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1. Running head: ALL YOU BOUGHT IS THE SEAT 1
ALL YOU BOUGHT IS THE SEAT
… and the Space Beneath the Seat, For Now
Benjamin Chong
MGMT 642 Air Carrier, Passenger and Cargo Management
Dr. Gerald Cook
Embry-Riddle Aeronautical University – Worldwide, Singapore Campus
July 2013

2. ALL YOU BOUGHT IS THE SEAT 2
All You Bought is the Seat … and the Space Beneath the Seat, For Now
Anyone who has flown with Spirit Airlines would understand the literal meaning of
the title and why it is so apt. Branding itself an Ultra Low Cost Carrier (ULCC), Spirit
epitomizes flying on the cheap, and is proud of it. Founded in 1964 as the Clippert Trucking
Company out of Michigan, it became Spirit Airlines in 1992, having undergone two name
changes and a stint as a charter tour operator along the way (Spirit, 2011). With the
appointment of Ben Baldanza as CEO in 2006, Spirit began its transformation into a ULCC
and in 2007, formalized it as a corporate philosophy with new branding and colors.
• Caliente Red – Low fares;
• Environmental Green – On-time and reliable;
• Sunshine Yellow – Clean new planes and
• Ocean Blue – Friendly staff.
These form the backdrop to its approach of offering ultra-low base fares to millions of
customers in the North, Central and South Americas and the Caribbean.
Fleet and Network
Spirit currently operates a fleet of 51 Airbuses (as of end-July 2013), comprising 29
A319s (145 seats), 20 A320s (178 seats) and 2 A321s (218 seats). Future deliveries of A320s
(including A320neos from 2015) and A321s would take its fleet to 79 total aircraft (Spirit,
2013), supporting annual growth of 18-22% through 2015 (CAPA, 2013).
With its corporate headquarters in Miramar, Florida and main base at Fort
Lauderdale-Hollywood, Spirit’s network encompasses 55 cities (as of end-July 2013) and
includes crew bases at Las Vegas, Detroit and Atlantic City (Velotta, 2012). While the
company eschews hub-and-spoke operations and avoids the word “hubs”, an examination of
the airline’s route map would reveal that Dallas/Fort Worth and Chicago/O’Hare are well-
served with a significant number of flight segments radiating from them (Spirit, 2013).

3. ALL YOU BOUGHT IS THE SEAT 3
Spirit’s preference for point-to-point operations avoids hub-and-spoke inefficiencies and
costs and allows the airline to quickly redeploy assets if the route does not break even or
show signs of profitability within six months (average break-even period is 6.5 months). In
fact, its Dallas/Fort Worth-Houston and Philadelphia-Las Vegas services are scheduled to be
terminated in September 2013 and January 2014 respectively, approximately nine to twelve
months after launch (CAPA, 2013).
Fuelling Spirit’s foray into Mexico via Cancun, Los Cabos and Toluca from
Dallas/Fort Worth was the success story from Fort Lauderdale. Spirit’s main base was the
launch pad for its push into Central and South Americas and the Caribbean, and the company
believes it can achieve the same level of growth with Dallas/Fort Worth and Mexico. The
company’s lack of sentiment about its routes is famous. “We expect every route to make
money. Not half of them. Not 99%,” said CEO Baldanza in an interview (Yeo, 2012). As
such, travellers should not be surprised to find that a city served by Spirit a year ago has now
dropped off the radar.
Business Model
Spirit’s business model is obsessively simple and focuses on lowering the base fare of
air travel, while unbundling everything it possibly can from the travel experience – checked
and carry-on bags, food and drinks, boarding passes, etc. and charging for them as optional
extras, boosting ancillary revenue. The company believes that passengers should pay for only
what they use and not subsidize others’ use (disproportionate or otherwise) of resources. An
oft-touted example is checked luggage. Spirit contends that airlines that offer “free” checked
bags have already included their cost into the ticket and passengers are, in a sense, exhibiting
over-consumption of a perceived zero-cost item (Shampanier, Mazar & Ariely, 2007). Those
who have no checked bags are then over-paying for their ticket. In an ideal world, passengers

4. ALL YOU BOUGHT IS THE SEAT 4
would just pony up for fuel “and everything else is an option”, according to CEO Baldanza
(Karp, 2011).
Spirit uses the low base fares to stimulate demand in what they feel are under-served
markets, where price-conscious customers are priced out of air travel by the incumbent
carriers, whether legacy or budget. A minimum of 25% reduction in fares is Spirit’s target in
new markets (Ranson, 2012). In fact, they have done better than that, considering the country
as a whole. The average US domestic airfare in 4Q12 was $374 in non-inflation adjusted
dollars (Bureau of Transportation Statistics, 2013) while Spirit’s average ticket revenue was
$126.50 (comprising an average of $75.11 in ticket revenue and $51.39 in ancillary revenue
per passenger flight segment), one-third of the national average (Spirit, 2013). The low fares
stimulate demand, leading to traffic growth, which increases revenue, allowing Spirit to
lower fares and setting off a virtuous cycle, which the airline is exploiting.
Spirit targets the price-sensitive leisure travelers as well as those visiting friends and
relatives (VFR) – low-yield markets that were largely ignored by the legacy carriers as they
pursue the higher-yield corporate travelers. Its initial expansion into Latin America was
fuelled by this strategy and its latest push inland at the domestic US market is but a
continuation of its chase for the “low-hanging fruit in legacy carrier markets” (CAPA, 2013),
emboldened by consolidation domestically and convinced that opportunities abound.
Keeping Costs Low
Spirit’s low cost base allows it to pursue a low-fare market stimulation strategy. The
company aggressively contains costs and works hard at extracting the maximum productivity
out of its assets. Its aircraft utilization is 12.8 hours per day, which compares favorably with
the industry daily average of 10.5 hours (Spirit, 2013; Massachusetts Institute of Technology,
2013). Turnarounds as short as 30 minutes plus scheduling of red-eye flights contribute to the

5. ALL YOU BOUGHT IS THE SEAT 5
high utilization, although any delays would have repercussions down the schedule (Nicas,
2012).
Packing more seats into its aircraft also allows Spirit to reduce seat-mile costs. Its
planes carry 20-30% more passengers than its competitors’, which while making for an
uncomfortable flight, have kept unit costs low (Spirit, 2013). Further cost efficiencies are
derived from operating a single aircraft type comprising the A320-family models, reducing
maintenance, inventory and training costs, both for pilots as well as maintenance crew.
Spirit sells most of its tickets (64.2%) through its website (www.spirit.com), reducing
distribution costs. Bookings through its call center and airport counters account for a small
percentage (8.6%) while third-party channels such as travel agents (physical or online) and
global distribution systems (GDSs) make up the rest at 27.2% of sales (Spirit, 2013). The
company seeks to pass on all distribution-related costs to the customer, which has the effect
of driving traffic to its website, where distribution costs are the lowest. Customers without
Internet access or wishing to engage a travel agent would have no choice but to pay the
difference.
At the end of 2012, Spirit’s cost per available seat mile (CASM) was 5.93 cents,
excluding fuel – one of the lowest in the industry. But even it cannot escape the high fuel
prices and its fuel costs were 35.8% of revenue in 2012, about par for the course for airlines
(Spirit, 2013).
Increasing Revenue
Using price to influence consumer behavior is not new to Spirit. When it started
charging for all checked bags in March 2007, the airline discovered that passengers were
bringing more bags onboard as they sought to avoid fees. Passengers contend for space in the
overhead bins, because while the airline managed to squeeze more seats in its aircraft, the
amount of overhead bin space remained the same. Bags that could not fit had to be checked at

6. ALL YOU BOUGHT IS THE SEAT 6
the gate, creating delays that ripple through the schedule (McCartney, 2010). In a first for the
industry, Spirit began charging for carry-on bags in August 2010. Initial outrage within the
industry soon gave way to grudging admiration as passengers kicked up a fuss at first but
then adapted. Load factors are as high as ever, fewer bags are carried on board and the plane
turns around quicker. “Most of the charges for optional services, they act as economic
incentives for customers to behave in a way that would cost us less money,” said CEO
Baldanza (Yeo, 2012).
Apart from the space beneath your seat, everything else is chargeable. Even the
printing of boarding passes at the airport would cost you money. As the airline aggressively
and some would say, ruthlessly, stripped out non-essentials, it was embarking on “price
discovery” to find out what travelers value (Denning, 2012). And what travelers value is low
fares, in the market segment that Spirit is targeting. By charging for ancillaries, allowing the
company to simultaneously lower base fares, Spirit has managed to maintain an average 85%
load factor over the past two years. Despite being crowned America’s most-hated carrier in
the latest Consumer Reports rankings, Spirit has seen no let-up in its demand, as customers
consistently vote with their wallets, even as they moan about fees (Karp, 2013).
Competition
Spirit’s route network has 60% market overlap with American Airlines, but it would
be slightly inaccurate to term American as a competitor, at the moment, given that both
airlines target different segments of the market. Spirit’s operations into the Caribbean and
Latin America from Fort Lauderdale contend with American’s out of its Miami hub.
Likewise, JetBlue Airways has a presence in Fort Lauderdale and competes on those routes
as well (Spirit, 2013). Thus far, Spirit has managed to avoid market retaliation, as it is small
(approximately 1% national market share) and it is not taking customers away from the other
carriers (Nicas, 2012). What it is doing, is growing the market with its low fares, attracting

7. ALL YOU BOUGHT IS THE SEAT 7
price-conscious travelers who were previously priced out of the market, particularly in the
VFR segment in the Caribbean and Latin America.
Another airline with a similar model is Allegiant Air. Like Spirit, it targets the price-
sensitive leisure travelers and derives a large portion of its revenue from ancillary fees.
However, its network has very little overlap with Spirit and one of its business strategies is to
use fully depreciated old aircraft that are cheap to operate, despite fuel inefficiencies.
Nonetheless, Allegiant is eyeing the Mexican market and its expansion plans may bump up
against Spirit’s as both compete in same market segment (Nicas, 2013).
Profitability
Spirit has been consistently profitable since its emergence as a ULCC in 2007. Its
2012 net income of $108.5 million was 42.0% higher than the previous year’s. Its pre-tax
profit margins in 1Q13 was 13.4%, the second highest among U.S. airlines (first was
Allegiant with 18.5%) (Nicas, 2013). As noted earlier, the airline is not focused on market
share, but profitability. It institutes just enough flights to stimulate demand (typically two to
three flights daily) and would not enter a battle for dominance, unlike legacy carriers who
need frequencies and service to attract the high-yield corporate traveler. Such tactics are
anathema to Spirit’s model and it assiduously avoids them, in fact yanking non-performing
routes and redeploying assets at short notice.
Another key driver of Spirit’s profit is its ancillary revenue. Accounting for 40.6% of
total revenue in 2012, it grew 40.3% from the previous year to reach $535.6 million in 2012
(Spirit, 2013). Wolfe Research airline analyst Hunter Keay says, “We factor in our opinion of
an airline’s willingness to pursue new fees when we decide whether or not to recommend the
stock” (Karp, 2013).
Continued profitability in any business is dependent on delivering exactly what the
customer wants. As CEO Baldanza puts it, “We care about the thing that customers tell us

8. ALL YOU BOUGHT IS THE SEAT 8
they care the most about, and that’s offering the lowest possible fares. If you can do it
yourself, it’s free. If we have to do it, you’ll pay for it” (Mouawad, 2013).
Conclusion
Spirit’s success is due in no small part to its first-mover advantage in the ULCC
business. It was shrewd enough to identify a gap in the market and moved quickly to fill it.
Despite constant bad press (or free publicity, as the company would say) and reviews, there is
still significant demand for Spirit’s product. A best-ever second quarter showing of $45.8
million in adjusted net income in 2Q13 (a 29.6% gain year-on-year) attests to that (Spirit,
2013).
As it continues to expand, Spirit would face pressure to reduce its cost base further,
given its stated goal of a baseline 25% reduction in fares upon market entry. If network
carriers are successful in trimming their costs, Spirit has no choice but to get even more
creative in unbundling. Perhaps, a cleanliness charge would be next. As long as it is in line
with their business model and fares continue to drop (2Q13’s base fare fell 4.4% year-on-
year), passengers such as one Mr. Sech on one of Spirit’s Atlanta-Florida flights would
continue to fly. He summed it up nicely, saying, “I would never be loyal to this airline. But I
appreciate the model – as long as they don't ever charge to use the bathroom” (Spirit, 2013;
McCartney, 2010). Customers would move out of the target segment as their incomes grow,
but there would always be more passengers for whom the lowest fares beat everything else.

9. ALL YOU BOUGHT IS THE SEAT 9
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-Quarter 2012 Domestic Airfare Almost
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l
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