Spirit Airlines new chief executive Bob Fornaro plans to improve on the successful ultra low-cost carrier’s model, taking aim first at operational improvements and network changes in his first months on the job.
“We’ve got a great business model. I did not invent the model [but] a key goal is to make it better,” he says today during his first earnings call since joining the Miramar, Florida-based carrier in January.
Fornaro and Spirit chief financial officer Ted Christie emphasise the need to improve the experience for the airline’s passengers, highlighting better operational performance as one of the first steps.
Nearly a quarter of the airline’s flights arrived late in November 2015, the latest data from the US Department of Transportation shows. This was second to only Frontier Airlines whose flights arrived late 26% of the time.
Spirit has slightly reduced its peak-period aircraft utilisation to improve reliability, says Christie. This minimised the impact of the recent blizzard that impacted airports along the eastern seaboard from Charlotte to Boston in January.
The carrier will not change its schedule for the upcoming peak northern summer, says Fornaro. This is the busiest period and one of the most profitable for leisure-oriented Spirit, he adds.
Spirit will also look at is its many single-frequency routes, which Christie an Fornaro say can have an impact on overall reliability as one delay ripples across the system.
Network check up
“We’re going to be much more open to a broader view of routes,” says Fornaro. “Over the past couple of years we really focused on big markets to other big markets, which really put us in legacy carrier hubs. Over time we will be just as interested in mid-size markets and small-markets to leisure routes.”
This shift in strategy could see Spirit expand in and enter more medium-size markets, like Cleveland or Kansas City, while keeping its network connecting large, hub-to-hub markets.
Medium-sized markets have benefits and drawbacks, says Fornaro. Using Kansas City as an example, he points to the fact that leisure demand – “what we do” as he puts it – is not as strong as from Florida or from Baltimore/Washington, another market where Spirit is growing.
This is not to say Spirit will not continue to expand in markets like Kansas City, he says, emphasising more the different nature of the markets compared to the airline’s previous hub-to-hub focus.
“Some underserved markets exist outside of other carrier hubs,” says Fornaro. “You’ll see less predictability in how we pick routes going forward.”
The network strategy that Fornaro describes is very similar to those at Allegiant Air and Frontier Airlines. Executives at both ultra low-cost carriers have touted growth opportunities in mid-size markets like Cincinnati, Cleveland and Memphis and expanded their networks in these cities in turn.
Allegiant has expanded in these mid-size cities with flights primarily to sun-belt leisure destinations, like Las Vegas, Orlando Sanford and St Petersburg/Clearwater, while Frontier has connected the markets with leisure destinations and major cities alike, for example from Cleveland to Seattle, Orlando and Tampa.
Despite the obvious network strategy convergence, Fornaro downplays any potential merger chatter in the market.
“That’s really mostly speculation that’s been out in the marketplace since I joined the company,” he says in response to analyst questions over a possible merger. “I’m certainly aware what’s going on in the marketplace but there’s really nothing for us to deal with or discuss at the moment.”
Spirit plans to grow capacity in the 15% to 20% range annually in coming years, says Fornaro. He says executives do not expect to “repeat a 30% growth rate” – the speed at which the airline expanded in 2015 – again in the future.
Capacity will increase about 27.5% in the first quarter and 20% for the full year in 2016, an investor update today shows.
Spirit is re-evaluating its existing and future fleet needs as part of its shifting network focus.
“We are in the process of updating our five year fleet plan, which begins with a detailed review of gauge and mix,” says Fornaro. “These discussions are about whether or not the [Airbus] A319s should remain, as well as evaluating the gauge and timing of future deliveries.”
Whether Spirit focuses on more frequent service to smaller cities or less frequent service between large markets will play a big role in whether the airline removes its A319s and moves to larger gauge aircraft, he says.
The carrier had 79 aircraft, including 29 A319s, 42 Airbus A320s and eight Airbus A321s, at the end of 2015, its fleet plan shows. It plans to add three A320s, five A320neos and nine A321s while removing three A319s during 2016.
However, potential delays to the delivery of its first few A320neos may change these plans slightly, says Christie.
“We are working through a couple of contingency plans, including the pacing of several fleet retrofits, to cover capacity growth shortfall should this happen,” he says.
There has been a wholesale shift among US carriers towards larger gauge aircraft in recent years. Alaska Airlines has replaced Boeing 737-400s and 737-700s with 737-900ERs, Frontier took delivery of its first A321 in October 2015 and JetBlue Airways has only added larger A321s to its fleet since 2014.
A break from this shift towards larger gauge by Spirit would be notable, as almost all of its peers are doing the opposite.
Spirit has orders for 32 A321s and A321neos, the fleet plan shows.
Total unit revenues are expected to decline in line with their drop in the fourth quarter of 2015, when the metric fell 16%, says Christie. This is despite a stable pricing environment since October 2015.
However, Spirit’s costs per available seat mile (CASM) excluding fuel remain lower than other carriers giving it an edge despite the falling unit revenues. Unit costs are expected to decrease 2.5% to 3.5% in the first quarter, the investor update shows.
Unit costs excluding fuel decreased 8.2% to 5.15 cents in the last quarter of 2015.
Spirit forecasts an average fuel expense of $1.25 per gallon in the first quarter, which would represents a 35.9% drop from the first quarter of 2015 and a $0.34 per gallon savings compared to the fourth quarter.
The carrier has no fuel hedges, says Christie.
Spirit anticipates an operating margin of 19% to 20.5% in the first quarter.
For 2016, Spirit forecasts flat to down 1% unit costs excluding fuel and $630 million in capital expenditures.
Source: Cirium Dashboard