Understanding how Spirit Airlines works

Spirit Airlines fascinates me. I’ve never flown them, but despite all the horror stories and “never-again” declarations I’ve heard from friends and anonymous Internet voices alike, I’ve always wanted to give Spirit a try.

I find Spirit’s stated philosophy of offering rock-bottom prices for a “no-frills” flight experience deeply intriguing. When Spirit CEO Ben Baldanza argues that nothing in the airline world is truly free, he has a point.

For example, a major U.S. budget airline might claim that not one, but two checked bags fly free™! But in reality, transporting all those heavy suitcases, golf clubs, kayaks, and guitars becomes extremely expensive.

It’s easy to drop off our bags and see them magically appear on a carousel thousands of miles away. But on the airline’s side, you have to factor in costs like fuel burn, all the labor associated with making sure your baggage gets where it needs to go – and all the insurance fees for when they don’t. Even the little things like the sticky tags that get wrapped around your bag’s handle, and the ink to print your final destination on these paper strips, cost something. And when you’re transporting millions of bags a day, those costs add up quickly.

So while an airline might claim your bags fly free, they’ve already built in the enormous cost of transporting checked bags into the price of your ticket – into everyone’s ticket.

I rarely check bags, so I don’t necessarily like the idea of being forced to subsidize a service I don’t really use. So if you proposed lowering the cost of every round-trip itinerary by $20 – in exchange for charging $30 per bag when I actually needed to check something – I’d jump for the cheaper tickets any day.

That’s why I found Spirit’s value proposition so attractive. They claim to strip your fare to the bare minimum (i.e. getting you to your final destination in one piece) and charge extra for everything else. That way, you presumably only pay for “what you use, not what you don’t.”

Spirit Base Fare and Options

Sounds great, right? If I ever found super cheap Spirit fares, with ready access to an airport lounge where I could sufficiently booze myself numb for what would in all likelihood be a horrific flight, I was ready to give Spirit a try.

But as I looked into Spirit Airlines a bit more, something didn’t sit quite right. I’d heard reports of Spirit being one of the most profitable airlines in the world a few months ago, but I figured this had something to do with high-volumes and low-margins. To my untrained and not-a-financial-analyst mind, this made sense. Sell fares for cheap, and make less on each one. But also sell more tickets – and take more money to the bank at the end of the day.

Despite claiming to offer “ultra-low fares,” Spirit Airlines boasts the highest profit margins in the industry.

Yet when I actually read these reports, I was surprised to find that Spirit Airlines actually boasts the highest profit margin of any airline in the country.

Airline Operating Margin, Y2014

Spirit Alaska JetBlue Southwest American V.America United Delta
18.4 17.9 13.0 12.0 10.0 6.5 6.1 4.8

Source: Google Finance

I found this puzzling. If Spirit Airlines was really charging passengers for only what they used, I couldn’t see how they managed to reach such record-breaking margins. It’s one thing to cram more passengers on a plane to increase revenue, but if we were to follow Spirit’s mantra that “everything costs something,” the costs of transporting each passenger should balance things out at least somewhat when actually calculating profits.

Maybe Spirit’s invented a super secret cost-saving technology like self-driving planes or jet engines that run on french fry grease from nearby concourse restaurants.

Or in a more likely scenario, Spirit more than makes up for its cheap fares by making more money (as a percentage of total revenue) off ancillary fees than any airline in the world

Spirit doesn’t try to hide that they charge for everything from advance seat selection to printing your boarding pass with a live person at the airport, so it’s not a huge surprise they make the most off these “ancillary” services.

You can view Spirit’s full schedule of fees here, and if you’re flying them anytime soon, you definitely should. You could be charged up to $100 per carry-on bag if you don’t pay until you reach the gate.

It only makes sense to suffer on Spirit if the sum of your Base Fare and ancillary fees is significantly less than what you would’ve paid elsewhere.

With all this in mind, it inevitably occurred to me that flying Spirit only makes sense if the sum of your Base Fare and all of these ancillary fees is significantly less than what you would’ve paid on another airline for the same services. You might also account for the fact that Spirit’s seats don’t recline and can barely fit your legs, though it’s hard to put a dollar amount on the pain and suffering you’ll endure in such cramped quarters.

And for all this to work out, Spirit’s Base Fare really needs to be that much cheaper than everyone else’s.

Are they? Let’s find out.

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