Things in the Sky

Spirit Airlines is pursuing additional frequencies to expand its service to Colombia, and hopes to use this potential new flying as a way to expand it service to other South American destinations…this according to a Spirit filing with the DOT last week (yes, I’m behind).

The airline’s application for new service comes after the United States and Colombia signed an open skies agreement earlier this year.

As part of transition period to open skies, there are thirteen routes to Colombia that are stills subject to frequency restrictions. But 42 new frequencies for those routes (half available now, half available on January 1) are now available. Spirit is applying for 14 frequencies to add two new flights from Ft. Lauderdale to Bogotá – a route the carrier currently flies once daily.

In addition to the expanded Colombia service, Spirit sees the potential new Bogotá service as an opportunity to expand further in South America. The carrier noted in its DOT filing requesting the frequencies that it “plans to use the 14 frequencies to operate two additional daily flights between Fort Lauderdale and Bogotá and continue on to the beyond points, Quito and Guayaquil, Ecuador.”  (Spirit’s also made a filing about the Ecuador service – that can be found here.)

Spirit also said in its filing that if it receives the frequencies it will also be able “to operate a daily one-stop via Bogota to Lima.” Spirit said it “operates a daily non-stop during May through August, but only a weekly roundtrip from September through April. The one-stop will enable Spirit to offer more seats and a consistent annual product in that market which will enhance competition.”

As most already know, Spirit Airlines filed for an IPO with the SEC late last year, and has subsequently revised the initial filing with goodies like full-year 2010 final results. I’ve been meaning to write about these updates for awhile, and coverage over some of the airline’s latest adjustments to its luggage policies.

Despite all the negative media coverage about Spirit’s luggage policies, the airline continues to generate significant revenue ($91.3 million in 2010) through its fees for bags. In fact, Spirit’s implementation of a fee for carry-on bags that do not fit under the seat resulted in significant revenue growth:

In August 2010, we introduced a fee for carry-on bags, resulting in a significant reduction in the number of carry-on bags checked at the gate. In the fourth quarter of 2010, the first full quarter of the carry-on bag fee, we experienced an increase in total bag revenue per passenger segment to $16.82, compared to $9.59 in the fourth quarter of 2009.

I wonder how much of that revenue increase is from the fee itself versus passengers choosing to pay lower fee for checked luggage.

Meanwhile, for 2010 Spirit reported operating of $68.9 million, compared to a $111.4 million net profit in 2009. It is worth noting, however, that Spirit estimates that its pilot strike last year “had a net negative impact on our operating income for 2010 of approximately $24 million.”

Spirit saw revenues increase 11.6% to $781.3 million, primarily driven by a 48.5% year-over-year increase in ancillary revenue to $243.3 million. Spirit notes, however, that its Big Front Seat (formerly first class) product is no longer sold as a separate fare but rather an upgrade, so revenue is now being reported differently.

One last interesting stat – Spirit’s ancillary revenue per passenger flight segment was $35.00 last year, up from $25.91 in 2009, but ticket revenue per segment decreased from $84.77 to $77.39.

Spirit Airlines last week filed with the SEC for a $300 million initial public offering – of which $150 million will be kept, and the remainder used to pay off debt, terminate the airline’s professional services agreement with Indigo Partners (a group that took a majority stake in 2006) and some other things.

While the IPO is exciting in and of itself – I always enjoy the IPO filing the most because it offers a whole lot of data, which is especially exciting for a company that has previously be private.

Of course – we can get a good picture of Spirit’s performance through DOT Form 41 – but generally I much prefer SEC data. First, the data is presented in a format that’s much more accessible, and there’s also data that DOT doesn’t provide. And plus SEC filings contain details and explanations from management – while the DOT data is just the straight numbers.

So a few things I’ve noticed.

First, everyone loves to hate Spirit for their business model. But – it’s working. Ever since Indigo took a big stake in the company and Ben Baldanza became CEO…the company’s results have been improving – and the airline has successfully pulled off three straight years of profitability.

Spirit did, however, post a net loss the first half of this year – $2.8 million – but did earn a $22 million operating profit. Why the change? Spirit cites that its fuel expense was up over 40%  – and the pilot strike was also a big factor. From the airline:

We estimate that the 2010 pilot strike had a net negative impact on our operating income for the quarter and six months ended June 30, 2010 of approximately $19 million consisting of an estimated $23 million in lost revenues, and approximately $4 million of incremental costs resulting from the strike, offset in part by reduced variable expenses avoided during the strike of approximately $8 million.

But I was most interested at examining Spirit’s revenues – as well all know that it has really emphasized ancillary revenues. And the growth in that kind of revenue is staggering. Here’s a graph of total non-ticket revenue – and how much non-ticket revenue makes up of Spirit’s total revenue.

And to add some further color to the first half – Spirit’s $98.1 million in non-ticket revenue was 23.5% higher than the first half of 2009.

Spirit also provided a breakdown of its fee revenue that was very interesting. Baggage fees were the biggest source, followed by Spirit’s usage fee, which one pays while buying a ticket. I’d be very interested to see how this graph looks with data from later on this year, when Spirit introduced its new fee for carry-ons.

Something else that was interesting about revenues is that Spirit has said as they introduce fees, they lower fares, and the filing sheds some light on this. In 2005, Sprit’s revenue per passenger flight segment was $102.16. $98.78 of that was the base fare. In 2009, total revenue per passenger flight segment was up slightly to $110.68 – but the base fare portion of that had gone down to $84.77.

Spirit’s utilization is also interesting. It stood at 8.9 hours in 2005, and was 13 hours in 2009 – a 46.1% increase! So Spirit has been really focused on generating as much revenue it can every day.

And finally – Spirit’s text on customer satisfaction was interesting in terms of customer adjustment:

One challenge that we experienced in connection with the implementation of our ULCC business model was an increase in customer complaints lodged with the DOT. This problem was particularly acute in domestic markets that we had been serving for a considerable period. Elements of our new business model, including unbundling services that were previously included in the product (e.g., baggage and onboard food and beverage) and adopting a high density seating configuration in our new aircraft did not necessarily meet the expectations of our former customer base. We engaged in a concerted initiative to address the rate of customer complaints, including enhancing the clarity of the ULCC model and transparent pricing elements of our product at the point of sale.

In response to customer and other demands, we recently modified our online booking process to allow our customers to see all available options and their prices prior to purchasing a ticket, and have initiated a campaign that illustrates our total prices are lower, on average, than our competitors, even when options are included.

Anyway – that’s what I’ve found so far. The SEC filing is pretty massive so I might find some more goodies. You can examine it yourself here.

Spirit Airlines announced this morning that it would begin charging for some carry-on baggage. Really, is anyone surprised here? To be honest, considering Spirit’s focus on leisure markets it makes sense.

Currently, Spirit passengers are allowed a personal item (purse, briefcase, laptop case, etc.) and a free carry-on, which is pretty much an industry standard. Starting August 1st, only one personal item that sits under the seat will be allowed for free, as well as some “excluded items” like car seats, strollers, etc. On the same day, bags that can fit in the overhead bin will be subject to a fee – $20 for $9 Fare Club members who pay online, $30 for everyone else who pays online, and $45 for everyone who pays at the airport. The fee also includes boarding with the first group of passengers.

And Spirit is raising its checked baggage fees as well. The first checked bag costs $19 online, or $25 at the airport – those fees will go to $25 and $45, respectively. For some bags, there is now a distinction between domestic and international travel as well – the first international bag will cost $30 when paid online, for example.

The move also makes Spirit’s $9 Fare Club, which costs $39.99 per year, more valuable. Right now, those members are there for special offers, but Spirit is sweetening the deal by charging cheaper bag fees to those members when the new policy rolls out in August. Considering that the program offers some decent discounts ($15 online instead of $25 for the first bag on domestic flights, for example), I think it can be a good deal for those flying Spirit a few times a year. Another part of today’s news is Spirit’s new Penny Plus fares, which have a $0.01 base fare, plus taxes and fees. (How very Ryanair-like!) They will replace the $9 fares.

Let’s talk about the future here. Will other carriers follow suit? That one has me scratching my head a bit. On one hand, Sprit is a full-blown leisure carrier, which makes me think that the legacies will stay put. And we can look to Europe here – easyJet and Ryanair have more restrictive policies than the likes of British Airways, Air France, and Lufthansa. But then again, the European legacies have had traditionally better baggage policies than their American counterparts.

But it’s easy to find reasons why other carriers will follow Spirit here. The airline’s COO Ken McKenzie said that this move “will reduce the number of carry-on bags, which will improve inflight safety and efficiency by speeding up the boarding and deplaning process” in this morning’s news release. Of course, getting more ancillary revenue is a huge motivator here, but that’s not exactly the best thing to put in a press release.

From my few flights over the past few months, it definitely seems that passengers have wised up and are doing what they can to avoid baggage fees, primarily by bringing extra carry-ons that often end up getting gate-checked. That means lost ancillary revenue for the airline and a longer boarding process, increasing the probability of a flight leaving late. That, I think, actually encourages employees to gate check bags quickly, considering that airlines are often examining the on-time performance for each station, not the potentially-lost revenue.

I think the operational side, in terms of on-time performance, is really what helped set the price for the carry-on fee. For those paying online, it’s cheaper to pay for a checked bag. So the fee either motivates passengers to pack less, period, or to check their bags. With that policy, Spirit captures more revenue and will be able to improve on-time performance by reducing boarding times.

Though, when one considers on-time performance, it seems that this might be more of an issue for Spirit than for other carriers. A friend pointed out to me earlier today that Spirit has a pretty dense seating configuration. For example, its A321s seat 218 passengers, 35 more than a US Airways A321. So overhead bin space is at more of a premium for Spirit passengers already, increasing the possible number of gate-checked bags.

As always, we’ll just have to wait and see if other airlines follow. I’m not sure how likely it is, but I’m sure some legacy airlines might be giving this idea a closer look than they did in the past. And if one legacy carrier likes it enough, there’s a good chance most others will follow.

(Updated at 2:30 PM to reflect seating configurations.)

Photo Credit:

http://www.flickr.com/photos/flissphil/ / CC BY 2.0

Spirit is only known for cheesy/tasteless sales, and news about their latest promotion started spreading last evening – the screenshots speak for themselves. Yes, they really are taking advantage of the Tiger Woods news:

Is it immature? Yes. Tasteless? Yes. But it makes me chuckle, and like always, it’s a way to generate buzz.