Airline Weekly - June 9, 2009
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Airline Weekly - June 9, 2009

Loud Marketing, Quiet Profits: Spirit CEO Ben Baldanza talks about what’s going right, and what challenges lie ahead

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Loud Marketing, Quiet Profits: Spirit CEO Ben Baldanza talks about what’s going right, and what challenges lie ahead

Sure, the global airline industry may lose $5b this year. But some airlines around the world remain profitable. And one, self-described “ultra” LCC, Spirit Airlines, just had its most profitable quarter ever (see page two), even if not many people notice. Spirit is privately held and doesn’t regularly publish as many details as other airlines, and so an Airline Weekly interview with Spirit CEO Ben Baldanza—conducted last week at the airline’s headquarters near Fort Lauderdale—was particularly revealing.

Airline Weekly: After losses while fuel was peaking last year, you’ve now had a couple of great quarters in a row. Is this just generally a good environment for airlines like Spirit, or is something else going on?

Ben Baldanza: Well I think it’s a validation of the business model. 2007 and 2008 were both positive net income years for the airline. Not huge numbers, not the sort of thing that suggests the company doesn’t have challenges. But if you think about the company’s history starting as a charter carrier in the 1980s, I don’t think the company had ever put together two profitable years in a row. To do that in the face of all the industry and macroeconomic challenges is a real accomplishment. We have a vision for Spirit that we should be a carrier that makes money in good times and bad times—maybe make more money in good times, but not lose money in bad times either. And over the past few years that’s what’s been happening.

AW: But how has it happened?

BB: Well we’ve gotten our costs down to a very low level, and we have a roadmap to get them even lower. With 28 aircraft we’re created an airline that’s as efficient as carriers twice our size. We benchmark ourselves against maybe an AirTran, for example, and we have among the lowest costs—and we don’t even have the scale yet. Then of course there’s the ancillary revenue. We made our revenue stream more stable. Before we started unbundling, our average fare was maybe $100, and we were selling maybe $2 or $3 in other things per passenger—change fees, things like that. Now our average fare is just under $100, but we’re getting $30 per passenger in ancillary revenue. So the stability advantage in that is there are fare wars all the time, but the bag costs $20 to check no matter what. That revenue stream is fairly stable; it’s not subject to the supply and demand whims of the fare structures. And we’ve really worked at exploiting our niche. We realize we’re not an airline for everyone. There are people who demand things they won’t get at Spirit. We’re the airline for people for whom price is their primary concern, people who might not otherwise travel. Before we flew to the Caribbean, you had to pay pretty high fares on American from Miami. So it’s: 1) keep the costs really low and make them lower, 2) stabilize the revenue stream and 3) stimulate the market by bringing low fares to the Caribbean for the first time. The sum of those three things has led to 2007 and 2008 profitability.

AW: JetBlue has aggressively expanded into a lot of your Caribbean markets, albeit largely from other gateways. Do you see them as your main competition? Does their expansion hurt Spirit?

BB: Well clearly from a where-we-fly-today perspective, our largest single competitor is American, because everything we fly from Fort Lauderdale, they fly that and more from Miami. At Detroit, it’s Northwest—now Delta. In terms of encroachment, certainly JetBlue seems to have the most aspirations to do more of the kind of flying we do. But our costs are maybe 50% lower than American’s and maybe 25% lower than JetBlue’s, and we’re going to set fares at levels where we can make money. We’re really competing more broadly for discretionary dollars. I see our main competitors as Best Buy and Muvico, a cinema chain. Times are tough. A lot of people have lost their jobs. We want to make it possible for even those people to still take that trip and see their family. Virtually everyone else we compete with sells product. We sell price. JetBlue sells lots of legroom and TVs. American sells a worldwide network, lounges, global frequent flier reach, services for a business person... We don’t do any of that. We sell: it’s a low fare.

AW: Tell us about your traffic. What percentage connects over your Fort Lauderdale hub?

BB: Well we actually don’t connect much as an airline. We have less than 10% connecting traffic. Now certain flights, yes. The morning flight from LaGuardia to Fort Lauderdale is 50% connect, because that hits all the... (802 of 3208 words)

Also Inside this Issue:

Sure enough, there are signs of economic hope amid the rubble. In the U.S., slowing job losses, a pickup in retail sales and home buying, easing credit markets and rising stock markets are encouraging. But higher oil prices, the prospect of inflation, lingering weakness in the banking sector and—indeed—weak travel markets are all dampening the cheer.

For now, U.S. and Canadian airlines are reporting steep unit revenue declines while always-profitable Ryanair is, well, losing money. British Airways is suffering what feels like an existential crisis, and Southwest is starting to look like a legacy carrier: shrinking, losing money and unable to secure a contract with its unionized pilots.

In better shape is Kenya Airways, which reported profits ex special items last week, and Spirit Airlines, which generated another quarter of strong operating profits.

United isn’t doing so well but finally feels ready to replace its aging fleet. It’s sure to get a good deal from either Airbus or Boeing, which are desperate to generate new orders at a time when nobody else is buying. But financing a giant order could be tricky.

Speaking of aircraft orders, will there be any of consequence at this year’s Paris Airshow? Festivities begin next week.

One airline that recently ordered a large number of B737-800s is FlyDubai, which took to the air last week. Delta, meanwhile, launched a large number of new international routes.

Finally, news of the worst type hit the industry last week: an Air France crash killed more than 200 people.

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