Presentation and Report
KM.
FP-P.docxPaper #1–Organization and Industry Descriptions
Provide a brief introduction to your team’s chosen company. Some questions to consider:
· What is the organization’s history?
· Who is the founder?
· What does the organization do? Not do?
· In what geographic markets?
· In what demographic markets?
· In what industry does your firm operate?
· Who are the other major players in the industry? Any strategic groups?
Spirit Airlines
Spirit Airlines is a well-known airline that operates in the United States, Latin America, and the Caribbean. Spirit Airlines is known for their cheap airfares and being a budget-friendly airline. However, they are also known for not being the most reputable brand in the airline industry.
What is the organization’s history?
In 1964, the company started as Clippert Trucking Company. They changed their name to Ground Air Transfer, Inc. ten years later. The airline service was founded by Ned Homfeld as Charter One Airlines, a charter tour operator that provides travel destinations to popular entertainment destinations.
In 1922, Charter One introduced jet aircraft into the fleet, and this is when they changed their name to Spirit Airlines. Flights between Detroit and Atlantic City were scheduled about a month later, and then flights between Boston and Providence soon thereafter. In 1993, they began scheduled service to Florida and in the next year, service to Philadelphia. They continued to expand further over the next 5 years.
Their first major mishap occurred in the summer of 1994 when Spirit overbooked their flights and was forced to cancel 1,400 customers' tickets. They had given the wrong instructions to travel agents which resulted in the tickets being invalid even though they had been paid for. In response, Spirit said they would make sure all customers who already paid would be able to get to their destination even if it meant booking them on a competitor's airline.
Spirit's first female captain, Jane Patton was appointed in 1996.
In 1999, Spirit relocated its headquarters from Eastpointe, Michigan to Miramar, Florida.
In 2000, Spirit was fined $67,000 by the US Federal Aviation Administration for violating federal regulations on cabin and seat marking and placards.
They started service in San Juan, Puerto Rico in 2001 and implemented a service plan for Spanish-speaking customers which included a website and dedicated reservation line.
Ben Baldanza was hired as the President in 2005. He moved up to CEO a year later and remained CEO for 10 years during which he completely transformed the business model and took the company public in 2011.
In 2008, Spirit made a WARN (Worker Adjustment and Retraining Notice) application to possibly relocate or lay off hundreds of employees and close their San Juan and LaGuardia crew bases. Later this year, they started placing advertisements on the side of their aircraft and in several locations within the aircraft.
In 2009, over 98% of Spirit pilots voted in favor of a strike after more than 4 years of negotiations between them and the Air Line Pilots Association (ALPA) overcompensation, work rules, and benefits as Spirit pilots were among the lowest-paid Airbus pilots in the US. About a year later in June 2010, Spirit was forced to ground their flights when its unionized pilots walked out on strike. Negotiations were resumed on June 15 with an agreement reached the next day ratified by 74%. It increased the compensation and benefits for pilots to be closer to other Airbus operators in the US. Flights resumed on June 18.
They discontinued business class service in 2007 and rebranded Spirit Plus as “Big Front Seat.”
Spirit became the first US airline to charge passengers for carry-on bags in 2010.
In 2012, the airline sparked public outrage when they denied a dying veteran a refund after he learned that his cancer was terminal and instructed him not to fly. The CEO, Ben Baldanza, apologized and refunded the veteran his ticket while also making a $5,000 donation to the Wounded Warrior Project.
In 2013, Spirit made a deal with Transport Workers Union of America who represent the airline's flight dispatchers.
Spirit was named the top growth airline pick for investors by Morgan Stanley in 2014.
CEO Baldanza was replaced by Robert L. Fornaro in 2016. Fornaro decided to team up with the Disney Institute to change internal policies and create a more welcoming environment.
In 2017, Spirit was in second place for on-time performance after ranking last place 2 years prior. In 2018, Spirit was the only airline in North America to make it on the Top 10 list of safest airlines in the world.
In 2018. They announced that they would become the first ultra-low-cost-carrier to offer high-speed Wi-Fi
When the pandemic hit in 2020, Spirit received $334 million in aid from grants and loans via CARES and Coronavirus Aid to fund employees. They put 20-30% of its employees on a leave of absence in October.
In 2022, Spirit was going to be acquired by Frontier Airlines but Spirits shareholders rejected it. JetBlue agreed to purchase Spirit for $33.50 per share plus additional payments to shareholders. However, the Department of Justice tried to block the sale citing that the merger would result in “higher fares, fewer seats, and harm to millions of consumers.” In January 2024, a federal judge blocked the acquisition because the deal was anticompetitive and would harm consumers. Spirit’s stock fell 47%. They denied rumors of filing for bankruptcy and are currently looking for new plans to sustain the company's future.
Source:
Wikimedia Foundation. (2024, January 28). Spirit Airlines. Wikipedia. https://en.wikipedia.org/wiki/Spirit_Airlines
Who is the founder?
The founder of Spirit Airlines is Ned Homfield. He started it in Detroit as Charter One Airlines and would fly to big entertainment areas like Vegas and the Bahamas.
What does the organization do? Not do?
Spirit Airlines is the largest ultra-low-cost air carrier in the United States that provides some of the lowest ticket fares in the US. Unlike many full-service airlines, Spirit charges additional fees for checked and carry-on bags. To bring more luggage than just a purse or laptop, a baggage allowance must be purchased. Most other airlines allow people to pick their seats in advance when traveling on nonbasic economy fares, but Spirit charges additional for allowing passengers to pick their seats. They don't offer any complimentary beverages during the flight, including water. They charge $25 to print boarding tickets at the airport. They also offer a much more limited schedule than other airlines. They do not have interline agreements with other airlines which allows them to sell tickets on another airline, which is an important thing to have when something goes wrong and passengers need to book a different flight. If Spirit does not have the capacity for a passenger, they are not able to put the passenger on, for example, a Delta Airlines flight. Spirit can only rebook a passenger on its own flight or cancel and refund the ticket. According to their website, the services offered are:
· Portable Oxygen Concentrators (POC)
· Accompany Someone to their Gate
· Onboard Assistance - Accessible Lavatory Options
· Battery-Powered Wheelchairs and Mobility Aids
· Traveling with a Trained Service Animal
· Guests Traveling With a Disability
· https://customersupport.spirit.com/en-us/category/?id=CAT-01056
· https://www.nerdwallet.com/article/travel/is-spirit-airlines-good#:~: text=Unlike%20many%20full%2Dservice%20airlines , or%20can%20be%20added%20later .
· They also offer a frequent flier program called Free Spirit
In what geographic markets?
Spirit serves 58 destinations in the United States and 32 international destinations in Central and South America and the Caribbean.
Source: Perkins, G. (2023, October 26). Where does spirit airlines fly? spirit route, map & destinations. www.wheredoesitfly.com. https://www.wheredoesitfly.com/blog/where-does-spirit-fly/
In what demographic markets?
Spirit serves those in the United States, Central and South America, and the Caribbean. They also appeal to those with lower incomes due to their cheap fares.
In what industry does your firm operate?
The industry that our firm operates is in the airline industry.
Who are the other major players in the industry? Any strategic groups?
Spirit's main competitors are American Airlines, United Airlines, Alaska Airlines, Delta Airline, Virgin America, Alaska Airgroup, Airhelp, and Frontier Airlines.
In the airline industry, Spirit falls into the strategic group of low-cost carriers.
Source:
Spirit Airlines Culture. (2023). https://www.comparably.com/companies/spirit-airlines
https://craft.co/spirit-airlines/competitors
External Environmental Analysis of Spirit Airlines
Using your understanding of external analysis and the tools we’ve acquired thus far (PESTEL, 5 forces, industry groups, etc), conduct an analysis of your firm’s EXTERNAL environment. Identify the implications for your firm. That is, how have or will the factors you’ve identified influence your company and the potential for superior performance?
Use tables/graphs when appropriate to support and illustrate your analysis.
PESTEL Analysis
1. Political Factors: Government rules regarding environmental protection, airline security, and safety have an impact on operations. Regulations related to taxation and subsidies, for example, can change and affect profitability. Presidents have changed laws over the years and the current president provided funds for airlines.
2. Economic Factors: Demand for travel and purchasing power are affected by economic factors such as GDP growth, inflation rates, and currency rates. Consumer spending on airlines may decrease during economic downturns. Fuel prices can be extremely volatile and affect the airline industry.
3. Social Factors: Demand is influenced by the client choices, travel lifestyles, and economic developments. Spirit's market share could be impacted by changes in travel practices, attitudes about low-cost airlines, or lifestyle changes. Shared beliefs play a major role in Spirit's role as a wallet friendly airline.
4. Technological Factors: Client’s experience and operational efficiency are impacted by developments in reservation systems, networking infrastructure, and aircraft technology. Introducing modern technology, such as fast Wi-Fi, can boost competitiveness.
5. Environmental Factors: Reputation and operations are impacted by environmental laws, carbon emission guidelines, and sustainability programs. Regulatory compliance and consumer perception may be impacted by a greater emphasis on eco-friendly operations. Weather, climate change, and government regulations are the big things Spirit focuses on in the Environmental department.
6. Legal Factors: Respecting labor laws, airline statutes, and contractual responsibilities is important. Financial performance and reputation can be impacted by legal issues, such as contract disputes or antitrust investigations. Airlines have very strict guidelines on everything so legality issues are a big deal.
In conclusion, the PESTEL Analysis of Spirit Airlines depicts just how valuable of a tool this can be for them. By reviewing this, they can go forth and make educated decisions on what to do externally to help them bring in more business and expand as a company. They can also employ this framework to address any threats and weaknesses. Once they are aware of these, they can attack them from the source to better themselves.
Porter’s 5 Forces Analysis on the Airline Industry
Threat of Entry
The threat of entry into the airline industry is relatively low. There is a substantial capital requirement, even when entering on a small scale. A new entrant would need a couple of airplanes, which can be rented; a few employees such as pilots and stewardesses; specific routes that connect from city to city; and access to gates in airports. Larger and more established airlines can benefit from economies of scale since they can spread out their fixed costs over a larger number of flights/ passengers. In addition, new entrants need to obtain an Air Operator Certificate (AOC) to transport passengers which takes up a lot of resources and can take 10 months, on average, to obtain (Schunck, 2023). New entrants also have to gain access to airport gates and specific time slots. This can be difficult for new entrants because existing airlines usually have long-term agreements with major airports that allow them to get preferential access to these gates and slot times. New entrants also might struggle because established airlines have strong brand loyalty achieved by loyalty reward programs and quality service. Even though switching costs for customers are low, attracting customers may be very difficult.
Power of Suppliers
The bargaining power of suppliers can be quite high due to the limited number of airplane manufacturers. Boeing and Airbus are the two largest aircraft manufacturers in the world and share almost exclusive control of the supply business for large commercial jets worldwide (Hayes, 2024). Boeing and Airbus manufacture airframes which makes them powerful suppliers because that industry is much more concentrated than the industry it sells to. There are hundreds of commercial airlines around the world compared to the two airframe suppliers. Airlines will have to face significant switching costs when changing suppliers because staff will need to be retrained to fly a new type of airplane, maintenance will need to be upgraded, and there is a possibility of needing to modify routes because new aircraft could have different ranges and capacities for passengers (Rothaermel, n.d.). There are no accessible substitutes for commercial airliners which makes supplier power very strong. However, Boeing and Airbus are very unlikely to forward integrate by becoming commercial airlines themselves. In addition, manufacturers of smaller commercial airframes have started to increase the size of the jets they offer which are now able to compete with the smaller models of planes from Airbus and Boeing. Other suppliers of the airline industry include aircraft engine manufacturers, aircraft maintenance, labor unions, airline catering companies, and airports that control gate access.
Power of Buyers
The bargaining power of buyers is moderate. Buyers in the airline industry do not face high switching costs meaning they can shop around as they see fit. Customers can be quite price-sensitive and often search for the lowest fares for their travel needs which makes it likely for them to switch between airlines based on pricing and offers. Due to the plethora of different airlines that customers can choose from, there is a high amount of competition in the airline industry. Customers view air travel as a commodity with very little differentiation among different airlines, which increases their buying power. In addition, it is becoming increasingly easier to compare prices through travel booking sites like Kayak and Travelocity. Another factor that increases buyer power is the large contracts that airlines have with corporate customers to serve the travel needs of all their employees, which can reduce profit margins for the airlines.
Threat of Substitutes
When it comes to Spirit Airlines, or the airline industry as a whole, the threat of substitutes holds a low to moderate threat as air travel seems to be the quickest way to travel, especially in trips with a further away destination. Alternatives to flying on a plane include different types of transportation besides air travel such as driving, taking the bus, taking a train, traveling by ship, etc. If one consumer is able to physically travel from point A to point B by driving, they may assume that driving would be the cheapest option even though it may not be the fastest. They may not want to deal with the hassle of flying and conclude that driving would be cheaper. However, these substitutes are not as quick as flying and may not always be the most cost effective (Kryscynski, 2019). In fact, driving may end up costing more than flying in some situations. Nevertheless, some people do prefer to drive rather than fly due to the convenience of driving, the more freedom driving has than flying, and the more scenic routes driving has than flying. Another factor to note: with the advancement of technology, business travelers do not necessarily need to fly to wherever their business partners are to have a meeting and can opt for a video conferencing call instead. Even though this is a fact, this does not necessarily replace flying and this does not seem to have had a huge effect on the airline industry (Kryscynski, 2019). Overall, when it comes to international travel or long-distance travel, the airline industry tends to win over their substitutes and they pose no threat to this industry. However, for local travel, obviously, people are going to utilize driving, taking the bus, taking a train, etc.
Rivalry Among Existing Competitors
The competitive rivalry among existing competitors, i.e. the other airlines in the airline industry, is extremely high. Spirit Airlines is known to be a low-cost carrier, however, they are not the only low-cost carrier among the airline industry and as this competition becomes more intense between airlines, more airlines are lowering their prices to be more accessible to the greatest number of people. These airlines are all about offering the best service at the cheapest available price to travelers that will make their airline seem to be the most optimal choice out of every other airline. One of the huge factors that consumers focus on when buying a plane ticket is the price. They always beg the question: What is the cheapest price I can pay to travel from point A to point B by going on a plane? (Kryscynski, 2019). Since there are very low switching costs for consumers when switching to a different airline, lots of air travelers do not always use the same airline when traveling as they gravitate towards whichever airline is offering the lowest price at the time of their purchase. However, some air travelers that are more frequent flyers may have decided to stick to a particular airline depending on the services they offer and if they offer membership benefits such as being able to earn points or credit the more they fly with this airline meaning they are able to get discounts on future flights with this airline. Spirit Airlines does not seem to have as high of a brand loyalty as other airlines such as Southwest Airlines and Delta Air Lines and this may be what is holding them back ( Airlines most loyal to in the United States, 2023). Delta Air Lines, for example, provides seat upgrades for frequent flyers who have attained a particular status level in their membership program as well as other benefits such as “Free Entry to Airline Clubs, TSA Pre, CLEAR, and Global Entry” (Kryscynski, 2019). The higher status that a member achieves with a specific airline only increases the perks that consumers receive making them less likely over time to switch to another airline.
Factors and Future Performance
All of these factors that we have identified above work to solidify Spirit Airlines’ position to succeed in the future. The composition of the airline industry ensures that it is extremely difficult for any new firm to enter into the marketplace with any competitive ability. Due to the exorbitant capital requirement to enter the industry, it is unlikely for any new firms to enter, let alone any firms that can compete with Spirit Airlines. The composition of Spirit Airlines’ business model makes it extremely unique and difficult to replicate, let alone compete with. Airlines by nature are expensive, with very high overhead costs meaning that the costs then must be passed on to the consumer in the form of expensive flights. Spirit’s unique business composition and savings that it results in are then passed on to the consumer in the form of discounts that other airlines cannot compete with. Another significant barrier to entry that would require a significant amount of capital to overcome would be the power that buyers and sellers have in the market. There is a high supplier power in the airline industry due to the lack of manufacturers in the sector, whereas buyers have a moderate buying power as they are able to shop with low switching costs. There are also relatively moderate to low threats for substitutes since flying is usually the fastest and most convenient option out of the different modes of transportation. Finally, to cover the rivalry amongst existing competitors, there are huge rivalries between some of the more popular and well-known airlines, however, Spirit is not generally involved in this. Overall, all of these factors contribute to Spirit Airlines ability for future superior performance because of their relationship with their external market.
References:
Airlines most loyal to in the United States. Statista. (2023, November 21). https://www.statista.com/statistics/1284295/airlines-loyalty-united-states/
Department, S.M. Spirit Airlines, Inc.. Pestel Analysis & Environment Analysis, Fern Fort University. Available at: http://fernfortuniversity.com/term-papers/pestel/nyse4/3125-spirit-airlines--inc-.php (Accessed: 20 February 2024).
Detailed Pestel analysis of airline industry: EdrawMax Online Edrawsoft. Available at: https://www.edrawmax.com/article/airline-industry-pestel-analysis.html (Accessed: 20 February 2024).
Hayes, A. (n.d.). Who are the major airplane manufacturing companies?. Investopedia. https://www.investopedia.com/ask/answers/050415/what-companies-are-major-players-airline-supply-business.asp
Kryscynski, D. (2019, December 11). How to Use Industry Analysis. YouTube. https://www.youtube.com/watch?v=LMZS2l0Urck&list=PLm_KHsudL0azHdkEarPQc6p2lv6-CAqwJ&index=3
Rothaermel, F. (n.d.). 3.2 Industry Structure and Firm Strategy: The Five Forces Model. In Strategic Management, 5e (pp. 39–39). essay, McGraw Hill.
Schunck, K. (2023, April 5). Grounded growth: The decline of new airline foundings. TNMT. https://tnmt.com/the-decline-of-new-airline-foundings/#:~:text=The%20industry%20dynamics%20in%20the%20airline%20industry&text=All%20of%20these%20components%20either,the%20airline%20industry%20increasingly%20unattractive
What are the Michael Porter’s Five Forces of Spirit Airlines, Inc. (SAVE)? Discounted Cash Flow. (n.d.). https://dcf.fm/blogs/blog/save-porters-five-forces-analysis
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Paper #3 – Internal Environmental Analysis Core Competencies - Resources and Capabilities
Spirit Airlines’ most well-known core competency is offering some of the cheapest flights in the industry. This core competency has allowed Spirit to have the highest market share (5.1%) of its ultra-low-cost carrier strategic group (11%). They can do this by maximizing the use of their resources and capabilities.
Spirit’s operations focus on maximizing asset utilization and non-ticket revenues. This is what allows them to offer cheap base fares and create customer demand, specifically from people who don't normally fly, as opposed to structuring their operations around the existing demand of frequent flyers (Average ticket price of low-cost carriers in the U.S. 2020, 2024).
Airlines have very high fixed costs such as crew costs, maintenance costs, and depreciation. Variable costs also affect Spirit such as fuel costs (which can account for about 40% of all variable costs) and crew costs. Spirit attempts to lower the per unit cost by taking specific actions. They only have a single fleet type which means they don't have to incur additional costs for training crew to operate different types of aircraft and the same crew can be utilized across their network. This also simplifies necessary maintenance of the fleet which requires labor and parts. Spirit also adjusted its fleet of aircraft to have a 20% higher seat capacity compared to its competitors with similar aircraft. This allows them to generate more revenue per mile flown. They optimize their route so they are utilizing their aircraft as much as possible during the day. One of the ways they do that is by charging high baggage fees to dissuade customers from checking bags. This means the plane can take off quicker and fly more routes per day. This also results in the decreased need for baggage handlers and increased fuel efficiency.
Spirit maximizes its non-ticket revenue per passenger by charging extra for baggage fees (both checked and carry-on), in-flight products (including water), advanced seat selection, a subscription service to access flash sales, third-party travel insurance, third-party travel packages, onboard advertising, and boarding pass printing. Spirit's non-ticket revenue per passenger has jumped from $5 in 2006 to $55 in 2014. This strategy is what has allowed them to offer ticket prices well below those of the break-even cost of their competitors, which gives them a higher pre-tax profit margin.
An important KPI in the airline industry is the Cost Per Available Seat Mile (CASM). This is calculated by dividing the operating costs (sometimes excluding fuel costs) by the total number of available seats for purchase on an airplane for a given route. Spirit’s CASM is one of the lowest in the industry, giving them a huge cost advantage and their core competency.
Resource Based View - VRIO Analysis
Valuable
From a pure resource standpoint, Spirit has some resources that are not only extremely valuable but can also be leveraged very easily. Spirits’ biggest resource that they have is their airplanes. Spirit has an entire fleet of airplanes, each of them worth hundreds of millions of dollars. Spirit has a number of different ways that they can leverage their fleet whether it be simply using them for commercial flights or even leasing them out for other airlines. This resource is not the only valuable resource that Spirit Airlines has, however, it is by far the most easily leveraged resource. Spirit Airlines, as an organization, through their unique business model of inexpensive airline tickets have been able to leverage their airplanes to their greatest potential as they are one of the many airlines that are working to fill every possible seat (Bondarenko, 2023).
Rare
It is extremely rare to find what Spirit Airlines has to offer at any other airline. Spirit Airlines offers an unbundled fare which essentially means that a customer is paying for a seat in the flight itself along with one personal item (Spirit Airlines, 2023). If they need other services, they are able to add these as they please. Most other airlines have many added features included in a fare which jacks up the price of the ticket. Most of these services offered are not wanted or needed by customers simply looking for the lowest price ticket available. Spirit Airlines always strives to offer the least costly ticket. This is why Spirit Airlines is known as the “no-frills” airline since they don’t attempt to add unnecessary service costs to the tickets they offer. Spirit Airlines also operates an all-Airbus Fit Fleet Ⓡ, which happens to be one of the youngest and most fuel-efficient fleets in the U.S. (Spirit Airlines, 2024). Although this type of aircraft is utilized by other airlines, Spirit is known as being an airline that only employs one singular type of aircraft. Most other airlines resort to three to five different types of aircraft but Spirit Airlines prides itself on solely possessing one type of aircraft (Nowakowski, 2023). This also contributes to their low-cost fares. Spirit Airlines’ slogan “Less Money, More Go” lends itself to the fact that Spirit Airlines’ focus is on supplying the cheapest available price to airplane travelers (Nystrom, 2024). This is uncommon among other airlines who attempt to sway customers by bestowing all these extra services that are not necessarily needed when traveling from point A to point B. Many airlines lead customers to pay more simply because these customers are not aware of what they are actually getting when they buy a ticket while Spirit Airlines is upfront and honest with what they offer.
Inimitable
Due to Spirit Airlines’ being able to offer the cheapest flights across the airline industry, it is very difficult for other airlines to follow suit and offer either the same prices or lower prices than Spirit Airlines. Other airlines have high costs that they would be unable to get rid of or
modify due to the structure or organization of the company while Spirit Airlines has always strived to keep their costs low. There is a reason that Spirit Airlines’ is able to provide the lowest-cost flights while other airlines are unable to follow in their footsteps. Their strategy is almost impossible to imitate. This classifies Spirit Airlines as inimitable. Spirit Airlines doesn’t shy away from the fact that their airplanes do not provide as much room as other airlines but this allows them to add extra seats to their planes which then enables them to lower the ticket prices for all of the customers of these flights (Miller, 2023). The more passengers that a plane is able to fly, the cheaper the ticket prices will be for each individual passenger. Also, Spirit Airlines only employing one type of aircraft makes this very difficult for other airlines to imitate since most other airlines already make use of different types of aircrafts and attempting to make it to where there is only one type of aircraft being used by this airline would cause many complications (Nowakowski, 2023). Not only would they possibly have to cut off different suppliers but they would also have to possibly get rid of those that know how to operate the type of aircraft that they are getting rid of. These are huge costly decisions that are not a simple decision to make and go through with. Lots would have to be done in order for another airline to do what Spirit Airlines does. There is a reason that Spirit Airlines’ is able to provide the
lowest-cost flights while other airlines are unable to follow in their footsteps. Their strategy is almost impossible to imitate. This classifies Spirit Airlines as inimitable.
Organized
This firm and their resources are somewhat well-organized. However, they are also stuck in somewhat of a limbo that is hanging over the firm as a whole. The majority of Spirit’s business plans revolved around the merger and the following steps once it was to be completed. However, since the merger did not go through, the company has been working frantically to make changes in other ways. The organization is regarded as having good and respected leadership, but there are many worrying aspects of the company that reflect poorly on the organization's executives. It is well known that Spirit offers cheap flights, however, because of this, it will affect the consumer’s choice and their profit margins. Executives within this company are taking action to correct these financial issues, such as recent initiatives in 2023 and 2024, however, it is a long road ahead and leadership needs to take more command at a broader level to steer the organization to success.
Dynamic Capabilities
Strategy of cost leadership
Spirit Airlines uses a cost leadership strategy by providing affordable air travel options through their low-cost tickets thereby maintaining a competitive edge and attracting
price-sensitive travelers to its low-cost business model.
Effectiveness of Operations
Spirit Airlines prioritizes operational efficiency to manage expenses and boost revenue. Ways that they do this include providing economy class, continuously seeking ways to enhance efficiency, streamline operations, and control costs.
Fleet Efficiency
Spirit Airlines optimizes its fleet by utilizing modern, fuel-efficient airplanes, reducing operating costs and promoting environmental sustainability. The airline makes strategic decisions to maximize resources and regularly reviews its fleet composition.
Creative Sources of Income
Spirit Airlines leverages innovative revenue streams beyond ticket sales, including baggage fees, seat preference, snacks and drinks, and flight amenities. This enhances their principal revenue stream and overall profitability.
Customer Experience
Spirit Airlines is prioritizing customer experience by investing in projects such as enhancing their website and mobile app, updating cabin design, and improving Wi-Fi.
Value Chain
The value chain of Spirit Airlines is quite a unique one. Being in the airline industry gives Spirit Airlines a complex environment that has many factors playing into it. From the internal view, there is definitely more than meets the eye.
Inbound Logistics
Spirit’s internal inbound logistics essentially consists of warehousing for their planes, flight/route choice, and crew scheduling. There are, however, very strict laws on how these parts and planes should be stored and cared for. This translates to a complex and somewhat expensive process for them. Allocation of planes and their scheduling is also a part of this. Their flight choice is another aspect that allows them to create value. If they can make a cohesive route that allows for them to stay organized and cut costs, this allows them to save money. A crew will have to be able to go whenever and wherever they have flights planned. This means that they need a well-trained crew at all times available, and backups ready just in case.
Operations
Their internal operations value chain include items such as baggage, onboard services, and ticketing. Keeping luggage safe and secure can be a challenge on a plane. By hiring staff that won't damage goods or steal from a customer's bag, this will guarantee that they will give Spirit more consideration in the future. On-board services are a crucial way that Spirit makes money.
By offering no “freebies”, they are able to charge for everything including water, snacks, Wi-Fi, and extra baggage fees. This is one of the reasons that they are extremely profitable. Lastly, having an operating system that can keep track of all of the people flying’s activities and localize everything in one place is a necessity.
Outbound Logistics
Their internal outbound logistics includes making sure not to overbook flights and making sure flights are there and on time. On time arrival is a big deal for anyone that travels. Flights are expected to be there as promised. Connecting flights are another factor that Spirit Airlines would have to do the outbound logistics for. Making multiple stops is a standard in the industry but having a system that coordinates all of this is wonderful for their internal value chain.
Marketing and Sales
Spirit's main sales come from the fact that they are low fare flights. This attracts many sales from travelers that want to fly cheap with the bare necessities. Spirit’s marketing in the past took the bold and brash route. This put their name on the map by making memorable advertising that most people would laugh at thus bringing in more business. Another factor that brings value to their business is their frequent flier reward system. This is something that most companies are standardizing and it works for a reason: it brings in lots of repeat customers.
Services
Their internal services consist of customer service and maintenance. This includes ensuring that customers have had a pleasant experience and if they haven't; taking notes and learning from their mistakes. Complaint follow-ups are another service that is vital as they currently do not have the best reputation for their customer support. Another factor that Spirit is concerned about is making sure that all of their airplanes are being maintained and serviced. This is in order for them to maintain a consistent reliability and value for their customers.
Factors and Future Performance
Factors and future performance for Spirit Airlines are somewhat up in the air. There is currently uncertainty surrounding their organization and long term viability due to recent events. Recently, a merger that was meant to merge JetBlue with Spirit Airlines was terminated. The idea behind the merger was certainly ambitious. This business initiative that these two firms sought out to achieve was to not only combine resources and capabilities but also to truly compete with the larger airline companies (JetBlue, 2024). An important note about this merger is that it was not simply dissolved based on mutual disinterest; this deal was interjected by the Department of Justice. Luckily, for Spirit Airlines as a part of their canceled merger, JetBlue will be paying $69 million to Spirit as a form of separation (JetBlue, 2024). Looking to the future, Spirit Airlines will be able to use these funds to explore other business opportunities in an effort to expand, as it seems they are hoping to do. Spirit is in a difficult position financially when looking at the future, but they are heading in the right direction. However, that is not to say they are doing well though. Spirit Airlines as an organization last made a profit in 2019, and has been losing millions of dollars every year since. Thankfully this has gotten better in recent years as they are closer to reaching a net neutral (Descalsota, 2024). Like in any organization, running a business in the red puts a stress on everything and losing money continuously over a number of years makes a business desperate. Fortunately, Spirit Airlines is level-headed as they look into the future even after the fallout of the JetBlue merger. Recently, Spirit has announced that to increase revenue, they will be leasing out a number of aircraft (Descalsota, 2024). Overall, the future is bright for Spirit. In the aftermath of the failed merger, JetBlue is ending many of their routes within the United States, paving the way for Spirit Airlines to step up as the forerunner in affordable airlines. Although Spirit has this opening, they must tread carefully, especially if they want to ensure their future. As a start, they must correct their finances and work to produce an operating profit for 2024 Q1.
References:
Bondarenko, V. (2023, November 15). I just flew Spirit for the first time ever — here’s what it was like. TheStreet.
https://www.thestreet.com/travel/flying-spirit-first-time-what-to-know
Descalsota, M. (2024, February 9). Spirit’s CEO says the airline has a plan to become profitable again. Business Insider.
https://www.businessinsider.com/spirit-airlines-debt-ceo-profitable-merger-jetblue-2024- 2#:~:text=Similarly%20the%20annual%20net%20loss,quarter%20onwards%2C%20per
Hayes, A. (n.d.). Cost per available seat mile (CASM): Definition, formula, example.
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JetBlue Announces Termination of Merger Agreement with Spirit. JetBlue. (2024, March 4). https://news.jetblue.com/latest-news/press-release-details/2024/JetBlue-Announces-Term ination-of-Merger-Agreement-with-Spirit/default.aspx
Miller, E. (2023, July 1). Spirit airlines review – seats, amenities, customer service, Fees & More. UpgradedPoints.com.
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National Archives and Records Administration. (n.d.). Circular no. A-126 -- attachment B (Standard Aircraft Program Cost Element Definitions). National Archives and Records Administration. https://obamawhitehouse.archives.gov/omb/circulars_a126_a126b/#:~:text=The%20speci fic%20fixed%20cost%20elements,also%20perform%20minimal%20aircraft%20mainten ance .
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Nystrom, A. (2024, March 2). 19 facts about Spirit Airlines. Facts.net. https://facts.net/airlines/19-facts-about-spirit-airlines/#:~:text=Spirit%20Airlines%20is% 20known%20for,need%2C%20while%20avoiding%20unnecessary%20costs .
Rfennerty. (2015, December 10). Spirit airlines: Ultra-Low-Cost, ultra-impressive-profits.
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Spirit Airlines, Inc. (2023, April 24). Spirit’s Fit Fleet® flies forward with 200th delivery from Airbus. PR Newswire: press release distribution, targeting, monitoring and marketing. https://www.prnewswire.com/news-releases/spirits-fit-fleet-flies-forward-with-200th-deli very-from-airbus-301805482.html
Spirit Airlines, Inc. (2024). What type of aircraft does spirit fly?. What type of Aircraft Does Spirit Fly? · Spirit Airlines Support.
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Zumbrink, D. (2024, February 24). Ultra-low-cost carriers now have a double-digit market share in the U.S. airportIR by Modalis.
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Spirit Airlines: Competitive Analysis
Sources of Competitive Advantage
Spirit Airlines' most powerful competitive advantage is its ultra-low-cost model. They are known for offering some of the cheapest base fare prices, attracting many price-sensitive customers. They have the highest market share (5.1%) of their ultra-low-cost carrier strategic group (11%). They achieve this competitive advantage by utilizing the resources and capabilities that also qualify as competitive advantages. These include non-ticket revenues and efficient operations.
Spirit maximizes its non-ticket revenue by charging extra for both checked and carry-on baggage, in-flight products (even water), seat selection, a subscription service for flash sales, third-party travel insurance, third-party travel packages, onboard advertising, and boarding pass printing. This strategy has allowed them to offer ticket prices well below those of the break-even cost of their competitors, which gives them a higher pre-tax profit margin. Over 50% of Spirit’s revenue was generated by non-ticket revenues which makes it very valuable. This strategy of non-ticket revenue is relatively rare in the industry as most legacy carriers usually bundle everything and include it in the price of their tickets. This strategy could technically be imitated by other airlines but would have a hard time succeeding since Spirit uses this strategy primarily to contribute to its ultra-low-cost strategy. This strategy is successful because of Spirit's organizational support. Different teams in the organization work to ensure everything is running as smoothly as possible.
Spirit focuses on efficient operations in order to drive their costs down. All airlines have high costs such as crew costs, maintenance costs, and fuel costs. Spirit only has a single fleet type so they don't have to incur additional costs for training crew to operate different types of aircraft and the same crew can be used across their network. This also simplifies necessary maintenance of the fleet which requires labor and parts. Spirit also adjusted its fleet of aircraft to have 20% more seat capacity compared to its competitors with similar aircraft. This allows them to generate more revenue per mile flown. Spirit also optimizes its route to ensure that the aircraft is being used as much as possible during the day. One way they do that is by charging high baggage fees to dissuade customers from checking bags. This allows the plane to take off quicker and fly more miles per day. This also results in decreased need for baggage handlers and increased fuel efficiency. These efficient operations are valuable since they result in decreased costs and increased revenue for the company. Many airlines have efficient operations but it is rare for an airline to have a high level of efficiency while also being one of the lowest-cost producers in the market. It would be difficult to imitate Spirit’s efficient operations since many factors go into their business model such as agreements throughout their network and the way they optimize their fleet. Spirit’s strong organization contributes to its success in keeping costs down and utilizing its resources efficiently.
Although Spirit currently has powerful competitive advantages, they have the potential for more. One potential competitive advantage could be its partnerships and alliances. Spirit only flies to 16 countries. Forming new partnerships and alliances would allow Spirit to fly to more locations and offer easier connections thus giving them the opportunity to increase their market share.
Another potential competitive advantage would be a new and modern fleet of aircraft. Spirit recently introduced 7 new Airbus aircraft into its fleet and plans to add 24 more in 2024. These new aircraft have wider seats, more cushioning, headrests (which the carrier has never offered), and wider seatbacks that are angled further back (Spirit Airlines New Jet with Wider Seats Arrive, 2023). If they continue to update their fleet, it would be a huge competitive advantage since it would increase efficiency and customer satisfaction while reducing maintenance costs and its environmental footprint. This leads to another potential competitive advantage of being a sustainable airline.
Environmental concerns are becoming more important to consumers. Spirit’s website says they have “one of the youngest and most fuel-efficient fleets in the U.S, with more planes on the way.” When searching for flights on Google, it will tell you the relative amount of emissions produced for each flight. There is even a filter that shows the flights that have lower emissions only. Becoming a sustainable airline would be a significant competitive advantage since it would be a point of differentiation among airlines and allow them to successfully adopt a blue ocean strategy.
Sources of Competitive Disadvantage
Although Spirit has been able to provide the lowest fares available which makes flying accessible to any traveler, it has also been the personification of how the airline industry has hit rock bottom. Spirit has also been perpetually losing money over the past few years. There has been no profit in sight for Spirit. Since 2019, Spirit has also lost more than $1.6 billion (Maharishi, 2024). Since Spirit has been continuously losing profit over the past couple of years, they are desperately trying to find ways to cut costs and save themselves from going out of business. They have adopted several undesirable procedures such as limiting refunds, condensing seat sizes, and what seems to be the most irritating practice of all: charging for the most simple services (Longman, 2024). These hidden fees and reduced quality can be why customers choose to avoid Spirit when traveling. Spirit may need to reconsider improving their quality as well as not charging for even the most basic amenities. Consumer preferences are gradually turning towards a better flight experience over a cheaper flight experience and Spirit is suffering because of this.
An adverse outcome of this is that Spirit’s customer complaints have been at an all-time high. Spirit comes in as one of the airlines with the highest number of customer complaints (Gesualdi-Gilmore, 2024). Spirit has often been criticized for their customer service since they don’t offer much in the first place and even what customers do get is not considered much. Again, Spirit improving their flying experience may just be what they need to turn the business around. Spirit’s loyalty program also does not offer as many benefits and perks as other airlines’ loyalty programs. They are ranked the lowest in terms of airline rewards programs which reflects the fact that they do not place a high priority on the customer (Kemmis & French, 2024). Because of this, Spirit’s brand loyalty is also not as high as other major airlines. Their brand loyalty may improve if they choose to improve their loyalty program as well as their focus on customer service.
Spirit’s market share compared to other popular U.S. airlines is quite small and they are certainly not dominating the airline industry. American Airlines, Delta Air Lines, Southwest Airlines, and United Airlines seem to be the top current competitors of the airline industry with each taking up over 15% of market share. Spirit only takes up 4.9% of the market (Statista Research Department, 2023). This is absolutely not a good look for Spirit. If they want to be able to compete with these top airlines, they are going to have to make some major changes.
Spirit’s recent failure with the JetBlue merger has also put a damper on their success as this merger was supposed to help Spirit get them back on their feet. Spirit and JetBlue had plans to officially come together this year but this action was blocked by a federal judge due to competition concerns. Both airlines eventually realized that several laws and regulations were standing in between them and this merger and there was no possible way to successfully fulfill this deal (Contreras, 2024). Not only was this supposed to help with their deteriorating revenues and increasing operating costs but help to get rid of the massive amount of debt they have amassed over the years. Although JetBlue is paying Spirit a $69 million termination fee, Spirit continues to struggle with their performance and success in the airline industry (Contreras, 2024). Since the merger with JetBlue did not go as planned and will not be happening, Spirit shares have declined by nearly 70% (Maharishi, 2024). Since Spirit needs to find a way to stay afloat among the competitive airline industry, they may also have to cut back on routes and completely close down some of these (Contreras, 2024). This can have an immense negative effect on Spirit Airlines as cutting down on certain routes may cause them to lose certain customers who take these specific routes. However, this may help them cut down on costs which may be what they need to survive.
Spirit has also experienced issues when it comes to the engines they use. Pratt & Whitney’s geared-turbofan engines (also known as GTF) are the engines that are mainly found in Airbus A320neos. RTX, who owns Pratt & Whitney, has recently uncovered a myriad of production quality problems among these engines which is unfortunate for Spirit since they own an all-A320 and A320neo aircraft fleet. Due to this occurrence, Spirit has had to ground much of its aircraft and in 2024, they are expected to encounter more disruptions (Maharishi, 2024). This has been another hit that Spirit has had to take as it fights to have a stake in the airline industry.
Domestic market share of leading U.S. airlines from February 2022 to January 2023
Important Metrics
Being that Spirit Airlines is such a big company, there are a ton of metrics that they track. Things like customer satisfaction, Cost, and growth rate are some of the big metrics that they watch and constantly make adjustments to try and give the company any and all competitive advantages.
Keeping customers satisfied is a big deal in today's world, where customers really don't show much interest in staying loyal unless you give them a great deal. According to the chart below, Spirit Airlines has had a steadily increasing customer satisfaction rate from years 2015-2021. Their ACSI (American Customer Satisfaction Index) has gone from an initial rating of 54 in 2015, to steadily increasing yearly to an astounding 12 point increase by 2021 of 66 points on the ACSI. This is great for Spirit, the more happy customers, means the more loyal customers. This also means that customers will talk to others about their experience and slowly convince others to try them. This steady increase in customer satisfaction is crucial to try and get a better competitive advantage.
The next important factor in competitive advantage in metrics would be the cost and profit. According to Spirits 4th Quarter Earnings Report, “Total GAAP operating expenses for the fourth quarter 2023 decreased 9.5 percent compared to the fourth quarter 2022 to $1,536.6 million. Adjusted operating expenses for the fourth quarter 2023 increased 11.3 percent compared to fourth quarter 2022 to $1,485.1 million.” (Spirit Airlines reports fourth quarter and full year) From reading this, you can see Spirit has taken the initiative to cut costs that aren't necessary and take upon themselves some needed spending to keep bringing in money and expanding upon their airline empire. They have lowered their costs of operating expenses by nearly 10% and have increased their spending towards leasing more planes and offering more flights in general. Another aspect of this increase was making the employees happier by increasing salaries, benefits, and wages. This is a great move for them considering everyone is still veering back from being off track from Covid.
Spirit has been growing more and more since the effects of Covid have worn off and people are now seeking to travel once again. “In response to gradually improving air-travel demand, Spirit Airlines is expanding its network and intends to expand its fleet to accommodate the rosy air-travel-demand scenario. It ended 2022 with 194 planes in its fleet, up 33.8% from 2019.” (Yahoo! Finance) This is exactly what Spirit needs. Expanding on their ultra low-fare fleet to gain the complete competitive advantage in this area. The expansion of more flights and planes will just grow the volume of customers and in return should continue to drive more and more money in. This metric may be the most important one of them all, with continued growth, allowing them to branch out to more areas or just completely dominate in one. In all, Spirit is set up to be in a pretty good spot for the future as long as these metrics continue to go in the way they currently are. They aren’t particularly the best airline out there but with some slight improvements I feel as if they could compete with any of the big names out there. They are in a good spot for how competitive airlines can be.
Strategic Issues
The biggest issue that Spirit Airlines is currently facing strategically is that their gimmick, their pricing strategy is driving down their profits by a significant margin. This pricing strategy is driving down their profits because they are currently flying planes with a large amount of open seats, leading to them offering discounts of up to 25% (Singh, 2024). The biggest reason behind the lack of capacity on flights for Spirit Airlines is that their greatest offer is their price, and during a time in which inflation is at all time highs even the cost of a flight from Spirit Airlines can be significant.
As many people bring up Spirit Airlines is meant to fill a very specific need, within very specific demographics, take for instance Spirit’s partnership with Arnold Palmer regional airport. Arnold Palmer regional airport is a small airport that has many amenities that you would find in the larger regional airports, with one big difference, Spirit is the only airline that flies in or out of Arnold Palmer. Arnold Palmer is an extremely attractive airport with its many amenities offered at a small and compact site, however, recently Arnold Palmer has been hit hard as Spirit has drastically decreased the amount of flights going in and out of this location, down to just one route to Orlando (Williams, 2024). Not only does this drastically change what can be considered the Spirit ecosystem, it also is a concerning financial revelation, that one of their biggest selling points is heading to the graveyard. Spirit shutting down numerous flight paths can be traced back to low operating income, due to heavily discounted seats, because of the general emptiness of Spirit flights.
For all of the issues that Spirit Airlines has the biggest factor for the firm as an entirety is, why? The biggest “why” of all these issues comes down to the fact that Spirit Airlines has not turned a profit in years, as we discussed in a previous deliverable, due to this they were relying on the merger with JetBlue. Spirit Airlines is trying rapidly to amass any capital that they can as they have serious liquidity issues with large debts coming up such as $1.1 billion due towards their loyalty program and they are also entering into leasing agreements to sell back some of their aircraft (Rohlena, 2024). Ultimately due to various negative factors, the culmination or catalyst of them all being consistent lack of profits as well as high levels of debt, Spirit needs to make drastic strategic changes such as the move they made to sell back some of their aircraft if their firm is to survive at all.
References:
Contreras , C. (2024, March 11). Spirit’s financial future is on the rocks after failed JetBlue merger, says Northeastern expert. Northeastern Global News. https://news.northeastern.edu/2024/03/05/spirit-jetblue-merger-failed/
Domestic market share of leading U.S. airlines from February 2022 to January 2023. Statista. (2023, August 29). https://www.statista.com/statistics/250577/domestic-market-share-of-leading-us-airlines/
Gesualdi-Gilmore, L. (2024, February 7). 15 Airlines With the Most Complaints . Finance Buzz. https://financebuzz.com/airlines-most-complaints#:~:text=1. ,Spirit%20Airlines&text = Spirit%20Airlines%20was%20in%20first ,according%20to%20the%20DOT%20data .
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Memon, Dr. O. (2023, November 29). Top 5: The airlines receiving the most ancillary revenue per passenger. Simple Flying. https://simpleflying.com/airlines-receiving-most-ancillary-revenue-list/#:~:text=%2467.61%20per%20person%20in%20ancillary%20revenue&text=Spirit%20Airlines%20is%20number%20four,and%20services%20other%20than%20airfare .
Published by Statista Research Department, & 1, D. (2023, December 1). ACSI: Spirit Airlines U.S. 2015-2021. Statista. https://www.statista.com/statistics/1004096/american-customer-satisfaction-index-spirit-airlines-us/
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