Why You Love Spirit Airlines (but May Not Know It)
Americans love to hate airlines, and none more than Spirit Airlines . This ultra-low-cost carrier keeps prices down and profits up by nickel-and-diming customers for just about everything, including onboard drinks, advance seat selection, and bringing a carry-on bag. Spirit also provides significantly less leg room than most U.S. airlines.
Yet Spirit's low prices and rapid expansion have played a big role in keeping airfares down for the routes it serves. Some observers have argued that Spirit has replaced Southwest Airlines as the key discount airline that keeps competitors honest. In other words, major airlines have to think twice before raising fares, or else they risk letting Spirit move in and undercut them.
Spirit Airlines has been growing rapidly by undercutting high legacy carrier fares. (Photo: Spirit Airlines)
For that reason, if you like low airfares, you have to love Spirit Airlines -- even if you've never flown Spirit, and even if you did fly Spirit and hated the experience! Simply put, without Spirit Airlines' rapid growth and commitment to low fares, Americans would be paying higher ticket prices today.
Spirit Airlines has grown faster than any other U.S. airline over the past two years. Revenue is expected to reach $1.62 billion this year, up 23% from last year. That follows a similar 23% increase in 2012 and a 37% gain in 2011.
Spirit's recent growth has been concentrated in legacy carrier mega hubs such as Dallas-Fort Worth International Airport -- AMR's largest hub -- and Chicago's O'Hare International Airport: the second-largest hub for United Continental and AMR.
By contrast, Southwest has traditionally avoided competitors' strongholds. Spirit is even starting to challenge Southwest in some of its largest markets, such as Las Vegas, Baltimore, and Denver.
Spirit's focus on legacy carrier hubs is not a coincidence. Spirit looks for a few key characteristics when deciding where to expand next. First, it looks for large markets (averaging more than 200 daily passengers each way). Second, it looks for high fares, which are typically found in markets dominated by one carrier's hub. Third, Spirit only enters when management believes it can hit a low enough price point to stimulate demand, while still achieving an operating margin of at least 14%.
The "Spirit" effect
It should be clear by now that Spirit's goal is to grow rapidly by offering cheap fares between big cities that legacy carriers can't match. Has this strategy helped reduce airfares?
The evidence overwhelmingly suggests that Spirit's growth has led to lower airfares. In Dallas-Fort Worth, where Spirit has grown the most rapidly (with 33 peak-day flights today, up from zero in 2011), the average domestic fare dropped from $431.15 to $415.82 between Q1 of 2011 and Q1 of 2013. That's much better than the nationwide average fare increase of 6.5% over that period of time.
Most of the other airports where Spirit has expanded rapidly -- including O'Hare International Airport in Chicago, McCarran International Airport in Las Vegas, and Denver International Airport -- have also seen smaller fare increases than the rest of the country since 2011.
Minneapolis-St. Paul is another market that has benefited from Spirit's growth recently. Airfares increased 10% between Q1 2011 and Q1 2012, but then Spirit entered the market in June, 2012. By Q1 of 2013, fares had already fallen 1% year over year. Fares are likely to fall further in the future, as Spirit is adding more flights at Minneapolis-St. Paul International Airport next month.
Foolish bottom line
The growth of Spirit Airlines is one of the most important factors preventing the legacy carriers from exerting their pricing power to raise fares. In markets where Spirit has grown significantly in the past few years, fares have fallen, or at least increased much slower than the national average.
The "Spirit Effect" does not stop there. With Spirit actively looking to enter high-fare markets, legacy carriers like American and United have to be careful about trying to raise fares. Spirit's current aircraft orders point to 15% annual growth over the next several years. As a result, no legacy carrier wants to present itself as a target by imposing high fares on the routes that it dominates.
For most American travelers, snagging a cheap plane ticket is the top priority when planning a trip. Even if Spirit Airlines' spartan accommodations are not your style, you are probably still benefiting from the price competition Spirit provides. In a market where a lot of factors -- such as consolidation, high oil prices, and high labor costs -- tend to push ticket prices up, Spirit Airlines is one of the few things keeping fares affordable.
Spirit is leading a revolution
Spirit Airlines is one of two airlines that are breaking all the rules of the industry. By keeping costs low and avoiding direct competition, these companies are churning out enviable profits. The Motley Fool's new special report will fill you in on how these airlines are soaring above the competition, and it will help you assess their long-term prospects. Click here for your free copy!
The article Why You Love Spirit Airlines (but May Not Know It) originally appeared on Fool.com.Adam Levine-Weinberg is short shares of United Continental Holdings. The Motley Fool recommends Southwest Airlines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.