Running an airline is hard. The airline industry has a reputation for being one of the most cut throat businesses out there. It’s so tough to do well in the sector that Richard Branson once said the easiest way to become a millionaire was to start off as a billionaire and then launch a new airline.
Perhaps Spirit Airlines can empathize with that statement right now. Spirit launched as an ultra-low cost airline based in Miramar, Florida. In 1964 the company was initially called Clipper Trucking Co. It launched an airline in 1980, quickly turning itself into a provider of cheap transport to entertainment destinations such as Las Vegas, Atlantic City and even the Bahamas. The name was changed to Spirit in 1992 and the airline has had its fair share of trouble ever since.
Let’s start by mentioning the fact that Spirit Airline is the only Airline to have a two-star rating on Skytrax, which means its level of service is below the industry’s standard.
In 2006, the airline hired Ben Baldanza as the CEO of the company. He was hired to help with a transition from low cost to ultra-low cost. After a decade of running the company, Ben Baldanza shocked investors by announcing his retirement in January 2016.
This transition comes at a crucial time for the company, which makes it even more of a shock for investors. Under Baldanza, the airline added many planes and routes. The fleet of airplanes under the airline’s brand was doubled, while the market capitalization hit $2.8 billion.
However, the stock surge ended around the start of 2015. The market capitalization of the company is now down by 50%. Declining revenue per available seat mile, a common metric for the industry, has been down for the past year. The main reason for this is the rise of competition in the industry. American Airlines in particular has cut ticket pricing drastically, pushing Spirit to do the same.
Investors now fear the decline in RASM will continue further with no end in sight. They are also worried about the rise of customer complaints that have followed the airline’s transition to ultra-low cost over the past decade.
The company has selected Robert Fornaro as the new CEO. Robert Fornaro is sixty-three years old, which makes him a whole decade older than the outgoing CEO Baldanza. This goes to show that the CEO is not retiring to allow a younger leader to take the company forward.
It helps to study Fornaro’s history to make better sense of the sudden change in leadership at Spirit. Fornaro was the CEO of AirTran Airways for many years before this and over the course of his tenure there he helped set the company up for an acquisition by Southwest Airline. Ever since completing that sale, he has been a board member at Spirit and has intimate knowledge of the business.
His experience with mergers in the airline industry has led many to believe he may have been appointed to do the same for Spirit. There were no hints of Baldanza leaving the company until he actually announced it. The stock returns over the past year have been abysmal, but the analysts on the street still expect EPS to grow by over 25% to 30%. Many say that the move to name a new CEO was in order to arrange a merger to Frontier Airlines.
Both Frontier Airlines and Spirit Airlines have a very similar business model. The companies would be a natural fit and the former marketing leader at Spirit Airlines, Barry Biffle, is now the president of Frontier Airlines. Barry is only 43 years old and has developed Spirit’s marketing strategy for the past nine years. He is seen as a more natural successor to the outgoing CEO.
The airline industry, as we’ve mentioned before, is extremely difficult to navigate. Passenger numbers are very cyclical and commonly run at 2X the GDP growth rate. Keeping pricing and capacity at stable levels is often an issue for most airlines and many have struggled to meet supply with demand at a sweet spot. The rising competition means the pricing scenario is unlikely to improve for the airline any time soon.
But there are positives. The merger with Frontier may or may not go through, but the stock has fallen from a high of $83.45 to a low of $32.74 per share. That means the stock trades at a mere 10x of EPS for this year. Perhaps investors are catching onto this as the company rose close to 6% when the announcement for a new CEO was made.