Spirit Airlines: Achieving a Competitive Advantage Through Ultra-Low Costs

Abstract

Large losses between 2004 and 2006 brought Spirit Arrlines to the verge of failure. With capital mfustons from two pnvate equity groups and a new cost focus strategy patterned after Europe's Ryanarr, Spirit proclatmed itself an ultra-low-cost carrier Spirit usually offers the lowest fare m its markets, but thts base fare buys a seat with allowance for under-seat baggage only Everythmg else, mcluding a glass of water, ts extra. Ancillary fees account for some 40% of total revenues. Although it has developed a customer base of pnce sensitive travelers, Sptnt ts also among the mdustry leaders m complamts. Nonetheless, Spirit should dommate the pnce sensitive U.S. arr travel market tn the short to medium term as it has achieved a sustamable competitive advantage based on Porter's cost focus strategy. Since deregulation ID 1978, the U.S. airline 1Ddustry bas struggled to achieve consistent profitability. No longer protected from competition on profitable routes, legacy earners faced 1Dcreased competition from each other and, more importantly, from new entrant airlines not burdened by ngtd contract work rules and btgh labor costs tnherited from the regulated 1Ddustry. The first decade of the twenty-first century was particularly difficult for the 1Ddustry as it was buffeted by successive world events 1Dcluding the terronst attacks of September 11, 200 I and subsequent recession, the severe acute resprratory syndrome (SARS) epidemic, the dramatic nse and 1Dcreased volatility of oil pnces, and, finally, the global recess10n begtnn1Dg ID 2008. By 2012, the collective toll resulted ID the bankruptcy of all surv1vmg pre-deregulation legacy earners. Thts led to airline consolidations and domestic capacity reduction resulting ID much needed 1Ddustry stability. While the lowcost earners (LCCs) have generally continued to expand ID the new millenmum, the domestic airline product offered by the full-servtce and LCCs has converged to the extent that many passengers view the domestic economy class seat as a commodity (Tarry, 2010). An 1Dteresting recent JAAER, Fall2013 development ts the emergence of the so-called ultra-lowcost carrier (ULCC) bus1Dess model first developed ID Europe by Ryanair and more recently IDtroduced ID the U.S. by Spirit Airlines. The ULCC bus1Dess model stnves to obtatn a competitive advantage through a more aggressive implementation of Porter's cost focus strategy compared to traditional LCCs. By choos1Dg to focus almost exclusively on mm1m1z1Dg costs, the ULCC bus1Dess model results ID a very focused target segment of those passengers who are concerned solely with obtatntng the lowest pnce for arr travel (Porter, 1998). Tbts paper ts a case study of Spirit Airlines' aggressive implementation of Porter's cost focus strategy to transform from a small, struggling low cost airline serv1Dg gambling and vacation destinations ID the eastern United States to a highly profitable and rapidly growmg ultra-lowcost earner with routes stretcbtng across the U.S. and south to the Canbbean and Central and South Amenca. History Spirit Airlines traces its onglD to the Clipper Trucktng Company established ID 1964. Twenty years later, with a new bus1Dess plan and name, Charter One, the