 PM, mrbreeze330 wrote:

    Thanks to davidl9821....this is a fact that the public does not see. Southwest usually charges a higher ticket price than most airlines, allowing them to not charge a baggage fee. However, all of those TV ads about no baggage fees plays to their strategy. They are the only airline that doesn't subscribe to online booking sites, such as expedia.com, etc to sell tickets online. If you will notice, they are the only airline that advertises via TV. They are deceptive in their motives.

    Also, Spirit Airlines' CEO , Ben Baldanza used to be employed at our airline. Sure, he will offer you a good price on your ticket.......while he treats his employees like crap!

  • Report this Comment On September 26, 2013, at 9:59 PM, mrbreeze330 wrote:

    Just another CEO who is lining his pockets while running a sweat shop!

  • Report this Comment On September 27, 2013, at 4:56 AM, Myworldleyfull13 wrote:

    I think any airline is the same because they cost the same money not gold or silver. It up where you live and where you go and what you do are most important. On the contrary they are the same old tradition like the rules.

    Crispyn genius.....

  • Report this Comment On September 27, 2013, at 5:12 AM, Myworldleyfull13 wrote:

    Airline are same faster transport that move people from places to places. The cheaper the better as long you have money on your packet. The food is important that they offer inside the airplane.

    The paket

  • Report this Comment On September 27, 2013, at 10:23 AM, GW710 wrote:

    Spirit is a joke! Nasty, dirty planes, delays, no leg room, smelly cabins and a leader who does not care about the customer (Google his famous email that he cc'd to everyone). Do not fly this airline. You will regret it if you do (asuming you don't ge bumped because they oversold).

  • Report this Comment On September 27, 2013, at 12:39 PM, ddyced01 wrote:

    DONT EVER BE FOOL BY THIS SPIRIT AIRLINES

    I don't care how cheap Spirit Arline Tickects are. I would never fly sprit again. They charge you for everything.....i think they would away to even charge for air if they could.They are very could of losing people baggages too. Plus they have the worst costumer service i have ever encounter. They treath people like S*#t. Trust me cheap is not worth the headache and regrets you will have after you fly spirit arline.

  • Report this Comment On September 27, 2013, at 12:40 PM, ddyced01 wrote:

    Worst Airline Ever..........

  • Report this Comment On September 27, 2013, at 4:26 PM, Love2fly2 wrote:

    If you were on a cruise ship would you read the fine print? If you rent a beach house or condo would you read the fine print? Why don't you read the fine print at Spirit. Cheap fares, you get to choose when you come and go. You pick the dates and the prices. If you check a bag, check one under 40lbs, and pay for it when you book the flight, online. Carry one free bag that fits in the sizer at the airport. Print your own boarding pass at home. This couldn't be any easier to do. I love flying with them, yes they have delays, so do all the other airlines, if your paying 19.99 for a one way fare have a back up plan if something falls through. You people are used to flying the larger airlines where they have 1,000s of airplanes, I can fly almost everywhere I need to on Spirit and 9 times out of 10, I can do it under 70.00 each way.

    I pay online, print online and don't have to deal with agents other than to board my flight.

    Again, it can't get any easier.

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