WorldCity Business Magazine

Flying high

by Mary Dempsey

South Florida’s low-cost carrier pushes ahead with its strategy to conquer Latin America.

Two weeks before Christmas, Spirit Airlines began non-stop flights to Punta Cana in the Dominican Republic. The service was yet another step toward the Fort Lauderdale airline’s ultimate goal: to become the low-cost U.S. carrier that dominates Latin America and the Caribbean.

“Our base in South Florida gives us a natural launching pad,” says Ben Baldanza, president of the carrier. In fact, Spirit CEO Jacob Schorr has said that part of the reason the airline shifted its headquarters from suburban Detroit to Fort Lauderdale in 1999 was precisely so it could move into Latin America. The carrier’s marketing now includes catch phrases: “Hot Fares. Sexy Places. Caribbean Chic.”

Domestic destinations were Spirit’s focus in its first years, and regular service from Florida to Las Vegas, Los Angeles, Chicago, Detroit, Dallas, Atlanta and five eastern seaboard cities are still the backbone of its network. But the small airline began a serious international push two years ago when it kicked off service to Santo Domingo in the Dominican Republic, Nassau in the Bahamas and Cancn, Mexico.

Spirit also flies to San Juan, Puerto Rico, and St. Thomas in the U.S. Virgin Islands. Non-stop daily flights from Fort Lauderdale to Jamaica, where it serves Kingston and Montego Bay, were added in November 2005. This February, the airline will begin flying to the Turks and Caicos islands.

And it’s not stopping there. Spirit makes no secret of its interest in Central America and, one day down the line, even Peru. The question is whether the airline has the know-how to make a name for itself in a region that is seeing its own proliferation of low-cost carriers, including some linked to the most profitable airlines in the Americas. Aviation industry analyst Robert Booth thinks the carrier has a good chance at success.

“The market between South Florida and the Caribbean and Central America is huge,” says Booth, the president of Aviation Management Services in Miami. “Spirit does have its northeast [U.S.] connections so I don’t see its strategy as a weakness as long as the company plays the game right. They’ll need point-to-point service with new generation Airbuses, with high aircraft utilization and with dedicated people.”

Battling on multiple fronts

In the company’s modest headquarters in Miramar, high-energy Baldanza talks optimistically about Spirit’s strategy for international expansion. For starters, it has no plans to compete head-to-head with Miami’s air traffic.

“A lot of the Caribbean and Latin America used to be served only from Miami. Fort Lauderdale is now seen as an alternative, but that’s because of how Fort Lauderdale has changed and grown,” Baldanza explains. “Take Jamaica. There are a lot of Jamaicans that live in Broward County. Why should they have to schlep to Miami for a flight?”

Spirit’s ability to grab a slice of the Jamaican market comes at the same time the island’s main carrier, Air Jamaica, has been reorganizing. In October 2005, Air Jamaica named a new CEO in an effort to stem the company’s losses.

By the same token, Baldanza says there will be destinations, particularly for business travelers, that will always be best served from Miami. For now, Spirit seeks only to fill in the gaps.

That said, shortcomings at Fort Lauderdale International Airport are among the airline’s immediate challenges. The airport only has one runway, although it has sought authorization from the Federal Aviation Administration to add another. There are few international gates. More immigration and Customs agents are needed if additional foreign flights are added. “There is limited fixed capacity at the airport,” Baldanza acknowledges. “It would be difficult for us to move 16 flights at the same time, for example.”

But Spirit says it is working closely with the airport and predicts the growth for both will come in tandem.

The airport apart, expanding service to Latin America carries complexities. Airport taxes and fees in that region are among the world’s highest and a constant source of complaint by other carriers. Red tape is a given. And in some countries, local carriers are given preference over foreign ones when it comes to access to gates and airport facilities.

Like other low-cost carriers, Spirit saves costs by having passengers book tickets online, rather than over the phone or with travel agents. But Latin Americans tend to use the Internet less than U.S. travelers, so when it comes to budget travelers in and out of the region, Spirit has already modified its procedures allowing more offline booking through travel agents.

Some Latin American and Caribbean countries also do not have so-called Open Skies, the unrestrictive aviation landscape that allows foreign carriers to easily offer service.

Instead, certain countries have onerous rules about foreign airline ownership and routes. Those policies are designed to protect local airlines.

The Spirit management team has focused on destinations that are the easiest. “We’re always looking at the next, best, opportunities. And markets that are closer often tend to look better,” Baldanza says. But he adds: “We’d love to serve Colombia, Peru and Venezuela, but some of those have regulatory restrictions.”

Meanwhile, on the marketing side, Spirit will have to boost its brand recognition among travelers destined for Latin America. And it may find itself competing with the blast of new low-cost carriers or LCCs, as they are known in the aviation world that have suddenly appeared within the region. Chile has a low-cost airline and Peru has seen several surface. But the 30-million-passenger market of Mexico which Spirit already serves on a limited basis has proved the most fertile grounds for LCC start-ups.

The growing roster of Mexico’s budget airlines includes Vuelva and Click. Mexico billionaire Carlos Slim is one of the principal investors in Vuelva, which just placed an order for 16 Airbus jets. The owners of Brazil’s 5-year-old and hugely successful LCC, Gol, have announced their investment in a new low-cost carrier in Mexico. That as-yet-unnamed airline is expected to begin service in mid-2006.

Baldanza seems unafraid of the competition and says Spirit will benefit from the LCC hype hitting the region. Aviation analyst Booth says the Latin America airlines offer no real challenge to the Fort Lauderdale carrier because most of the new airlines are interested in serving only their domestic markets. Few talk about crossing borders. And those that do are not yet talking about the U.S. border.

“None of the new LCC start-ups are thinking about the United States as a market,” Booth explains. “Gol, the leader in Latin America, is concentrating on domestic and regional destinations Argentina, Uruguay, Paraguay, Bolivia and other nearby countries.” He added that as Spirit makes inroads in Latin America, it can avoid the problem of competition by forming strategic alliances with the region’s most successful LCCs.

Closer to home

To see profits in Latin America and the Caribbean, Spirit will have to make sure it stays profitable at home. Among low-cost carriers, the secret is to keep costs down. World airlines were expected to end 2005 with $6 billion in losses lower than the earlier projected $7.4 billion, thanks to good performance by low-cost carriers, according to the International Air Transport Association. But IATA executives say a net loss in 2005 marks the fifth year in a row of red ink, led by losses by U.S. carriers that are saddled with huge debts.

Although JetBlue Airways and Southwest Airlines have fared well in the U.S. market, other budget carriers have not.The airline was born in 1992 as part of the evolution of Charter One, a Detroit-based charter operator that spent a decade flying to the casino destinations of Atlantic City, Las Vegas and the Bahamas before it began scheduled service to Atlantic City in 1990.

In mid-December, Las Vegas-based Allegiant Air expanded its service to Orlando Sanford International Airport, 18 miles outside Orlando. The carrier is taking over routes abandoned by low-cost carrier Southeast Airways, which stopped flying a year ago, and TransMeridian, which replaced Southeast but then found itself permanently grounded in September 2005.

Even Song, the low-cost spin-off launched by Delta Airlines in 2003, will shut down in May 2006. Delta, which filed for Chapter 11 bankruptcy protection in September 2005, has refused to say whether its offspring ever made money. Song offered coast-to-coast fares as low as $99 each way.

And it’s not just existing budget carriers that Spirit must watch. New low-cost airlines are springing up. Virgin America, the carrier being started by British billionaire Richard Branson, lined up more than $177 million in start-up capital in December and applied for an operating license in the United States. The airline plans to set up offices in San Francisco.

That said, Spirit’s longevity it’s been in the air for 15 years proves the worth of its strategy, which has been to start small, then slowly expand.

Spirit embodies no-frills flying. Economy-class passengers are served a soft drink and small bag of pretzels during the flight. Unlike JetBlue, there are no in-flight phones, movies or other entertainment. Planes taxi on one engine to save fuel and pilots fly at altitudes designed to burn the least jet fuel. Spirit has also moved up its timetable for converting to an all-Airbus fleet, which will save it money on maintenance, parts and pilot training as well as reduce fuel bills by 30 percent.

“They are on the right game plan,” says analyst Booth. “By the end of 2006, they will have a unique fleet of A320-family aircraft, less than a year old, excellent fuel efficiency and they are hedging their fuel costs.

“I believe they are on track. And I like what I see in the airline’s management and culture,” he adds.

That management has shifted in the past two years to include more executives with experience in Latin America. CEO Schorr, a former biochemist, joined the company in 1997 as its chief information officer and took the helm three years later. He had no background in aviation or Latin America, but he knew that the right management team was crucial. That team now includes former executives from US Airways, American Eagle Airlines, Continental Airlines and Northwest Airlines.

Baldanza was senior vice president of marketing and planning at US Airways and, prior to that, chief operating officer at profitable Central American airline Grupo Taca. He’s also worked for Continental and Northwest. “We know how the region works. We know you can’t fly to many of these markets and just assume that it’s like flying to Columbus, Ohio,” Baldanza says. “We’ve got a good and experienced management team.”

And beyond Latin America and the Caribbean? Spirit may cast a glance northward to Canada. Baldanza says it would be a natural destination from its Detroit hub.

“We have a well-defined business model,” Baldanza says. “We’re not staring with a vision. We’re halfway through one.”

Upgrading the equipment

In real estate, it’s all about location. In aviation, it’s all about equipment.

In March 2005, Spirit Airlines began service on Airbus A319 aircraft on the route between Detroit and Fort Myers. Before the year ended, the airline had eight additional A319s and two A321s, some leased and some owned, making Airbus the supplier of half the carrier’s fleet.

Through 2006, the company will continue retiring old McDonnell-Douglas 80s, until it becomes an all-Airbus fleet with 36 jets by the end of the year six months ahead of schedule

“We’re privately held and I think that’s one of the reasons we can be so aggressive,” says Spirit President Ben Baldanza. “We have a very supportive ownership.”

When Spirit CEO Jacob Schorr joined the airline in 1997, he invested $2.25 million to take a 21 percent stake in the aviation company. Within three years he had upped the ante to 51 percent and later reportedly held as much as a 75 percent share. In March 2004, Oaktree Capital Management, a private hedge fund based in Los Angeles, became a majority owner, pumping in $125 million to help the carrier to buy a fleet of fuel-efficient Airbus planes.

Aviation industry watchers say the jets are suited for service outside the United States, are more fuel-efficient and have the range needed to fly into South America.