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Spirit Airlines is Going Public and Its Business Model is Producing Stellar Results

People love to hate Spirit Airlines for its unapologetic low fare, high fee approach, but guess what? It's making the airline a lot of money. Spirit has decided to go public, and that means the financials have been released for all to see. It looks good to me, all thanks to its business model.

In all respects, Spirit's transformation over the last five years has been remarkable. It was a wandering airline without specific focus on product or on its route map. And yeah, it lost money. But then the decision was made to turn the airline into an "ultra low cost carrier" (ULCC), which meant lowering base fares and charging fees for just about everything beyond the seat. It also focused its route network on Ft Lauderdale and made a big push into the Caribbean. The result? A smashing success.

Let's start with the basics, net income.

As you can see, net income has actually become income (instead of a loss) in the last couple of years, and in a big way. The airline had a 15.9 percent operating margin in 2009.

In the first half of 2010, there has been a dip, but that was solely due to the cost pilot strike which had a negative impact of about $19 million. Now that the strike has been settled and the pilots have a new contract, that is behind the airline.

But net income isn't that interesting to me. It's more about how Spirit got there. This chart says it all for me.

Since 2005, Spirit's average ticket price per flight segment has dropped more than 16 percent from $98.78 to $82.67 but in that same time, its total revenue per flight segment has gone up 11.5 percent.

The difference, of course, is in the non-ticket revenue, what most of the world calls "fees." For Spirit, that number has skyrocketed from $3.38 per person per flight segment in 2005 to a whopping $31.28 in the first half of this year. What's even more attractive about this? It doesn't face the usual aviation taxes, just income tax if the airline is profitable.

Naturally, Spirit is looking to grow that revenue source further. From the prospectus:

These plans include a focus on increasing sales of itinerary attachments on a commission basis and generating additional fees from proprietary, brand-based services, such as our FREE SPIRIT MasterCard and our $9 Fare Club ultra low-fare subscription service.
But this is just the commercial side. The operations side plays a key focus as well. Spirit isn't required to report to the Department of Transportation, but a few years of history were given in the prospectus. On-time performance has climbed from a dismal 69.7 percent in 2007 to a mediocre 75 percent in 2009 (but hey, it's an improvement). Cancellations have dropped, and the number of bags lost has been cut by more than half. This improvement needs to continue.

But for Spirit, the path is clear. Focus on lowering base fares even further by increasing additional non-ticket revenue sources will get more customers. As long as the business model is clear, then this is the right way to go. This is what many airlines have said in the past, but nothing shows more clearly how well this can work than Spirit's performance over the last five years.


Photo via Spirit Airlines
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