Why You Love Spirit Airlines (but May Not Know It)

Americans love to hate airlines, and none more than Spirit Airlines (NASDAQ: SAVE  ) . This ultra-low-cost carrier keeps prices down and profits up by nickel-and-diming customers for just about everything, including onboard drinks, advance seat selection, and bringing a carry-on bag. Spirit also provides significantly less leg room than most U.S. airlines.

Yet Spirit's low prices and rapid expansion have played a big role in keeping airfares down for the routes it serves. Some observers have argued that Spirit has replaced Southwest Airlines (NYSE: LUV  ) as the key discount airline that keeps competitors honest. In other words, major airlines have to think twice before raising fares, or else they risk letting Spirit move in and undercut them.

Spirit Airlines has been growing rapidly by undercutting high legacy carrier fares. (Photo: Spirit Airlines)

For that reason, if you like low airfares, you have to love Spirit Airlines -- even if you've never flown Spirit, and even if you did fly Spirit and hated the experience! Simply put, without Spirit Airlines' rapid growth and commitment to low fares, Americans would be paying higher ticket prices today.

Rapid growth
Spirit Airlines has grown faster than any other U.S. airline over the past two years. Revenue is expected to reach $1.62 billion this year, up 23% from last year. That follows a similar 23% increase in 2012 and a 37% gain in 2011.

Spirit's recent growth has been concentrated in legacy carrier mega hubs such as Dallas-Fort Worth International Airport -- AMR's (NASDAQOTH: AAMRQ  ) largest hub -- and Chicago's O'Hare International Airport: the second-largest hub for United Continental (NYSE: UAL  ) and AMR.

United Airlines has been one of Spirit's prime targets. (Photo: United Airlines)

By contrast, Southwest has traditionally avoided competitors' strongholds. Spirit is even starting to challenge Southwest in some of its largest markets, such as Las Vegas, Baltimore, and Denver.

Spirit's focus on legacy carrier hubs is not a coincidence. Spirit looks for a few key characteristics when deciding where to expand next. First, it looks for large markets (averaging more than 200 daily passengers each way). Second, it looks for high fares, which are typically found in markets dominated by one carrier's hub. Third, Spirit only enters when management believes it can hit a low enough price point to stimulate demand, while still achieving an operating margin of at least 14%.

The "Spirit" effect
It should be clear by now that Spirit's goal is to grow rapidly by offering cheap fares between big cities that legacy carriers can't match. Has this strategy helped reduce airfares?

The evidence overwhelmingly suggests that Spirit's growth has led to lower airfares. In Dallas-Fort Worth, where Spirit has grown the most rapidly (with 33 peak-day flights today, up from zero in 2011), the average domestic fare dropped from $431.15 to $415.82 between Q1 of 2011 and Q1 of 2013. That's much better than the nationwide average fare increase of 6.5% over that period of time.

Most of the other airports where Spirit has expanded rapidly -- including O'Hare International Airport in Chicago, McCarran International Airport in Las Vegas, and Denver International Airport -- have also seen smaller fare increases than the rest of the country since 2011.

Minneapolis-St. Paul is another market that has benefited from Spirit's growth recently. Airfares increased 10% between Q1 2011 and Q1 2012, but then Spirit entered the market in June, 2012. By Q1 of 2013, fares had already fallen 1% year over year. Fares are likely to fall further in the future, as Spirit is adding more flights at Minneapolis-St. Paul International Airport next month.

Foolish bottom line
The growth of Spirit Airlines is one of the most important factors preventing the legacy carriers from exerting their pricing power to raise fares. In markets where Spirit has grown significantly in the past few years, fares have fallen, or at least increased much slower than the national average.

The "Spirit Effect" does not stop there. With Spirit actively looking to enter high-fare markets, legacy carriers like American and United have to be careful about trying to raise fares. Spirit's current aircraft orders point to 15% annual growth over the next several years. As a result, no legacy carrier wants to present itself as a target by imposing high fares on the routes that it dominates.

For most American travelers, snagging a cheap plane ticket is the top priority when planning a trip. Even if Spirit Airlines' spartan accommodations are not your style, you are probably still benefiting from the price competition Spirit provides. In a market where a lot of factors -- such as consolidation, high oil prices, and high labor costs -- tend to push ticket prices up, Spirit Airlines is one of the few things keeping fares affordable.

Spirit is leading a revolution
Spirit Airlines is one of two airlines that are breaking all the rules of the industry. By keeping costs low and avoiding direct competition, these companies are churning out enviable profits. The Motley Fool's new special report will fill you in on how these airlines are soaring above the competition, and it will help you assess their long-term prospects. Click here for your free copy!


Read/Post Comments (12) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 07, 2013, at 1:30 PM, Inspectigator wrote:

    Spirit competes directly with the regionals that are subsidized by majors with service contracts. The regionals have stopped growing partly because their small jets are not economical, and partly because they can't find enough new pilots as the bigger airlines are beginning to hire their current pilots. This is a great situation for Spirit and Southwest, they will not be able to expand fast enough as the regionals increasingly run out of pilots. As Spirit and Southwest try to expand rapidly and hire more pilots, the regionals will shrink faster, in an accelerating process. The majors have also begun to hire, many will come from Spirit.

    Will the majors try to protect their regional feed partners and hire more from Spirit? Will the majors start to shrink as their domestic feed network begins to collapse? Will ticket prices and profits go sky-high especially where Spirit has no more competition? I guess we'll soon see.

  • Report this Comment On October 07, 2013, at 2:14 PM, TMFGemHunter wrote:

    I don't quite understand your comment. For the most part, Spirit has focused its service on high-traffic markets; markets that the legacy carriers usually serve with mainline aircraft.

    Of course there's competition for pilots, but the market will sort this out. Spirit doesn't pay major airline salaries, but it can afford to pay pilots much more than regional carriers. If Spirit has 150+ people on an average flight and regional airlines have 50 or 60, Spirit will be able to pay much higher salaries while still keeping costs lower.

    Adam

  • Report this Comment On October 07, 2013, at 2:26 PM, FrancesO wrote:

    Have you ever flown on Spirit?? It is a bunch of young kids playing grown up, except they can't really do it. When my son's flight was suddenly canceled, the counter attendant laughed in his face with a "too bad" comment. Then he and the other attendants texted each other and all laughed at the situation. He had to pay another $300 to get home, on top of what he already paid Spirit. When I complained to customer service about the cancellation, they told me they had to cancel the Tampa, FL flight because of bad weather in Salt Lake City. And you LIKE this airline???

  • Report this Comment On October 07, 2013, at 3:54 PM, Inspectigator wrote:

    @TMFGem: the pool of new pilots isn't being replenished, therefore can't follow market rules. Private flight schools are still shutting down as regionals see few qualified pilots applying, and the military is offering big bonuses as they experience a shortage of pilots. It is not a desireable career if you run the numbers and read opinions on forums. This industry is running out of an essential commodity, and the companies that deal with it best will be the winners.

    Spirit is not a desireable destination career for airline pilots, they are all after a career that will put them in a wide-body international cockpit with the pay and status Spirit cannot match. Spirit will have to pay their pilots what they would make flying much larger airplanes at the majors, to keep them from leaving to get that pay. This is one of many challenges smaller airlines face, and the reason AA and USAir need to merge to survive. For a time, Spirit will have an ample supply of regional pilots knocking, but training costs are significant.

    Southwest treats their employees unusually well for the airline industry, and it will pay off when they are competing with the majors for employees. Spirit has not done as well, and they have already lost many senior pilots as the majors recall them from furlough. They are leaving Captain jobs at Spirit to start at the bottom of majors, not a good sign at all for Spirit or the regionals. I've heard of no pilots leaving Southwest for recall. Corporate pilots are also returning to the majors from desireable positions. There is a lot of quiet movement that is hard to see from outside the pilot community, and we haven't begun to see the large retirements and growth at the majors that is coming.

  • Report this Comment On October 07, 2013, at 4:04 PM, johnnya2 wrote:

    @ Frances,

    I do not believe your story about being forced to pay $300. It is just not protocol for the airline. IF the flight was cancelled, they put you on the next avaiable flight and YES, weather in any city could cause a cancellation in another city. This does nto just go for Spirit, it goes for EVERY airline that flies a plane. If there is a plane schedule to fly from Salt Lake City to Chicago and then to Orlando, and the plane leaves Salt Lake City 3 hours late, and THEN can not leave Chicago before mandatory curfews for flying, or due to crew being on the clock for too long (per FAA regualatons), then the flight MUST be cancelled. No airline is sitting with crew on call in every city with back up planes to fly. IF you want that, you are free to hire your own PRIVATE pilot and plane

    The problem with the flying public is they have no understanding of the industry, yet try to tell a successful one how they should run it. United, American, Delta all survive because they walked away from their bills (bankruptcy). Spirit is the envy of the rest of the industry with high profit margins and high growth rates.

  • Report this Comment On October 07, 2013, at 4:13 PM, johnnya2 wrote:

    @ Inspectorgator,

    Sounds lie a pilot who does not like being paid what the market bears. The rest of the industry can only bring pilots back if older ones retire, or if they add new routes. Capacity is NOT growing. This is intentional to keep prices high. Spirit has bucked that trend and data bears it out. They lower prices every market they enter. There are very few high level international captain positions available and it is a 1970's thinking of that being the prestige position that seems to be in your brain. Pilots are the only ones talking about pilot shortages because the fact is, it is not a reality. The "pending pilot shortage" has been talked about for decades and has not happened yet. There will always be those willing to work for an airline like Spirit over working at a place like United, Delta or US AIR which teeters on the brink of bankruptcy and walks away from their contractual pension and other obligations

  • Report this Comment On October 07, 2013, at 10:12 PM, TMFGemHunter wrote:

    I don't believe that the market will not/cannot work for airline pilots -- which is not the same thing as saying that everything will go smoothly. If a shortage does occur, pilot salaries will go way up, making it a more desirable career, making private flight schools a better investment, etc. And U.S. pilots who have gone overseas in search of better pay will come back. There could be some "friction", but I don't think the U.S. will have a permanent pilot shortage.

    Second, the rapid shrinking of the small regional jet business will make a lot of pilots available for growth and replacement. Every time you swap out a couple of 50 seat RJs for a small narrowbody or a 76 seat RJ, you free up about 8-10 pilots. Do that a few hundred times (which is what will happen in the next 5 years), and you have a lot of pilots available.

    Adam

  • Report this Comment On October 08, 2013, at 5:06 AM, wmaloney22 wrote:

    @johnnya2

    Frances story is probably true. I flew Spirit from Chicago to New York on a Wednesday and after a 4 hour delay (10pm) my flight was cancelled. The last flight out of Chicago left and the next Spirit flight available was not until Monday. They did issue a refund, but claimed it was company policy to not book Spirit fliers on other airlines once their flight was cancelled. I managed to get a flight on Delta the next morning for $500 more than Spirit and had to pay $75 for a hotel room.

  • Report this Comment On October 08, 2013, at 2:59 PM, CSpotGo wrote:

    @Johnnya2

    I can certainly believe that is how Spirit treated that customer. They did the same thing to me. Granted, I was late for a flight and missed it by only a few minutes, but they refused to transfer my ticket to another flight like any other carrier. Further more, I had to wait till Thurday for the next Spirit flight out and this happened on a Thursday. I ended up having to just by a ticket for a real airline. Spirit is the worst joke of an airline airline on planet earth. Their customer service is horrible. Their planes are old and dirty. And soon they will start charging to breathe air on their planes. If keeping prices low on other airlines is their only value, I might as well just fly with one of their competitors.

  • Report this Comment On October 09, 2013, at 6:01 PM, fspiritair wrote:

    Spirit is the worst. Their continued existence is a mockery of decent business practices and corporate social responsibility.

    It's time we do something about it! http://www.fspiritair.com/

  • Report this Comment On October 09, 2013, at 6:58 PM, unitedsux wrote:

    As a former prosecutor, I cannot understand how their is a not a blitz of subpoenas handed out to those who orchestrate, engage and ratify the blatant fraud that is at the core of the Spirit model. Obviously, despite what Aircartels for America is spouting, we need MORE not less regulation and law enforcement of the airlines.

    The collusive and price fixing tactics led by United's "seat discipline" also cries out for law enforcement and increased regulation. Air travel in this country is MASS TRANSIT, nothing more and those people paying for it themselves want it to be cheap PERIOD (safe, of course thanks to the government). Since the Obama Administration took office the middle class has been driven from the skies, competition has been replaced by collusion and you have to look a few times to see if the airfares being quoted are for real. Then, the airlines have the nerve to say "thanks for choosing us" No one is choosing the current ripoffs that air travel is-a revolution is imminent, I predict.

  • Report this Comment On October 10, 2013, at 9:59 AM, agentwebb wrote:

    I have flown Spirit once, and will never do it again if i can help it. The worst flight experience ever. The rudest FAs. The worst cabin experience. Again, I will fly them again if that is the ONLY option, which it rarely is the only option.

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