Spirit Airlines: Airline Crisis Management | In Practise

Spirit Airlines: Airline Crisis Management

Former CEO at Spirit Airlines

Learning outcomes

  • How airlines can make travelers feel safe traveling on planes
  • A travel demand comparison with both 9/11 and 2008 shocks
  • How airlines could approach managing the fleet and fuel costs
  • Potential changes in the airline industry structure between LCC and flag carriers
  • The role of lessors in the airline industry
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Executive Bio

Ben Baldanza

Former CEO at Spirit Airlines

Ben has over 35 years of experience in the airline industry. From 2005 - 16 he was CEO of Spirit Airlines and is known for defining the ultra low cost carrier model after transforming the business to become the 7th largest airline in the US. Ben was previously SVP at both American Airlines and Continental Airlines and also led the restructuring of Avianca Holdings. He now consults with the largest US airlines and is an Adjunct Professor of Economics at George Mason University.Read more

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Ben, it’s a pleasure to have you with us, today. Could you start by laying out how you are looking at the potential impact, on travel demand, for both the leisure and business traveler, post-Covid?

Obviously, for both leisure and business travelers, there is going to be a sense of confidence needed that it’s okay to get back on an airplane, without taking undue risk. We all knew that there was some risk, in any sort of gathering, before, but we dealt with that and we understood those. In a post-Covid world, reintroducing flying and more densely packed sessions, is going to be something that people are going to have to get used to again. I think there are a couple of things.

I think leisure demand will rebound quite strongly, largely as a reaction to being cloistered for so long. Many people have probably had cancelled vacations for this summer and by summer 2021, I expect that people will want to get out more almost, as I said, as a reaction to being stuck home with the kids. For others, it will just be, let’s get out more. I think leisure travel will rebound well. It may take a little while, but I think people will. Obviously, they need discretionary income to do that and when you take into account the fact that people, maybe, haven’t been working as much, that may delay some return to the leisure side also.

On the business side, I think there’s two things. I think there’s a certain kind of business travel that will rebound as soon as people are comfortable being on airplanes again. Sales work, for example, will be strong. I think the ability to inspect and audit facilities, plants, things like that, will be good. But I also think that there is a portion of business that will either never come back or take a long, long time to come back. That’s business that has become comfortable with this sort of format, with Zoom, Microsoft Teams, Skype, BlueJeans, name your favorite platform. The people who buy business, so the businesses who pay for their company’s travel, some of them will say, we understand why we need to pay for this trip over here. But why do we need to keep paying for travel, for business that has worked very well, for the last six, eight, 12 months in some cases.

Let me give you an example. I serve on a couple of corporate boards. I don’t know that every board meeting has to be held in person. It’s nice to have them in person and it’s nice to have a dinner and lunch with people. But the reality is, the business of what the board does – for normal companies, the board meets four or five times a year – maybe you could two of these meetings by video or maybe two, in person. But you could choose a mix. In that case, you could cut some expenses out of a company.

There are other things where the video chat is going to be just as effective and it will save a lot of money for a company. Business will say, I’m going to pay for this travel, but I’m not going to pay for that travel. I actually think that business travel, on the one hand, will come back sooner, because businesses will want their people to travel, for the needs they have to. On the other hand, it won’t come back as complete. Whereas, I think leisure travel will take a little longer to spool up, but once it comes back, will be quite strong. That’s my sense.

How would you compare the demand, potential bounce back, for Covid, versus 2008 and also 9/11, between that leisure and business traveler?

9/11 affected everyone, obviously, because there was a sense that it was not safe to be on an airplane because of what might happen on an airplane. Changes in security, changes physically, on the airplane, making the cockpit harder to enter and the attendants putting the cart, when the captain has to use the restroom, all those things, we’ve just got used to them. The fear that something bad is going to happen to me, on board, in terms of somebody taking over the airplane has now gone, but it took years and years for the industry to recover from 9/11, in terms of the US industry, in terms of the amount of traffic coming back.

The 2008 financial crisis affected both business and leisure travel. Business, because obviously, banks travel a lot and a lot of the financial collapse hit a lot of businesses. But interestingly, what people didn’t necessarily realize before that is, a lot of the leisure travel, especially higher-end leisure travel or longer-term packages, like Beaches and Sandals Resorts and things like that, a lot of that travel, the industry realized was funded, based on home-equity loans and when the housing markets collapsed, those loans were no longer available. Some people think of the financial crisis as a business thing, but it really affected the leisure market, as well. People couldn’t finance their vacations anymore, so they took shorter vacations or stayed at home and didn’t fly as much.

That recovered more quickly and, again, leisure came back full and business came back full, eventually. 9/11 was probably four to five years, before demand was back. The financial crisis, maybe about two years, before demand was back. In this case, I really see, what I’m calling a U U shape recovery. I’ll tell you what I mean by U U. The first U is getting volume back. The volume is going to come back, I think the way I said. Strong in leisure and a little weaker in business, because of the amount that won’t come back. The industry will adapt its capacity, accordingly. But I think the volume is going to come back, probably, by maybe 2023. But on a day in the future, which I can’t predict exactly when that will be right now, or a month in the future, there will be a point when the industry carries as much global traffic as we used to carry, before Covid.

On that day, I don’t think the rate, meaning the average ticket price, is going to be the same. The industry is going to have to buy back a lot of that traffic, with a lot of incentive. They are clearly going to have to build confidence by workers and customers all wearing facial coverings, by making sure that they understand how clean the plane is, that people can be comfortable and can clean their own areas. Maybe more protections in the airports, like taking temperatures and other things. All of that is going to have to happen and people will get comfortable with that.

But at the same time, I think the industry is still going to have to use low prices to say, now here’s a great deal. When you say, okay, I think I can be safe on this plane, because of the protection and I’ve got this screaming deal to this bucket list location, I’m going to go. I think, for airlines and you might put a British Airways in this category, a Lufthansa, an American Airlines, a United, carriers that carry a lot of business traffic. By business traffic, I mean the business pays for the ticket, not the customer paying for the ticket. Not necessarily the intent of the travel, but the fact that somebody else is paying for it. It’s going to take those kind of carriers a second U, to recover the rate and to get the average rate back to be compensatory with the cost structure of the industry.

I think that carriers, like the Ryanair or like a JetBlue, in the US, will recover more quickly, even though it won’t be quick, than a carrier that carries a lot of business-intent travel. Once the volume is back, they’re almost fully back, because they live on lower average prices anyway. But carriers that need more of higher-price business carrier, like an Emirates or something like that, it’s just going to take longer and they’ll get the plane full, before they’re going to get their rate back. That’s why I say it’s going to be a U and a second U.

How did you change the average ticket price, post-2008 or post-9/11?

What happens is, the pricing is directly related to capacity, in the airline industry. One of the crazy economics about the airline industry is that they have very high average costs. Airplanes are expensive, people are expensive, fuel is expensive, even though it’s less expensive today, but it’s still expensive. Airports are expensive. But the marginal cost is very, very low. If a flight is leaving this afternoon and there’s empty seats, the cost to put you in that seat, versus have it empty, costs me almost nothing. Literally, pennies. If anyone is taking an Economics 101, microeconomics class, you know that in a competitive market, the price drives to marginal cost. Capacity tends to drive pricing in the industry, and so the industry prices to fill its airplanes.

After 2008 and after 9/11, what happened is, it was the rate of capacity coming back, that determined when the airlines could, effectively, charge the rate again. In 9/11, it was easier in a sense. What happened after 9/11 was that it was such a dramatic shock to the system, that the industry reset its capacity. They got rid of airplanes, they retired airplanes that were older. They changed future order books and the industry was physically smaller, for a while. That allowed them to price reasonably, as the volume came back, because they weren’t trying to fill up all these empty seats.

In 2008, it took longer, because not a lot of capacity came back. The volume came back quickly, but it took longer to get the rate back. The rate wasn’t really back till, probably, about 2011/2012. It was a good year or two after the volume was back.

In this case, I think the reason I’m thinking it’s a U U, is because, right now, as we’re recording this, the industry’s capacity is, effectively, like your car idling in the garage, waiting to go out. All the workers are there. All the planes are there. They’re ready to launch all these planes again. Airlines have talked about that, taking on new deliveries this year, and they deferred deliveries that are coming in 2020, because why would you want to take delivery of a new airplane, when most of your fleet is on the ground, anyway? But in terms of the planes that were flying before Covid, they’re all there. There haven’t been returned airlines, there haven’t been big retirements, yet. If demand starts to return, say, by the end of this year, the industry is likely to quickly put capacity back in place, to start getting use of those employees that they’re paying or, in the US, that the government is paying for, until September, at least.

I think what’s going to happen is, I think the industry is going to bring back too much capacity, too quickly and that’s why the prices are going to stay low for a while. That’s great for consumers. Not necessarily great for the margins of the business. So I think the industry is going to have to buy back the traffic first, to get the volume, then spend some time letting demand catch up to the capacity, or trimming the capacity as needed, to get the rate up.

How did you choose which routes or what capacity to bring back to market first?

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Spirit Airlines: Airline Crisis Management

May 4, 2020

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