In the first part of this series, I discussed why major airlines Delta Air Lines, United Continental, US Airways, and American Airlines, a subsidiary of AMR, are currently in an advantageous position to raise fees and reduce services. But I also noted that one important part of flying may be protected. And Spirit Airlines (NASDAQ:SAVE) has emerged as that protector.
The Spirit model
When discount carriers such as Southwest Airlines and WestJet Airlines came into the industry, they lowered ticket prices through improved cost structures and more efficient procedures. But a new breed of ultra-discount carriers is taking price slashing to the next level.
Spirit Airlines takes hold of the low-cost structure methods seen at discount carriers and adds its own recipe. Spirit's pitch -- the distance from a point on one seat to an equivalent point in front of it -- is the lowest in the industry, coming in at 2 to 3 inches less than the seats of the major airlines. This difference makes flying on Spirit less comfortable than on a major airline, but Spirit targets a different type of customer. Rather than competing for those who would normally fly another airline, Spirit aims for the bus riders and the road trippers -- those who otherwise couldn't afford to fly.
The lower boundary
With ultra-low prices, legroom at bare minimum levels, and the airline relying on other ancillary revenues for a large amount of its earnings, Spirit has effectively established a lower boundary on air travel. Its ultra-low-cost structure implies that fares can't be much lower without becoming unprofitable. Yet the company attracts a sort of hatred among certain travelers who see Spirit in comparison to major airlines.
At 28 inches of pitch on an Airbus A320, Spirit is well below major airlines, averaging around 31 to 32 inches. (Some of Spirit's other planes have slightly more pitch but are still below the industry average.) Looking at the way fees and space move in tandem at major airlines, you may expect major airlines to begin decreasing pitch down to the lower bound of 28 inches.
But what would happen if major airlines moved all the way down to 28 inches? While it may take some time to spread, word would get out that major airlines are just as uncomfortable as Spirit Airlines. At this point, major carriers would have to lower their prices to compete with Spirit, drastically changing their business models, or else watch their customers leave en masse to a carrier providing the same pitch for a lower fare.
To avoid a complete overhaul of their business models that would also cause the loss of many high-revenue business travelers, major airlines need to stay out of Spirit Airlines' territory. Right now, major airlines and ultra-discount airlines are clearly differentiated by a difference in legroom, allowing major airlines to keep prices at current levels. Since maintaining higher fares is a key component to the airline business model, keeping legroom significantly greater than Spirit Airlines' is a smart move, benefiting both major airlines and travelers.
Thank you, Spirit Airlines
It may sound crazy that someone as much a fan of legroom as I am would thank knee-crunching Spirit Airlines for growing its presence, but Spirit is having a positive effect on the industry for every other traveler on a major airline who wants to feel comfortable during his or her flight. By establishing a lower bound on legroom, Spirit has effectively made it so any major airline lowering legroom dramatically will have to compete with Spirit's ultra-discount fares. Major airlines will quite likely continue finding ways to raise fees and generate additional ancillary revenues, but at least there's some protection against cuts in legroom.
Had Spirit Airlines never started or instead decided to keep itself to a tight, niche market, major airlines would quite possibly find it economical to eventually reduce legroom to Spirit's level. But Spirit's ultra-low-cost presence makes competing on Spirit's level uneconomical and should keep legroom at major airlines from falling further. And for that, we can all thank the airline with the least legroom for preserving our own.
Alexander MacLennan owns shares of AMR and Delta Air Lines and also has options on Delta Air Lines and US Airways Group. This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.