In High Spirits

Miramar-based Spirit Airlines, the nation's largest privately owned air carrier but just the 25th-largest overall, drew only modest attention in March when it announced it would charge passengers $10 for each checked bag and $1 for a soda.

Another sign of the times in flying the cheapskate skies? What next, coin-activated seat belts?
But Spirit Airlines CEO B. Ben Baldanza, 45, says the new "a la carte" pricing enables fare cuts of 10% to 40%. It is his next step in a bold plan, modeled on success stories in Europe and Asia, to convert Spirit from a lately unprofitable bit player in the domestic market into the only player in a unique niche -- bargain-basement air travel to Latin America and the Caribbean.

" 'It's all about the fare' is what we're sort of internally using to remind ourselves that's really what most of our customer base cares about when they're deciding to fly," says Baldanza, in an interview in his office in suburban Broward County. "It does cost the airline to process bags, and there's no reason that a customer who doesn't check bags should have to pay for that."

Spirit, born near Detroit in 1980 as a charter carrier, relocated to south Broward in 1999 with $2 million in incentives from Florida, Broward County and Miramar. The carrier, known best for its 1-cent fare promotions, racked up a cumulative $147 million in debt over the last 10 quarters, according to Department of Transportation reports, as it retired its MD-80 fleet in favor of $2 billion in new Airbus 319s and 321s.

Spirit's evolution reflects the competitive atmospherics around it. It's true that low-cost airlines have reached 30% share in major markets. But the segment includes tough competitors Southwest, with its numerous flights, and robust, Orlando-based AirTran Airways. Meanwhile, through cost-cutting and bankruptcy reorganizations, legacy carriers have become more competitive.

Baldanza, who arrived at Spirit in 2005 after a career at US Airways, Northwest, Continental and Grupo TACA in Central America, and his team didn't see a big future for Spirit as a me-too carrier on New York-to-Florida and other popular routes. Expanding overseas seemed a "natural play," Baldanza says.

Why? No Southwest-like competition in the region. "If you can own a big chunk of those markets, you can do very well," says Stuart A. Klaskin of KKC Aviation Consulting in Coral Gables. "My theory about the way they see the world is there's room for one carrier to live off American's scraps."

Baldanza notes that Fort Lauderdale-Hollywood International, Spirit's main gateway, is a low-cost airport. It charges airlines $4.35 per passenger compared to $17.01 at Miami International. Spirit's gates also happen to be in the international terminal.

Demographics favor expansion. Broward and Palm Beach counties are home to 235,827 people of Haitian birth or ancestry and 220,552 people of Jamaican birth or ancestry, according to the U.S. Census. Travel by immigrant Americans is a major sector in the marketplace, says Bob Brindley, vice president for the Americas for BCD Travel consultant Advito.

In recent months, Spirit launched service to San Jose, Costa Rica; Port-au-Prince, Haiti; Aguadilla, Puerto Rico; Guatemala City; filed to serve Caracas, Venezuela; and wants to expand to Lima and Chiclayo, Peru. Flights to Montego Bay draw largely leisure passengers; flights to Port-au-Prince and Kingston draw relatives visiting family, Baldanza says. The announcement of service to Costa Rica, which isn't served by any low-cost carrier, was well-received there, says Federico Castro, head of BCD Travel's San Jose office.

Since 2002, Spirit has climbed from No. 6 in market volume at Fort Lauderdale to No. 5 and was second only to Air Canada in February in international traffic. It will become the largest when Air Canada cuts back its service for the summer.

Expert help

The second piece of Spirit's strategy came into focus last year when Phoenix-based Indigo Partners, an airline-specific private equity firm headed by William A. Franke, former CEO of America West Airlines, acquired a majority stake in Spirit for a reported $150 million. Not coincidentally for Spirit's plan, Indigo's expertise is as a large investor in low-cost Asian airline Singapore-based Tiger Airways and the lead investor in central Europe low-cost carrier Wizz Air.

In those airlines and also Ireland's low-cost RyanAir -- and even in iTunes -- Baldanza found inspiration for the "a la carte" pricing that takes effect in June. By eliminating juice and soda giveaways, he saves $2.1 million a year. By dumping business class, he still can get customers who want a roomier seat to pay a premium -- a la carte price -- for one of the renamed Big Front Seats but saves himself the free drinks and extra costs of servicing just eight passenger seats in business class.

The Spirit plan isn't risk-free. Vacation traffic is highly seasonal, and leisure travelers don't pay the last-minute, high fares business travelers shell out. What's more, the airline is negotiating a new contract with its pilots, who want a better deal. Spirit, meanwhile, has "fairly substantial brand awareness issues," Klaskin says, though the airline should do well if it enjoys a period of stability. Also, Spirit must be wary of being a victim of its own success. Should Spirit prove the viability of a low-cost market, other low-cost carriers could pile in; American and foreign carriers can be expected to protect their routes.

But by keeping his costs at less than 5 cents per available seat mile without counting fuel -- costs below those of Southwest and AirTran -- Baldanza says he can defend against challengers and create a consistently, rather than cyclically, profitable airline.

All of which could attract an acquirer. Spirit's new all-Airbus fleet would complement JetBlue and all-Airbus Frontier, which is targeting upper Latin America and Mexico from the west. "I think they'll wind up being sold to someone else," says airline economist and professor Alan Bender of Daytona Beach-based Embry-Riddle Aeronautical University. "I think personally there are too many low-cost airlines in the United States today. I see them in the long run being between a rock and a hard place."

Baldanza, meanwhile, has his sights on becoming the No. 1 carrier at Fort Lauderdale. He expects Spirit's available seat miles -- the measure of airline capacity -- to climb 47% this year to 8.6 billion. He projects Spirit will turn its first profit, though "not wildly profitable," since the first quarter of 2004.

"What we're building truly is unique in North America," Baldanza says. "We're not the next Southwest. We're not the next JetBlue or AirTran. We're not going after American Airlines' traffic base or Northwest's traffic base. What we're trying to do is create a different airline than North America has seen, one that is structured like airlines in other parts of the world that are being successful but haven't yet been successful here."

Tags: Southwest