Future Prospects for Two Leisure Carriers

Spirit and Allegiant are two well-managed carriers that primarily operate in leisure markets. Even though these carriers have two different route structures, both face the same problems: high fuel prices and aging fleets of planes, high gas prices that decrease the discretionary spending of many people for vacations, and keeping their planes full of passengers.

Spirit Airlines offers service primarily to Myrtle Beach, Florida, and the Caribbean. Currently, the carrier utilizes Fort Lauderdale as its primary hub, and uses aging MD-80s, as well as some new Airbus planes. Periodically, a new Airbus plane enters Spirit's fleet and consequently Spirit retires an aging MD-80 in order to maintain the current flight schedule. However, with high fuel prices, the carrier has been retiring MD-80s faster than the Airbus planes have been entering the fleet, which has stunted the carrier's growth. But, the carrier has added flights to San Francisco, Atlanta, and Dallas recently, and plans to start service from Boston soon. The carrier also added a frequent flyer program recently, Free Spirit, that may help cement loyalty to a carrier that doesn't offer passengers much. The program offers free flights beginning at 15,000 miles, though most free flights are 20,000 or 25,000, still competitive, but not as juicy. The program also has a staggering number of elite levels, giving customers the ability to earn big benefits with the program.

But the carrier has a number of problems. First and foremost is revenue management. The carrier has launched a barrage of sales in the past couple of years, offering fares for $8 in some cases. While a few $8 fares here and there won't hurt the carrier too much, Spirit seems to rely on sales as a necessity to fill seats. While the carrier has done a good job of targeting fares to specific days and flights in order to fill certain seats only, it still raises some eyebrows. Recently Spirit launched a clever promotion in honor of the hurricane season. The carrier plans to have several named sales of the year (instead of storms). Sale Alonzo recently launched (only a Category 2-3), and there's no telling when the next sale will strike! Seriously though, with the hurricane season becoming a bigger threat in the minds of many Americans after catastrophic Katrina, many of these sales may fail to capture a captive enough audience.

Second, the carrier seems devoted to certain leisure destinations that likely don't attract enough traffic with Spirit's network. In particular, Atlantic City and Myrtle Beach. While these may be great places to visit, they don't attract the same kind of traffic as Fort Lauderdale or Orlando. While I don't see Spirit cutting off service to either city, I do see them trimming service to either or both cities in the future, particularly if fuel prices stay where they are. A carrier like Delta should (but doesn't) have more service to either city, since it has a very strong hub in that part of the country, Atlanta, and offers hundreds of flights to Atlanta each day, filled with passengers who can connect to Myrtle Beach or Atlantic City. Most of Spirit's passengers to these two markets are flying point-to-point, and I suspect that demand between Atlantic City and Fort Myers or Myrtle Beach and Detroit has peaked. Fortunately for Spirit, they don't have much competition in either market and can charge a meager premium, but they need to be careful, because both markets are price-sensitive (besides, gamblers in Atlantic City might not have much to get home in the first place).

Third, the carrier doesn't have an effective strategy for moving passengers to the Caribbean. Fort Lauderdale Airport is a mess right now, the terminals are packed, and some airlines including Southwest, JetBlue, AirTran, and Spirit all could use more gate space. Spirit is using Fort Lauderdale as a hub for flights to the Caribbean, where it funnels passengers from Detroit, Providence, New York, and elsewhere to the tropics. But Spirit has had a hard time making FLL into a hub. In order to increase traffic, the carrier launched flights to two destinations not fit for service, Dallas and Atlanta. Spirit hasn't had much success in either market, and flights are at a bare minimum. The carrier does have service from FLL to Orlando and Tampa, but this isn't a great market either, and pits the carrier against Southwest. Spirit might be wise to consider another airport, such as Orlando Sanford, Sarasota, or others that would love service and have the space. Spirit doesn't have the money to pay for a new terminal or runway to accommodate their expansion, so they should consider the move to an airport with much of what they need that isn't too expensive. Sarasota, West Palm Beach, St. Petersburg, and Sanford won't win as Florida's most popular destinations, but these airports are desperate for new service and can help Spirit cut its airport costs drastically. Since most flights to the Caribbean leave around the same time during the day, the carrier needs gates, or even space on the tarmac to load passengers onto planes using stairs. Fort Lauderdale isn't the cheapest airport anymore either. Even though it's still far cheaper than Miami, Florida is becoming increasingly connected so that a drive of an hour or two can get you between many of Florida's tourism hotspots. Spirit isn't glued to Fort Lauderdale and passengers to Florida can choose among airports for the best fare. Gas is still relatively cheap, and an hour or two drive can be much cheaper than a flight direct to the destination. FLL may still be a good fit for the carrier, in fact, it still may be a good hubsite, but there are a number of strikes against FLL, and using FLL as a hub may not be such a good idea.

But considering another hubsite isn't the only step Spirit should consider. Spirit pulled itself out of relative obscurity by launching a frequent flyer program and credit card recently, but the carrier still has far to go to demonstrating it's a real player. There have been reports in the past year the Spirit has been considering an entertainment system for its planes. This would be a huge help to the airline, particularly since they compete against JetBlue on many routes in Florida and the Caribbean. In fact, the CEO commented that their system would be better than JetBlue's, since it would be designed in 2006, rather than 1999. That article from I believe the Detroit Free Press was awhile ago and consequently has been archived. However, the airline is serious about competing in amenities as well as price.

But in-flight entertainment won't pay the fuel man. If Spirit wants to take a risk, but one with huge rewards, they should consider launching flights from Fort Lauderdale to Latin America. While the airline already serves Cancun, it doesn't serve Costa Rica, with an expanding ecotourist focus. Spirit doesn't serve Colombia nor Panama nor Belize. All these markets could reap rewards for Spirit, but all are heavily served by American Airlines and their big, bad A300s. The A300 may be an ancient unsafe fuel-hog, but it does serve passengers well. It has plenty of room for coach passengers traveling to visit relatives in Latin America, and has room for the most important moneymaker on these flights, cargo. The A300 has tons of room for Cargo, and this is partly the reason JetBlue got beaten down by American on New York-Santo Domingo flights. Spirit's A319s and A321s (members of the same aircraft family as JetBlue's A320s) simply can't handle that cargo. Spirit can offer a low-cost alternative from Fort Lauderdale for relatives living in the Miami area, but they will need to dig their heels in for a fight. Costa Rica or Belize is more likely than Panama, Colombia, Nicaragua, El Salvador, or Honduras, but Spirit should consider this option carefully. This could benefit the airline's attempts to better utilize their aircraft, as the carrier could fly these routes at night, in addition to using aircraft to fly to Atlanta or Dallas on early morning and late evening flights. Spirit has other advantages, their cabin configuration supports the passenger mix on these flights which demands primarily coach seats. Spirit is a low-fare carrier, and their presence really could lower fares dramatically on these routes. Spirit doesn't have to be a leisure airline only, this could dramatically increase revenue for planes that would otherwise be idle or flying to a domestic city with less than ideal yields, and hurt a competitor on their most lucrative routes. Perhaps this isn't the time for such a move by Spirit, maybe after they get their fleet in order and install an entertainment system. Even so, American would still put up a major battle against Spirit, Latin America is American Airline's bread and butter for revenues. Their most profitable flights are in Latin America, and although Spirit wouldn't likely fly these routes. Port-au-Prince in Haiti is American's most profitable route, but other routes in South America instead of the Caribbean are quite profitable as well. San Jose, Costa Rica and Panama City are important, but they won't destroy American. When Spirit starts serving Buenos Aires, then Spirit will get clobbered.

Allegiant also needs to cope with high fuel prices, and since all of its aircraft are gas-guzzling MD-80s, and the airline has no plans to retire them soon, the carrier will have to incur high costs. But, they have met the challenge by sporting high load factors on flights, and the management will axe unprofitable cities very quickly (remember Palm Springs...). Allegiant currently faces the challenge of keeping existing markets profitable, while expanding into many new markets. The airline plans to continue focusing expansion on routes from Las Vegas and Orlando Sanford, and doesn't plan to open new bases in the near future.

Allegiant will do well, as long as it obtains the aircraft it needs and converts their flight passengers into vacation package consumers. Allegiant makes more on selling vacation packages than on flights. As long as families can to go to Orlando and party animals to Vegas, Allegiant will do well since they have little competition in their markets, and as long as the airline prices itself competitively to other vacations, not necessarily to other airlines, then the carrier should do well. But even more so than Spirit, as consumers face higher prices at the pump and the doctor's office, then Allegiant could suffer. If Allegiant suffers a revenue shortfall, it may want to think outside the box for ways of increasing revenues.

One idea is to expand into more destination cities. Los Angeles is a possibility, but instead of flying from Peoria to LAX, Allegiant should consider flying from Mexico to LAX. Air travel is one of the most popular ways to get across the Mexican border, aside from driving or making the dangerous desert crossing. Delta plans to use regional jets from LAX to fly to various points in Mexico. Using MD-80s to do so twice or thrice weekly could work as well. Flights to Cancun from their current small or mid-sized airports could work as well, but Cancun is still recovering from Wilma, and we may have to wait and see whether Cancun gets a big hit again this year. Phoenix is another market where targeted flights could be profitable.

Aside from the hypotheticals, Allegiant needs to find markets that can grab passengers from multiple metro areas, but are still small enough to not have significant mainline service. Allegiant might consider expanding back east, though their MD-80s can only go so far and Las Vegas and Orlando are both poor locations geographically for Allegiant since they are on the outer edges of the country. Allegiant might consider winglets to improve range and decrease fuel burn, however, since the MD-80s are so old, no winglets currently exist, and none may ever be made for the plane. As long as Allegiant sticks to its game plan and it opens new origin cities, then the carrier should continue to make money. The next step is Allegiant's IPO, which it wants so it can buy "new" planes (used MD-80 rustbuckets like the rest of its fleet) and keep expanding to new markets. We'll see if it gets off the ground in the not too distant future.