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Spirit Airlines Gets a New CEO: Reading Between the Lines

By Adam Levine-Weinberg - Jan 6, 2016 at 7:40AM

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Ben Baldanza's sudden resignation could pave the way for a merger with Frontier Airlines.

Ultra-low cost carrier Spirit Airlines (SAVE -0.45%) shocked the airline world once again on Tuesday. This time, the news was that Ben Baldanza -- who had been Spirit's CEO since 2006 -- had resigned, effective immediately.

Spirit Airlines CEO Ben Baldanza resigned unexpectedly this week. Photo: Spirit Airlines

This surprise move has airline analysts wondering whether there is any hidden meaning behind Baldanza's departure. While it's impossible to be sure, there are some indications that the change in leadership could eventually lead to a merger: most likely with fellow ULCC Frontier Airlines.

An unexpected move
There had been no hints before Tuesday that Baldanza was on the verge of leaving the company. It's true that Spirit Airlines stock had a dismal 2015, losing nearly half of its value. However, analysts still expect that Spirit will report EPS growth of 25%-30% for the year. That's hardly the kind of performance that would put a CEO on the hot seat.

The switch was more bizarre in that Baldanza described it as an "orderly succession plan." Generally speaking, an orderly succession plan would involve naming a CEO-designate months or even a year in advance of the actual leadership transition.

Spirit appointed Robert Fornaro as its new CEO. Fornaro served as CEO of AirTran Airways for several years before ultimately selling the company to Southwest Airlines. He has been on Spirit's board since 2014, so he should already be quite familiar with the business.

What does the switch mean?
Spirit Airlines didn't reveal any broader strategic rationale behind the leadership change. That hasn't stopped speculation, though, given that it is rare to see such an abrupt CEO resignation at a highly successful company.

One theory is that Fornaro could take a more conservative approach to growth. Spirit increased its capacity by about 30% last year, contributing to industry overcapacity and causing unit revenue to plummet. (During its most recently reported quarter, Spirit's unit revenue declined 17.5% year over year.)

New Spirit Airlines CEO Bob Fornaro was previously AirTran's CEO. Photo: Wikimedia Commons

Still, slowing Spirit's growth wouldn't make very much sense. As noted above, the company is likely to report 25%-30% EPS growth for 2015. Its pre-tax profit margin now exceeds 20%. The ongoing decline in oil prices bodes well for another year of strong margins in 2016. In short, conditions are ideal for growth.

A more plausible theory is that Fornaro's experience leading a larger airline could help Spirit improve its execution. Operational reliability has been spotty in recent years, causing lots of customer complaints and (just as importantly) driving up costs.

Another intriguing theory is that Fornaro's appointment could signal the board's interest in pursuing a merger. Among the other U.S. airlines, Frontier Airlines makes by far the most sense as a merger partner for Spirit, as they have similar business models.

Why a merger with Frontier would make sense
Many people have pointed to Fornaro's role in the AirTran-Southwest merger to support the idea that he was hired to pursue a merger. Given how much consolidation there has been in the airline industry lately, this might just be a coincidence, though.

More telling is the fact that Fornaro is 63: nearly a decade older than Baldanza. Thus, this isn't a case of a CEO retiring early to give a younger executive a chance to lead. Indeed, Fornaro seems more like a temporary solution for a few years than a long-term CEO.

A more logical long-term successor would be Barry Biffle, who led Spirit Airlines' marketing efforts for about nine years and is only 43. Since 2014, he has been the president of -- you guessed it -- Frontier Airlines.

Frontier Airlines would be a logical merger partner for Spirit. Photo: The Motley Fool

Frontier Airlines Chairman Bill Franke also held the same position at Spirit until a few years ago and was instrumental in pushing both companies toward the ULCC business model. Thus, aside from making strategic sense, a merger with Frontier could provide Spirit Airlines with a dynamic new leadership team.

Just because a Spirit-Frontier merger would make sense doesn't mean that it will happen. However, with Ben Baldanza out of the picture, the prospects for such a combination look a lot better.

Adam Levine-Weinberg owns shares of Spirit Airlines and is long March 2016 $40 calls on Spirit Airlines and long June 2016 $30 calls on Spirit Airlines. The Motley Fool recommends Spirit Airlines. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

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