Since transitioning to an ultra-low cost carrier model around the time of the Great Recession, Spirit Airlines (NYSE:SAVE) has become known for spartan service. Leg room is minimal, and a slew of amenities that are standard on other airlines carry additional charges or aren't available at all. Spirit's unpopular policies were designed as part of a ruthless strategy to cut costs so that it could offer the lowest fares.
In keeping with this strategy, for many years Spirit Airlines ignored the airline industry trend toward installing onboard Wi-Fi. However, during 2017, management finally started coming around to the idea of offering internet access in the air. Last week -- as part of a broader campaign to highlight its improving service -- Spirit Airlines confirmed that it will install Wi-Fi throughout its fleet by the summer of 2019.
What Spirit's management thinks about Wi-Fi
Several years ago, then-CEO Ben Baldanza said that Spirit Airlines wasn't interested in offering Wi-Fi if it would have to raise fares to cover the cost of installation and providing the service. He stated that other airlines didn't earn enough revenue from Wi-Fi usage fees to cover their costs. For airlines that carry lots of high-paying business travelers, Wi-Fi availability is a must. But Baldanza viewed Wi-Fi as an unjustifiable expense for a leisure carrier like Spirit.
Luckily for Spirit (and its customers), the cost of installing and operating inflight Wi-Fi systems has been declining. Furthermore, the quality of service has improved dramatically, enabling broadband-like speeds even when lots of people are connected.
As a result, current Spirit Airlines CEO Bob Fornaro stated that the carrier was likely to add Wi-Fi in the near future. He indicated that Spirit was looking for a product that would be relatively inexpensive but capable of more than just basic email and web browsing.
Spirit Airlines makes its choice
On Friday, Spirit Airlines officially announced that it was signing an agreement with Thales Group to bring high-speed Wi-Fi to its entire fleet of more than 100 planes. Spirit is promising customers true broadband speeds that will enable video streaming. Installations will begin in November and continue through next summer.
Initially, Wi-Fi service will be available on 97% of Spirit's routes. (Certain flights to Latin America will go beyond the coverage area.) By 2021, the launch of a new satellite will increase speeds even further and extend Wi-Fi availability to Spirit Airlines' full route network.
The Wi-Fi announcement was coordinated with a new campaign focusing on Spirit's moves to "invest in the guest." The carrier noted that its on-time performance has improved dramatically this year, helped by a new pilot contract that quelled recent labor unrest. Spirit also has a new guest service training program for flight attendants that will soon be extended to its airport customer service staff.
It will probably take a while for Spirit Airlines to convince potential customers that its service quality has improved, but it is clearly making a sincere effort to improve its reputation.
A new ancillary revenue driver
Wi-Fi will become a new source of ancillary revenue for Spirit Airlines, which could help the carrier break its recent streak of unit revenue declines. "Spirit will offer high-speed web browsing and streaming options, starting with an average price of $6.50, with a cost range expected to be lower or higher based on the route and demand," according to the company.
Spirit's statement suggests that the carrier may implement tiered pricing, with a higher price for access to bandwidth-heavy video streaming services. Unlike most of its rivals, Spirit Airlines won't offer a library of free video content, creating more of an incentive for customers to pay a premium for the ability to connect to services like Netflix and Hulu.
Spirit Airlines shareholders will be happy to learn that adding Wi-Fi to the fleet won't have a meaningful impact on Spirit's cost structure. In fact, it appears that Thales may be footing some or all of the bill for the installations in exchange for a cut of the revenue generated.
If that's true, while Spirit Airlines will give up some of the potential revenue upside from Wi-Fi, there will be virtually no downside for the company. Thus, Wi-Fi could be an important tool for Spirit to improve its financial results in 2019 and beyond.