INTERVIEW: Spirit Airlines chief executive Ben Baldanza

Fort Lauderdale
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Aside from the artist's impression of an aircraft and the company's logo welcoming you at the entrance, there are little signs this nondescript office in Miramar, south of Fort Lauderdale in Florida, is the headquarters of an airline that made $76.4 million net profit in 2011.

But low-cost carrier Spirit Airlines has done just that. And after raising $150 million of net proceeds in its initial public offering a year ago - the listing has gone from strength to strength - the airline is showing no indication of slowing down. On the cards are flights from new destination Denver, Colorado, as well as new routes from Dallas-Fort Worth, Texas.

Spirit, which has its main base at Fort Lauderdale will grow capacity by 23% this year, and adding seven aircraft to its Airbus A320 family fleet to end 2012 with 44.

At the helm of Spirit is Ben Baldanza, 50, a veteran of the airline industry. Formerly with Taca and US Airways, New York-born Baldanza joined Spirit seven years ago. During that time, the company has rebranded itself as an ultra-low-cost carrier - it likes to remind travellers it was the first in the USA - and has established a good track record of profitability, even as high fuel prices and slowing economies made a dent in airlines' earnings.

Labelling 2011 a year of growth, Baldanza characterised it as "telling the Spirit story" to many people in many places. But what is the Spirit story really? The airline prides itself in adhering to a simple strategy, in keeping costs low and in not veering from its business model. This focus, Baldanza says, has led to Spirit's success.

KEEPING IT SIMPLE

Spirit executives sing from the same hymn sheet when they talk about strategy. The goal driving all business operations is simple - to make money. It sounds logical enough, but Baldanza believes most airlines are not as driven by profit as they should be.

Asked if its recent move to launch more domestic routes versus international is an indication of Spirit's strategy in the year ahead, Baldanza answers: "Our strategy is simpler than that. Our strategy is to make money." What this means, he says, is Spirit does not care about market share, and it expects every route in its network to be profitable. If it is not, the route's frequency is downgraded or dropped altogether.

"Market share is not relevant for us. We haven't found that market share correlates highly to profitability. We expect every route to make money. Not half of them, not 99%. Whether that makes us number one or number 10 in the city, it's irrelevant," he says.

The airline is also committed to its business model as an ultra-low-cost carrier, which means making passengers pay for drinks and snacks on board (that will be $3 for a bottle of water, thank you); paying for checked bags; offering a single class of service (with one of the narrowest seat pitches in the industry); and doing away with all the frills other airlines might offer. There is no in-flight entertainment, as offered by some other low-cost carriers in the USA, and no in-flight wi-fi or lounge access.

But Baldanza is proud of the airline's focus: "No one at McDonald's is worried they don't have the same product as Morton's Steakhouse. No one at the dollar store wants to be Nordstrom." As a result, the carrier says it has one of the lowest break-even fares in the industry per passenger per flight segment, at less than $62, a Spirit presentation in March stated. This is 58% lower than competitor Southwest Airlines, and 116% lower than JetBlue, Spirit says.

ANCILLARY PRIDE

The airline is also proud of its ancillary revenue, which makes up more than a third of its overall income, and which Spirit believes it can boost further - perhaps to 50% or more. The chief executive says the airline plans to do this by continuing to lower prices and trade off the fare portion a passenger pays to help the airline cover its costs for ancillary revenue.

This can be done in two ways primarily, Baldanza notes. The first is to sell things to customers that they are already buying, but not from the airline. For example, the carrier started selling hotel stays and car rental on its website last autumn.

Another way, Baldanza says, is to be "smarter" about the way the airline prices what it already sells to passengers. He cites the example of checked bags on Spirit flights. Previously, the price of a checked bag was dependent on two factors: where the passenger paid for it (online or at the airport); and whether the passenger was a member of Spirit's fare club. Last year, the airline introduced the timing element, making checked bags cheaper for passengers who paid for them online in advance. Saying this approach has "a lot of potential" in helping increase the carrier's ancillary revenue, Baldanza explains it makes sense to take revenue-management techniques on the ticketing side of the business and apply them to how ancillary services are priced. For example, he adds, a window seat on a flight "shouldn't always be $15". It could be priced differently depending on how full the flight is at any given moment.

The push for ancillary revenue could help the carrier reduce costs overall, Baldanza explains: "Most of the charges for optional services, they act as economic incentives for customers to behave in a way that will cost us less money." For example, price-conscious travellers have carried fewer bags on board since Spirit started charging for them, which results in less fuel being burnt by its aircraft.

"We want to change the airport from a place where customers check in to where customers drop off bags," says Baldanza, adding this could help the airline spend less on rental of airport space. Ultimately, he says, ancillary revenue helps with the carrier's cost: "They are so synergistic, and they work together."

Ancillary revenue also has an advantage because it is not seasonal, like fare revenue, and is less elastic. Baldanza believes customers will decide which airline to fly with based on its fares, but "once they've made the decision to fly to Cancun, whether they pay $20 or $30 to check a bag, it doesn't make a difference. Fares move up and down, but bag fees stay the same. There is no bag-fee war."

GROWING THE DOTS

Baldanza is not a fan of using the word "hubs" to describe the airports Spirit has multiple flights out of. Indeed, the airline is hesitant to tie itself to any airport, apart from its base at Fort Lauderdale. This is in line with the carrier's mantra of opening flights on city pairs that will make the most money for the airline, and ignoring other goals such as network connectivity or market presence.

The airline's approach to identifying these profitable city pairs is summed up in a Powerpoint slide often trotted out by airline executives at presentations. In this approach, Spirit pulls up all the non-stop routes that are served by any airline through North and South America. It then eliminates the routes it has no traffic rights to operate on, as well as the city pairs that have fewer than 250 passengers each day. It then identifies the average fare on each of the remaining routes, lowers this by 25% and assesses whether this will still yield profit for Spirit. The airline then picks the most profitable of these routes. There are more than 300 green dots on the Powerpoint slide, each signifying a non-stop city pair Spirit does not currently serve, Baldanza says: "There is a lot of growth potential because fares are very, very high [on these routes]."

PLAYING AT HOME

Spirit is launching several domestic routes this year, as well as an international service between Dallas-Fort Worth and Toluca, Mexico City's secondary airport. This growth is in contrast to the past few years, where Spirit kept busy expanding its Fort Lauderdale base and network in Latin America and the Caribbean.

Reiterating that the airline's strategy is to be profitable and not necessarily grow domestically, Baldanza acknowledges that recent events in the US airline industry have created more opportunities for Spirit. He points out the major consolidation events, such as Southwest's acquisition of AirTran, saying these have led to "a general environment of lower capacity and higher fares", allowing Spirit to come in and stimulate traffic demand by offering lower prices.

While Baldanza declines to name specific markets Spirit has on its radar, he indicates more flights to Mexico and to smaller US airports are favourable areas of growth: "We see Mexico over time becoming bigger for us."

Besides the upcoming flight from Dallas-Fort Worth to Toluca, Spirit already connects the Mexican airport to Fort Lauderdale. Baldanza believes there is more "Mexican affinity" with Texas and California than with Florida, and says Dallas-Forth Worth has international potential for Mexico and Central America. Most of Spirit's international flying is now out of Fort Lauderdale - it is already selling tickets for 14 routes out of Dallas-Fort Worth.

New flights to smaller, "alternative" airports in the USA could also be a key component of Spirit's growth in the coming years. The carrier now operates to a number of small airports such as Latrobe (Pennsylvania) and Niagara Falls, and Baldanza believes there is more room for growth at airports such as these. He notes smaller airports tend to be more flexible with costs, and points out that travellers are often willing to drive further to another airport to get a lower fare.

Fort Lauderdale will remain Spirit's main base, but Baldanza says growth out of there will slow. The Caribbean, which Baldanza says has been a good market for Spirit, will also see less growth compared with others, because the airline sees few big opportunities in that region, and it is not able to serve markets such as Cuba on a scheduled basis.

Beyond the Caribbean, Spirit is awaiting authorisations from local governments in Latin America to operate flights between Bogota in Colombia and Lima in Peru as well as Bogota and Quito in Ecuador. Spirit already operates between Fort Lauderdale and Bogota and wants those flights to be able to operate onwards to Lima and Quito. Baldanza expects to receive these authorisations soon.

Less immediate, however, is the approval for Spirit to begin flights to Caracas, Venezuela. The airline filed for the rights to start the flight in 2006 but still awaits approval from the Venezuelan government. While the relevant authorities there have been happy to talk to Spirit, Baldanza indicates the final approval has been hindered by recent tense relations between the USA and Venezuela.

FLEET PLANS

After ending 2012 with 44 aircraft in its fleet, Spirit expects to add another seven in each of 2013 and 2014, followed by another 10 in 2015. This will give the airline a 15-20% year-on-year growth in capacity up to 2015, Baldanza says.

Spirit placed an order for 75 new A320s, including 45 A320neos, late last year, and will begin taking delivery of these from 2016. The airline plans to make a decision on the engines for the order later this year.

Baldanza says the 30 regular A320s out of the 75-aircraft order are likely to be replacements for 28 aircraft in its existing fleet that will go off their leases at about the same time. The 28 aircraft comprise 26 A319s and two A321s. However, Baldanza says this decision is not set in stone, and there is flexibility for Spirit to keep the older aircraft for longer if economic conditions are favourable.

Even if the aircraft are replaced, Baldanza says there will still be some seat growth as Spirit's A320s are configured with 178 seats compared with the A319's 145 seats. Noting that the A320 is more cost-efficient to operate than the A319, he says: "The plan is to evolve the airline to the A320."

Despite Spirit's goal to become bigger, Baldanza is certain of one thing: "I don't see Spirit as a player in consolidation, meaning we are going to be a buyer or seller. But I see it meaning a lot in terms of our growth and where we can grow because consolidation creates a lot of opportunities for a carrier like us to create a low fare price point." Besides, Baldanza adds with a grin: "Anyone who bought us would screw up our costs."