Please ensure Javascript is enabled for purposes of website accessibility

Spirit Airlines' Small-Jet Strategy Is Confusing for 1 Big Reason

By Adam Levine-Weinberg – Apr 21, 2018 at 2:10PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Spirit Airlines appears to be seriously considering adding CSeries jets or Embraer E2-series jets to its fleet -- which raises the question of why the carrier just made a long-term commitment to its A319 fleet.

For more than a decade, Spirit Airlines (SAVE -1.88%) has exclusively operated Airbus (EADSY -2.96%) A320-family jets. Today, the 182-seat Airbus A320 is the backbone of Spirit's fleet, accounting for roughly half of its aircraft. Meanwhile, the 145-seat A319 and 228-seat A321 each account for about a quarter of the fleet. These planes help Spirit efficiently serve its smallest and largest markets, respectively.

This fleet strategy has allowed Spirit Airlines to tailor capacity to demand in each of its markets while benefiting from commonality between all the variants of the A320 family. The A319, A320, and A321 can be flown by the same pilots, and they use many of the same parts.

Nevertheless, in 2016, Spirit Airlines started studying the possibility of adding a second aircraft type to its fleet. Spirit's negotiations with manufacturers appear to be making progress. Yet some aspects of its small-jet strategy still don't make sense.

Looking at smaller jets

There are two key reasons why Spirit Airlines may be willing to deal with the complications of adding a second fleet type. First, small and midsize markets are more likely to be underserved than the highest-traffic routes. The CSeries jet family -- developed by Bombardier but soon to be under Airbus' control -- and Embraer's (ERJ -1.85%) E2-series E-Jets are better-suited to low traffic markets than any of the Airbus A320-family offerings.

A yellow Spirit Airlines A319 jet parked at an airport gate.

Spirit Airlines currently uses Airbus A319s for its smallest markets. Image source: Spirit Airlines.

Second, based on its current aircraft order book, Spirit's growth rate is set to decline significantly after this year. However, Airbus has a massive backlog for A320-family planes, so the bulk of any new order would probably have to be delivered after 2022. By contrast, there is good near-term availability of CSeries and E2-series jets.

Spirit Airlines is on the verge of requesting proposals from aircraft manufacturers for a new order, according to Bloomberg. Spirit may stick with Airbus or buy equivalent aircraft from Boeing, but management confirmed the company's interest in the smaller Bombardier and Embraer planes. This would support the ongoing move into small and midsize cities and keep capacity growing at a faster clip over the next few years.

The case for a second jet family

While Spirit Airlines is eager to add smaller planes to its fleet, it isn't willing to surrender its low-cost advantage. However, there is a significant trade-off between aircraft size and unit costs. If Spirit wants to minimize trip costs for serving smaller markets, Embraer's E190-E2 would be ideal. But with a maximum capacity of 114 seats, the E190-E2 would probably have comparatively high unit costs, since relatively fixed costs like crew and maintenance would be spread over fewer passengers.

By contrast, the largest models from each aircraft family -- the CS300 and the E195-E2 -- will have the lowest unit costs. The CS300 would probably hold about 150 seats in Spirit's configuration, compared to around 140 for the E195-E2.

An Embraer E195-E2 test plane in flight.

Embraer's E195-E2 jet is under consideration for Spirit Airlines' future fleet. Image source: Embraer.

Not surprisingly, the manufacturers disagree about how the unit costs of the E195-E2 and CS300 compare to one another. The best guess is that the E195-E2 offers slightly lower trip costs but slightly higher unit costs. However, one thing is clear: Both models will be dramatically more efficient than the Airbus A319 -- and even the updated A319neo.

The E195-E2 and CS300 jets would both likely offer enough fuel and maintenance cost savings relative to the A319 to offset the loss of commonality within Spirit's fleet. If Spirit Airlines is truly committed to smaller markets, ordering one of these two smaller models would make sense.

Why did Spirit just double down on its A319s?

The confusing thing about Spirit's growing interest in the CSeries and E-Jets E2 families is that just weeks ago, the company bought out the leases for 14 A319s. The leases for these aircraft had been set to expire in the early 2020s. However, based on the planes' ages, they wouldn't be due for retirement until around 2030.

By buying these planes, Spirit Airlines will significantly reduce its aircraft ownership costs. However, as they age, these A319s will become more and more expensive to maintain. Additionally, they are far less fuel efficient than next-generation alternatives.

It made sense to accept these trade-offs on the assumption that Spirit Airlines wanted to stick with a single fleet type. By contrast, if Spirit is about to add a second aircraft type anyway, it would have been more logical to let the leases expire and replace the A319s with E195-E2s or CS300s. Both alternatives are relatively close to the A319 in terms of seating capacity and vastly more efficient.

Spirit Airlines could still look to sell the A319s or trade them in a few years as part of a deal to upgrade to state-of-the-art aircraft. But for now, the company's small-jet strategy remains very unclear.

Adam Levine-Weinberg owns shares of Embraer and Spirit Airlines. The Motley Fool owns shares of and recommends Spirit Airlines. The Motley Fool recommends Embraer. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Spirit Airlines Stock Quote
Spirit Airlines
SAVE
$19.79 (-1.88%) $0.38
Embraer Brazilian Aviation Co Stock Quote
Embraer Brazilian Aviation Co
ERJ
$9.53 (-1.85%) $0.18
Airbus Stock Quote
Airbus
EADSY
$22.95 (-2.96%) $0.70

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
342%
 
S&P 500 Returns
110%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/05/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.