Meet the Carrier That Made Spirit Airlines Possible

Spirit Airlines stock has soared more than 90% over the past year. Source: Benjamin Beyers for The Motley Fool.

In the 1980s, a budget carrier known as PEOPLExpress changed the pricing model for airline tickets. Now a management group is resuscitating the brand while introducing some twists that Spirit Airlines (NASDAQ: SAVE  ) investors might find familiar.

Looking back, and finding the future
The old PEOPLExpress opened for business in 1981 and flew a wide range of national and international routes. In 1985 alone, the carrier flew 17.6 billion revenue passenger kilometers, according to data supplied Air Transport World.

Early innovations included charging for bags, soda, and snacks in-flight -- unfortunate take-backs that have since become the standard among major and discount carriers alike, though Spirit has taken the practice to new, but arguably necessary, lows.

A few people at a time
By 1987, PEOPLExpress had taken on too much debt in expansion, forcing a sell-off to then-Continental Airlines and parent Texas Air. This PEOPLExpress isn't as interested in serving major hubs. Instead, the airline will target underserved markets when its first 737-400s take off on June 30.

The new PEOPLExpress takes off on June 30. Credit: PEOPLExpress.

Initial flights will originate at Newport News/Williamsburg International Airport and carry passengers to Boston, Newark, NJ, and Pittsburgh. Additional flights to Atlanta, New Orleans, and St. Petersburg and West Palm Beach, Fla. will launch between July 15 and Aug. 28. Competition is likely to be limited to Delta's regional flight to Atlanta, which should make it easier for PEOPLExpress to gain traction and test its flexible pricing model.

Smells like more Spirit
"Air travel had become an unpleasant, difficult and costly experience for many travelers -- and in response to that need, the new PEOPLExpress was born with a name that left an indelible mark on aviation history," longtime airline executive Jeff Erickson said in a press release announcing the carrier.

Just as Spirit offers customers a variety of upgrades from an ultra-low base fare, PEOPLExpress pitches a customized flying experience where passengers can choose the amenities they need. Or, if they wish, just buy the cheapest available seat.

Fares begin at $76 each way. Cabins include coach and "Living Large" seats that offer extra room and run $59 per segment. Exit row seats cost $25 extra, and pre-assigned seats another $15. Fees add up quickly if you want to fly comfortably, or if you want to store anything. Overhead space is $25 per bag. Checked bags cost $20 for the first and $25 for the second.

Sound over the top? Maybe it is, but I can hardly blame PEOPLExpress for pricing this way. According to S&P Capital IQ, Spirit Airlines has grown revenue more than 20% in each of the last two years and the trailing 12 months, all while enjoying a better-than-30% gross margin and 20%-plus returns on capital. An enviable (and uncommon) record that PEOPLExpress, in building on its history, will seek to duplicate.

For now, there's no way to invest in PEOPLExpress. But if the airline catches on, it'll be a good sign for Spirit and others who've embraced the a la carte pricing model. For investors, that makes this a story worth watching.

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