In 2015, ultra-low-cost carrier Spirit Airlines (NYSE:SAVE) embarked on a massive expansion. The budget airline increased its capacity by a stunning 30% last year as it looks to stimulate travel demand among people who can't afford the fares at traditional airlines.
Spirit's fellow ULCC Allegiant Travel (NASDAQ:ALGT) also ramped up growth in 2015. Its capacity increased 18% year over year.
The newest member of the ULCC club -- Frontier Airlines -- is entering its own growth spurt. Frontier's expansion plan shows that it intends to continue carving out its own niche within the ULCC market, rather than just copying Spirit or Allegiant.
Gearing up for rapid growth
Frontier Airlines ended 2015 with about 60 airplanes in its fleet. That's up just modestly from the 55 aircraft it operated at the end of 2012, when it was a subsidiary of regional airline Republic Airways.
Republic sold Frontier to airline-focused private equity firm Indigo Partners in late 2013. In 2014, Indigo focused on beefing up Frontier's management team, including bringing on former Spirit Airlines marketing chief Barry Biffle as president.
Later in 2014, Indigo Partners chairman Bill Franke stated that the next key goal was to reduce Frontier's non-fuel cost per available seat mile from about $0.07 at that time to $0.06 or less. For comparison, through the first three quarters of 2015, Spirit Airlines had a non-fuel unit cost of $0.0563 and Allegiant Travel had a non-fuel unit cost of $0.0584.
Frontier Airlines has been rapidly reducing its unit costs in the past year or so through the tried-and-true methods of adding larger planes (like the 230-seat A321) and cramming more seats onto existing planes. As a result, Frontier is ready to accelerate its fleet growth.
Splitting the difference
In 2016, Frontier Airlines is scheduled to take delivery of 18 new planes. Some of those will replace older, smaller A319 jets that are leaving the fleet -- helping Frontier continue reducing its unit costs -- while others will allow for growth. In total, the carrier expects to grow capacity by about 20% year over year in 2016.
As part of this expansion, Frontier recently announced more than 40 new routes that will start up during the second quarter. It is deliberately focusing much of its growth on midsized cities. According to Biffle (the company president), many of these markets still have high fares, while prices have dropped on routes between the biggest cities.
This also means that Frontier Airlines is trying to carve out its own niche among the ULCCs. Spirit Airlines mainly focuses on serving the busiest routes, where it can stimulate lots of new demand. By contrast, Allegiant primarily flies from small cities to leisure destinations, routes for which it typically faces no direct competition.
Serving the markets in between requires adopting some of Spirit's tactics and some of Allegiant's tactics. Frontier will offer three or four weekly flights for each of its recently announced new routes, following Allegiant's strategy of flying routes less than daily.
However, Allegiant does that by buying cheap, out-of-favor used planes so that it can afford to have very low utilization. By contrast, Frontier Airlines -- like Spirit -- has a young fleet, which means it has higher fixed aircraft rent costs. To keep these costs manageable on a per passenger basis, Frontier and Spirit need to keep their aircraft utilization high.
Spirit flies most routes one or two times a day, so for each new aircraft, it will typically add about two new routes. But since Frontier is flying its new routes less than daily, each additional aircraft likely supports four or five more routes (on average).
Frontier Airlines needs to manage some intricate scheduling challenges to fly so many routes with each aircraft. However, if it can overcome the technical hurdles, this strategy may allow it to earn the same exceptional profits produced by Spirit Airlines and Allegiant Travel in recent years.