Spirit Airlines: A Strategic Management Case Study
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Spirit Airlines: A Strategic Management Case Study
- 1. By: Taylor Etzell Lauren Osmanski Marissa Pie’ Rachel Weir
- 3. Network Growth through Market Penetration • Codesharing in markets with Frontier Airlines o Shared risk and reward o Long term growth opportunity o Recommended Strategy
- 4. The Spirit Airlines Business Model • Low unit operating costs • High seat density • Unbundled “bare-fare” ticket prices Current Position
- 6. 40% 60%
- 7. Relationship Between RASM and CASM Spirit Airlines Industry
- 9. Load Factor A320 Spirit Airlines Load Factor 86.6% Rows 30 Total Seats 180 Seats * Load Load Factor 155 A320 Industry Average Load Factor 84% Rows 24 Total Seats 150 Seats * Load Load Factor 126
- 10. American •61% shared route network JetBlue •LCC Frontier •LCC, moving to ULCC Competition
- 12. What is codesharing? • Many different types • Revenue sharing, Risk sharing • 1 operating carrier, 1 marketing carrier o DENVER MARKET Frontier = operating carrier Spirit = marketing carrier o FORT LAUDERDALE MARKET Spirit = operating carrier Frontier = marketing carrier
- 14. Seattle San Francisco Salt Lake City DEN-SEA 2.40% DEN-SLC 1.10% DEN-SFO 0.84% Total % of Passengers Flown by Frontier Spirit’s New Routes
- 15. San Salvador Guatemala City Santo Domingo FLL-GUA 5.80% FLL-SAL 3.40% FLL-SDQ 5.00% Total % of Passengers Flown by Spirit Frontier's New Routes
- 16. 2013 Year 1 Year 2 0.034% Increase
- 17. % Increase Revenue 11.27% Expenses 0.034%
- 18. • Spirit’s Reputation • Overselling • Third-Party Distribution Turbulence
Editor's Notes
- TAYLOR: Good afternoon everyone! I’m Taylor Etzell. I’m Lauren Osmanski, I’m Marissa Pie’ and I’m Rachel Weir. RACHEL: Today we are presenting our case study on Spirit Airlines.
- MARISSA: How many of you have ever flown on an airplane before? Everyone who just raised their hand is stakeholder in the airline industry. This industry is ever present so many people’s lives. The airline industry is constantly innovating and changing to meet consumer demands, therefore what one airline does greatly affects another.
- TAYLOR: After utilizing the strategic management tools, we concluded that a market penetration strategy would be most advantageous for Spirit Airlines at this time. Codesharing is a low-cost strategy for airlines to expand route networks and meet customer demands. The way we are recommending code sharing is similar to when you purchase an American flight and when you go to the airport you enter the delta terminal, get on a Delta plane, operated by a Delta personal, but American recognizes your ticket revenue. The codesharing strategy we developed distributes both risk and reward between Frontier and Spirit and positions the two for long-term growth. We will talk more about our strategy later.
- RACHEL: Forget everything you know about the airline industry, because Spirit Airlines’ operations are completely unique! By maintaining low unit operating costs, high seat density and the signature “unbundled bare-fare” ticket pricing model, Spirit Airlines has secured a position in the market as the sole ultra low-cost carrier in the United States.
- TAYLOR: Spirit generates 60% of its total revenues from passenger ticket sales and 40% from non-ticket sales. Non-ticket revenues include early boarding fees, baggage fees, etc. Spirit gives customers the freedom to choose these additional services.
- LAUREN: As Taylor just mentioned, the 60-40 split of Spirit’s two divisions is perfectly illustrated in this booking of a Denver to Fort Lauderdale flight. The customer opted in to all of the non-ticket items, which accounted for 40% of the total ticket price, whereas the bare-fare ticket price is 60% of the total.
- RACHEL: RASM is a metric used industry wide to measure airline profitability. RASM, or revenue per available seat mile, is the revenue generated per customer flying one mile. As illustrated by the graph, Spirit’s RASM is increasing, but still below industry average. LAUREN: Likewise, CASM, or cost per available seat mile, is the cost incurred per customer flying one mile. Spirit’s CASM is and has been historically well under industry average, indicating high levels of profitability.
- TAYLOR: As a quick measure of profitability, here a graphic depiction of Spirit’s net income. As you can see, it has been increasing. Note the dramatic increase since its IPO in 2011.
- MARISSA: Load factor is one of the most important metrics regarding an airline’s asset utilization. Load factor measures how well an airline fills its planes. These two planes are the exact same model, an Airbus 320. On the left is Spirit Airlines. Spirit Airlines has 180 seats on its A320, whereas the industry average seats 150 passengers. Spirit is able to fill 155 of these seats on an average flight as opposed to a mere 126 seats on any other given airline. Obviously, more filled seats equals more passengers, thus more ticket revenue.
- RACHEL: Spirit’s 3 main competitors are: American Airlines, JetBlue Airways and Frontier Airlines. Although Frontier Airlines is competition, it presents opportunity because of its shifting business model. Frontier Airlines recently announced a plan to become an Ultra Low Cost Carrier, meaning it will unbundle its prices like Spirit does.
- TAYLOR: These two route maps illustrate the strategic issue we are trying to resolve for Spirit Airlines. Spirit Airlines is unable to meet customer demand in the Western United States due to a lack of a western hub. Frontier Airlines presents opportunity as a codeshare partner for Spirit Airlines because of its major hub in Denver, Colorado. LAUREN: Similarly, Frontier lacks access to Central and South American markets by means of a Southern hub. Spirit Airlines has a large hub in Fort Lauderdale, Florida. Codesharing through these two hubs will allow Spirit Airlines to address the strategic issue at hand.
- MARISSA: There are many types of different codesharing agreements, but our strategic recommendation focuses on one, in which there is one operating carrier and one marketing carrier. In Denver, Frontier Airlines will operate the flights and Spirit airlines will market them. This will give Spirit presence in currently unserved markets. In Fort Lauderdale, Spirit will operate the flights and Frontier Airlines will sell seats.
- MARISSA: To visually depict the codeshare agreement, here is an example Spirit and Frontier’s A320s. As you can see on the Spirit plane, average load factor is 86%, which leave 14% of seats unoccupied. Similarly, Frontier’s load factor is 88% , leaving 12% unoccupied and available for Spirit to fill through codesharing. To further this point, Spirit’s current load factor on the Seattle, salt lake city, and san Francisco routes is 0% because Spirit does not fly there. After implantation of the strategy, load factor has the potential to reach 12%.
- TAYLOR: This is Spirit’s route map after implementation of the market penetration strategy. We chose Seattle, Salt Lake City and San Francisco because they are high volume markets that Spirit currently does not serve. Spirit will gain access to these cities through codeshare via Frontier’s Denver hub. As illustrated by the graph on the left, Frontier currently serves 2.40% of the total passengers from Denver to Seattle. Our strategy will allow these Frontier flights to be marketed by both Frontier and Spirit, thus creating an opportunity for an increase in market share.
- RACHEL: This is Frontier’s route map after implementation of the codesharing strategy. Guatemala City, San Salvador, and Santo Domingo, Dominican Republic are currently unserved markets by Frontier. Spirit and Frontier will effectively meet the high demands of these markets together through our recommended codeshare agreement. RACHEL: As illustrated by the graph on the right, Spirit currently serves 5.8% of the total passengers from Fort Lauderdale to Guatemala City. Our strategy will allow these Spirit flights to be marketed by both Frontier and Spirit, thus creating an opportunity for an increase in total passengers flown.
- LAUREN: The beautiful thing about our codesharing strategy is that it doesn’t incur many additional costs. Spirit is going to operate these flights whether or not a codeshare agreement is formed. Therefore, the highlighted line items illustrate the very few expenses this strategy implementation will incur. The low-costs are directly associated with the low risk of this strategy.
- TAYLOR: In continuation of the point Lauren just made about low risk, this strategy presents the opportunity for high reward. There is an increasing number of passengers traveling in and out of Seattle, Salt Lake City, San Francisco and Denver. If Spirit is able to market to these passengers, revenues are projected to increase. Spirit will maintain low unit operating costs and further expand its route network.
- RACHEL: Of course, with any strategic recommendation, there is some turbulence that may be experienced. It is important that both Spirit and Frontier keep these three possible issues in mind in order to have a harmonious codeshare partnership.
- MARISSA: While this strategy has short term objectives, it presents long term opportunities. The nature of this codeshare agreement will allow Frontier and Spirt to experiment in new markets without incurring any major risk or major costs. LAUREN: The success of this agreements could pave the way for more codeshared routes and or the possibility of a merger. As mentioned previously, the two companies share similar business models and we foresee Spirit and Frontier working well together. Our strategic recommendation allows Spirit to start small, and choose to continue or expand if desired levels of profitability are reached.