Senior Project Final

Spirit Airlines Business Analysis 1


Table of Contents

Description of the Company........................................................................................................................4

Executive Summary of the company...........................................................................................................4

Background Summary and Chain of Command..........................................................................................5

Strategy of the Company.............................................................................................................................6

Cost Leadership Strategy.........................................................................................................................6

Differentiation Strategy...........................................................................................................................8

Focus Strategy.........................................................................................................................................9

Competitive Analysis/Intelligence.............................................................................................................11

SWOT Analysis.....................................................................................................................................11

Strengths............................................................................................................................................11

Weakness...........................................................................................................................................12

Opportunities.....................................................................................................................................12

Threats...............................................................................................................................................13

Processes...................................................................................................................................................14

Employee/Management.............................................................................................................................15

Financials..................................................................................................................................................16

Conclusions...............................................................................................................................................27

Conclusion A.........................................................................................................................................27

Conclusion B.........................................................................................................................................27

Conclusion C.........................................................................................................................................28

Conclusion D.........................................................................................................................................29

References.................................................................................................................................................31


Appendices................................................................................................................................................34

Appendix 1............................................................................................................................................34

Appendix 2............................................................................................................................................35

Appendix 3............................................................................................................................................36

Appendix 4............................................................................................................................................37

Appendix 5............................................................................................................................................38

Appendix 6............................................................................................................................................39

Appendix 7............................................................................................................................................40


Description of the Company

Spirit Airlines is an airline that was launched in Macomb County, Michigan in 1980.

During the early years of the airlines’ existence, they originally served under the name of Charter

One which offered airfare packages to a number of cities within the United States and Caribbean

Islands. However, the airline quickly increased its flight destinations with service along the

eastern coast of the United States with cities such as Boston and Providence, R.I. Their

expansion continued with the insertion of jets into the airlines’ fleet. Not long after jets were

introduced, Charter One became known as Spirit Airlines. With Spirit Airlines’ expansion,

introduction of jets and quick rise to success, the airline decided to relocate its headquarters to

Miramar, Florida. The uniqueness of Spirit Airlines in relation to other companies in the industry

began with their offering of ultra-low fares. Their ultra-low fares “empowers customers to save

money on air travel by offering ultra-low base fares with a range of optional services for a fee,

allowing customers the freedom to choose only the extras they value” (Spirit Airlines, 2014). As

described on the Spirit.com website, the company’s decision to offer lower airfare as compared

to competitors, gives customers the opportunity to save money (Spirit Airlines, 2011). Their low

fare advertising plan has skyrocketed Spirit Airlines’ ability to appeal to more customers and

ultimately has increased their revenue and profitability.

Executive Summary of the company

Spirit Airlines’ customers are able to reap the benefits of several products and services

offered by the airline through standard and also optional company features. These products and

services allow customers to not only save money on airfare but to also have the opportunity to

select the services available depending on what options are of great magnitude to the customer.


(Spirit Airlines, 2014)

Background Summary and Chain of Command

Spirit Airlines is an incorporation organization. The company’s legal aspect is separate in

regards to its owners and their obligation to the company. This means that Spirit has ownership

arranged into such a manner that shareholders have no financial responsibilities to the company.

Being incorporated allows for the shareholders’ risks being restricted to the value of their stock.

What being incorporated means to consumers is incorporated organizations have credibility and

obligations to the government, state and federal laws. As a corporation, Spirit Airlines is also

mandated to file annual reports which are made available to the public and notates where their

transactions occur, and their financial statements indicating their financial status.

Spirit Airlines’ executive compensation is comprised of the financial salary and other

non-financial awards that the company sets forth in all executive compensation packages.

Executive compensation packages may typically be a combination of salary, bonuses, shares, and

Spirit Standard Product Features Ultra low faresEasy online booking and check-inReliable, on-time serviceClean, fuel efficient airplanesFriendly staffDeluxe leather seatingOne personal item that fits under the seat

Spirit Optional Services & ProductsWider seats in 2 by 2 seating configuration with extra legroomCarry-on and checked baggageAssigned seatsTravel insuranceOnboard beverages and snacksHotels, cars, vacation packages and cruises


company stock. While considering executive compensations, Spirit Airlines must take into

consideration government regulations, state and federal tax laws and the desires of the

organization as it pertains to the performance of executives. Company chain of command and

compensation table see Appendix 1.

Strategy of the Company

Cost Leadership Strategy

According to Spirit Airline’s philosophy (2014), they follow a credo of “empowering

customers to save money on air travel by offering low base fares with a range of optional

services for a fee.” Included with their beliefs are their core principles. Their core principles

consist of treating all customers the same, one class cabins, one fleet type and no waiver or

favors. Their core principles allow for the company to not only save money, but to have a

standard that is overseen throughout the company that requires little to no other involvement at

any point. It also keeps the basis of Spirit Airline is perspective as being a business to continue to

be profitable.

Of their philosophies and core principles, it does not require them to state what other

services are available or the cost of those options. The primary focus is initiated by what is

presented to consumers at the time of purchase; cheap fares. The optional choices are available to

consumers while at the service counter. A company that has the ability to maintain a stable

routine as far as their low base fares has the capacity to have a niche over their competition in

being able to service more customers. The purpose of the optional services to consumers is to

present a feature or product that can be paid for as a choice to what they value.


To increase their position in their cost over potential competition, Spirit Airlines is able

to tag prices on services beyond the expected of air travel. This allows the airline company to

increase their revenue to higher levels. A few of the optional services that are available for

customers, at a cost, include big front seat, selecting your own seat on a flight, travel insurance,

onboard food and drink service and a package trip; which is a combination of hotel, flight and

rental car. A few of the options are vague from the consumer standards of expectations due to

other airlines not charging for most of these services. For example, part of Spirit Airlines

available services includes carry-on luggage at a price, other airlines as for it to be at a minimum

weight to be free. Spirit Airlines will charge for the bag not matter what. This would be a cost

similar to what their low base fare is offering when Spirit sets this procedure into their future

strategy plan.

Spirit Airlines has a history for boasting their name brand to continue niche in the market

for being aggressive against their competitors in the airline business. The concentration of the

strategy is the attention on what is going on in the world. This tactic has not only put emphasis

on the company for being recognized, but also has emphasis of being heartless to those it may

affect. In the efforts of being cost effective, it a good tactic, but it avoids the thought process of

being creative and genuine with their ideas. It displays no intentions of making their own brand

name known throughout the market as a symbol for being in the airline industry. Having a logo

is the first concept, but the logo being able to be identified as the one to go with is not trending

for Spirit.

Spirit Airlines is continuing another growth year of being successful without carrying

over debt. This has been their tendency for the last five years. This is possible through their

aggressive core values to sustain and their ability to charge low fare to the destinations they fly


to. For a company to have achievements of this caliber there was not much information available

in identifying if employees were rewarded for doing their part for the organization. Some

companies would award employees a percentage of their yearly income as computation for the

work while the senior management receives a higher amount. No information was able to be

obtained to prove this factor.

Differentiation Strategy

The way that Spirit Airlines continues to be successful is what they present to the airline

industry. Their ability to offer low rates is their method of attracting new customers to their

business and possibly maintaining those that are repeat customers. Like many other airline

companies, they do have their own types of frequently flyer programs that that can be beneficial

as well. The $9 Fare Club allows customers to receive discounts on the handling of luggage and

discounts on vacation packages that are booked by Spirit Airlines. They also offer a credit card

through MasterCard that earns $1.00 for every two miles when used for booking. The frequent

flyer programs that are offered from Spirit do not contrast against most other airlines in the

industry, but they have their uniqueness in their low air fare cost.

Part of Spirit Airline’s ability to offer low fares come from their approach in selecting the

aircrafts that are part of their fleet. Currently, Spirit Airlines has 56 aircrafts in their line with

five types (Planespotters, 2014). Of their competitors, such as Delta, JetBlue Airways and

Southwest Airlines, they have over one hundred aircrafts in their fleets. This area of business

operation is of the importance not only to Spirit, but to any airline company. Having only a five

types of aircrafts allows for staff training to be easier and the maintenance on them to be more

universal against similar models. Spirit Airlines is considered to be one of the few companies

that do not have many different types of aircrafts. The unfortunate to that factor is that the


aircraft’s cabin is considerable small and narrow. The aircrafts are may be referred to as being

undersized, but the general condition of them is above the importance. Based on reviews and

views of the aircrafts from Skytrax (2014), the areas for seats and storage is limited, yet is it

considerably fair within the market of similar aircrafts. The condition of the planes in the cabin

area could use more tender loving care from staff, but most conditions arise from misuse from

pervious guest that only temporary fixes were put into place.

Focus Strategy

Spirit Airlines focuses on empowering customers to save money at a low rate. The

attention is towards the customer requesting for a service that may come at a cost later during the

process of a transaction. On the home web page, the organization discloses a clear differentiation

of what is standard and what is optional (Spirit Airlines, 2014). By maintaining clarity that low

fares is what most people expect from an airline company, Spirit Airlines is able to maintain its

position as one of the most inexpensive airlines in the industry.

Another strategy that the organization has a focus on that adheres to their core principles

is a standardization of treatment towards customers. As important costs are to a customer, there

is a certain level of expectation that is expected as Appendix 2 displays. Even though the airline

is not well known for the quality of service that is presented, there should be a degree of comfort

that is displayed that every employee should deliver. From the many different available

resources, including Skytrax; airlinequality.com, there is no comfort being presented from the

staff from the airport to the cabin staff. Due to the inconveniencing of Spirit Airlines staff,

Skytrax downgraded their three star rating to a two star rating (Skytrax, 2013). It could be from

any number of reasons, but the idea is to correct it from both directions; management to

employees as well as employees towards management.


Market Characteristics and Dynamic

Spirit Airlines demonstrates a market strategy that is popular through media responds to

obtain the attention in their market area. This is achieved by focusing on what is going on in the

world to draw attention to their company in order to serve them. Some of their tactics are cruel

and deem inappropriate to some, but it gains attention to other and puts Spirit in their mind for

possible choice in the next time they may need to book a flight. In many different articles from

2011 to 2013 in the Huffington Post (2013), there have been many appearances of Spirit Airlines

and their marketing campaigns displaying the use of political figures and manipulating their

image to present a joke or inhuman jester to fly with their airlines.

Being cost conservative is a core principle that Spirit Airline values. Rather than nickel

and dime each and every possible service queue available, such as assigned seats, food and

drinks, and carry-on luggage, establish a the fees within the ticket price. Most airlines already

have this as part of ticket prices, but Spirit Airlines implies it as an optional service. Certain

additives are expected to have a cost; over weight carry-ons, but being able to offer certain

amenities, such as water or a pillow, are expectations that customers would prefer to be free.

Going forward, Spirit Airlines is has on the schedule many changes. Among them is the

current contract for advertisement. Barkley, an advertisement agency out of Kansas City, won

the bid from two other in November of 2013. They have yet to create any work for them yet, but

according to VP of consumer marketing for Spirit Airlines Bobby Schroeter, it will “promote our

value proposition of ultra-low fares and choice to our customers in a way that is provocative and

gets attention at a low cost" (McMains, 2013). Other plans that are part of their future feature the

growth of the fleet. By 2021, Spirit Airlines anticipates to have 143 aircrafts in their fleet shown


in Appendix 3. This will be a combination of upgraded models and new model developed for the

organization.

Competitive Analysis/Intelligence

Spirit’s core focus is on the operating cost structure, the low priced services. Spirit

Airlines predominately appeals to customers who want to travel for the weekend without paying

for an expensive ticket. The destination locations, such as the Caribbean Islands, South Florida,

and Latin America, have provided the company with multiple opportunities for growth and

expansion by offering affordable rates.

Currently, Spirit Airlines main competitor is American Airlines, which merged with

U.S. Airways late 2013. With airlines consolidating, that can give them an upper hand against

Spirit, which can result in competitive low fares. Included with the weaknesses, Spirit Airlines

has a noticeable market attraction compared to its competitors. They have a small niche, which

only caters to certain age group, putting them in a seasonal airline bracket.

SWOT Analysis

Strengths

Spirit main strength is their low cost structure; this gives them an advantage over their

competitors. They offer some of the lowest fares, which help protect their market position. Their

“operating costs per available seat mile (CASM) of 9.90 cents in 2013” (Financial Information,

2014) which is importantly lower than their competitors. Spirit Airlines achieves their low

operating cost through their highly productive workforce; reduce sales, effective flight

scheduling and their committed focus towards driving lower cost. Another distinctive strength is

their revenue generation. Spirit is focused on using unbundled pricing strategy to increase

revenue by inspiring customers to have the option to select and pay for the services that are most


important to them. Their “unbundled strategy has enabled us to grow average non-ticket revenue

per passenger flight segment from approximately $5 in 2006 to $54 in 2013” (Financial

Information, 2014). Spirit generates these revenues by charging for check and carry-on baggage,

premium seats and advance seat selection, subscription for their $9 fare club and selling their in-

flight products, those are just a few to name.

Weakness

Spirit has several weaknesses, that if they are improved, it contributes to an overall turn

around for the company. Spirit charges customers for carry-on luggage which raises a concern

for customers who are carrying more than two items (see Appendices 6 & 7). These tables give a

comparison between JetBlue and Spirit luggage fees. This will tie into the next weakness which

is the quality of customer service. Spirit does not offer complementary drinks or snacks on their

flight, instead customers are charged for a sip of water.

Opportunities

Spirits opportunities lies in the small domestic niche that they have positioned

themselves. They positioned themselves for growth, catering to niche markets like the Caribbean

and Latin America, which gives them a lot of growth opportunities. Spirits focuses on customers

who are price sensible, which in return maintains stable revenue and profit, even during the

fickle economic period. “In 2009, when premium-fare business traffic dried up due to the

economic recession, our operating revenue per available seat mile, RASM, declined 1.9%,

compared to an average U.S. airline industry decline of over 9%.” (Financial Information, 2014).

Spirit always seems to stand strong in economic crisis, and cater to customers, when other

airlines don’t. Spirit understands the market and ensures that their strategy to maintain their

revenue is well executed.


Threats

Spirit is facing many threats specifically when it comes to the cost of employee benefits,

labor union cost and fuel. If they are not able to keep the cost of those expenditures down they

risk operating as a low cost airline. Another major threat that every Airline can agree on is

terrorist attack. After September 11, 2001, the aftermath has left a huge effect on the airline

industry, such as loss or revenue, flight disruptions, increased security, which is another

expenditure, airport shut downs and flight delays and cancellation. This is a concern Spirit

Airlines anticipate another terrorist attack can greatly affect the cost structure of their company.

Spirit is heavily unionized, and the increased labor cost, strikes and unions disputes and have a

great effect on the business operation and finances, and this is another threat they face. Thirdly,

“the airline business is capital intensive and, as a result, many airline companies are highly

leveraged. All of our aircraft are leased, and in 2013 and 2012 we paid the lessors rent of $166.3

million and $140.8 million, respectively, and maintenance deposits net of reimbursements of

$24.1 million and $31.6 million, respectively” (Financial Information, 2014). Spirit Airlines has

a lot of aircraft related indebtedness, which can have an adverse reaction on the business

operation and finances. It restricts their ability to gain extra financing to support the enlargement

plans and overall reduce the flexibility to be able to adapt to the ever changing environment in

the airline industry.

When it comes to the airline industry, it is a highly competitive market; there are

numerous factors of competition such as; flight schedules, air fares, aircraft type, number of

routes, customer service, safety and reputation, and frequent flyer programs. When it comes to

domestic routes, Spirit’s primary competitors are American Airlines, Delta, and JetBlue Airlines.

Spirit Airlines’ strength compared to that of their competitors is the low cost model that they


offer. There low cost structure can also be a weakness for the company, because of the cost

structure increases; they will not be able to maintain the cost advantage that they currently have

over the above listed competitors, therefore hurting their operation and financial conditions.

When it comes to fuel cost, that is the only cost that spirit and their competitors have in common,

in relation to the cost. Fuel prices have increase over the years, placing a strain on Airline

companies.

Processes

Spirit should consider restructuring the costs towards customers for baggage fees and the

quality of their service. “It’s a leader in à la carte pricing that has swept the industry, charging

extra for almost everything. Ben Baldanza proudly says Spirit was the first airline to charge for a

checked bag and to stop pouring water for free” (Stoller, 2009). The airline is one of the first to

charge customers for bringing a carryon. Angry and unsatisfied customers threaten never to fly

with the airline again, but Baldanza, CEO of Spirit, doesn’t seem to mind. Referring to Spirit as a

Wal-Mart or a McDonalds, he clearly makes a statement that you get what you pay for.

Spirit Airline’s main expenditure is the cost of fuel and maintenance. Fuel cost remains

the single largest operating cost for airlines, including spirits. Fuel cost fluctuates year to year

and based on the airlines strategies, this can have a great effect on their revenue. “Fuel

availability and pricing are also subject to refining capacity, periods of market surplus and

shortage and demand for heating oil, gasoline and other petroleum products, as well as

meteorological, economic and political factors and events occurring throughout the world, which

we can neither control nor accurately predict” (Financial Information, 2014). The airlines cannot

predict the cost of fuel in the future and ensuring they stick with the cost structure and strategy


implemented in their business plan, they will have issues paying for fuel. “Maintenance expense

grew through 2013, 2012 and 2011 mainly as a result of the increasing age (approximately 5.1

years on average at December 31, 2013) and size of our fleet” (Financial Information, 2014). As

these aircrafts depreciates in value and get old, maintenance cost will increase. Regular checks of

the aircraft ensuring passengers safety is a must for all airlines, including Spirit Airline. Keeping

up with the aircrafts maintenance, is a huge expenditure that spirit has to plan accordingly for.

Employee/Management

The workforce consists of approximately 59% of union members that are covered by the

collective bargaining agreement as of December 31, 2013. Collective bargaining is a term used

when a group of employees and employers negotiate wages and other working conditions of

employment. The Railway Labor Act, or the RLA, governs the dealings among the air carriers

and labor unions. With the formation of the act, collective bargaining agreements usually contain

correctable dates, rather than expiration dates. The RLA expects that the carrier will uphold the

existing terms and condition of employment. This allows for a correctable date through an

occurring stage, which involves a prolonged series of bargaining process that is administered by

the (NMB) National Mediation Board.

On June 12, 2010, flight operation was shut down due to a strike which involved the

pilots of Spirit Airlines. This strike continued until the union reached a probationary agreement

for a new contract. It wasn’t until June 17, 2010 before flights started to resume under the Return

to Work Agreement. This strike had an adverse effect on the results of operation in 2010. Spirit

has to continue to meet this agreement with the unionized work groups or face interruptions or

stoppage; any labor dispute can easily interrupt the companies operation and reduce profitability.


Spirit understands that health insurance is very important to its employees. They offer a

very generous medical, dental, vision, life insurance, home, auto and pet insurance compensation

package. For families with children, spirit insurance offers a dependent care flexible spending

account (DCFSA) which basically covers for any child care expenses such as day care or an in

home baby sitter. While there is no direct childcare center offered to employees, they have the

option to participate in this benefit, tax-free.

Financials

Spirit Airlines operating revenue has doubled over the past five years with revenues of

$700,037 million in 2009, $781,265 million in 2010, $1,071,186 billion in 2011, $1,318,388

billion in 2012 and $1,654,385 billion in 2013. Spirit’s passenger ticket revenues were $782,792

million in 2012 and $986,018 million in 2013 resulting in a 26% increase. Spirit Airlines non-

ticket revenues were $535,596 million in 2012 and $668,367 million in 2013 resulting in a

24.8% increase. This means that their total operating revenue increased by 25.5% within 2012

and 2013. This is due to Spirit increasing their fleet from 45 to 54 with 25 new non-stop routes

throughout 2013.

Their operating cost in the past five years have been $588,628 million in 2009, $712,392

million in 2010, $926,804 million in 2011, $1,144,398 billion in 2012 and $1,372,093 billion in

2013. Since 9 extra fleets were added to cover traffic demand, operating costs also increased.

Even though their operating cost seems like a large number, Spirit Airlines carries one of the

lowest operating costs (percent wise) in the United States because they are able to utilize their

aircraft and they are able to accommodate more seating per aircraft in comparison to other

aircraft from other airlines. They also are able to schedule their flights accordingly to minimize

ground times between flights (Financial Statement, 2014).


Overall, their net income has increased by double over the past three years with net

income of $76,448 million, $108,460 million, and $176,918 million in 2011, 2012 and 2013

respectively. This shows that their ultra-low cost structure has been working and is making them

very profitable.

Liquidity

Is Spirit Airlines able to pay its debt by the time they become due? Their competitors?

In terms of liquidity and their competition, Spirit Airlines has the highest liquidity ratio. They

are able to convert their short-term assets (most liquid assets) into cash in a short period of time

in order to continue to fund its operations. In 2013, Spirit carried current assets of $649,075

(million), which easily covers its current liabilities of $335,993 (million). We have to take into

consideration that Spirit Airlines is a much smaller company than its competition, but percent

wise, their current liabilities are much lower than its current assets making it easier for them to

cover their current debts. This means that Spirit can easily pay off its current liabilities with its

current assets because they are able to convert their liquid assets into faster cash.


2013 2012 CURRENT RATIO 1.93 1.98

= Current Assets/Liabilities

1.93 1.04 0.56 0.68 0.79 1.00

Current RatioSeries1

Explanation:

The current ratio is a financial ratio that is used to test a company’s liquidity (Loft,

2014). This means we are looking for how fast we can convert their short-term assets

(cash equivalents, marketable securities, receivables & inventory) into cash to cover and

pay for our short-term debt (notes payable, current debt, payables, accrued expenses &

taxes) (Loft, 2014).

Spirit carries a high current ratio of 1.93 which is the highest from both its

competitors and the industry. This shows that they are doing a much better job in

collecting receivables by turning them into cash to pay for their short-term liabilities.


2013 2012

QUICK RATIO 1.65 1.59= Cash & Equivalents + Short-term Investments + Accts. Receivable

Current LiabilitiesExplanation:

The quick ratio measures the most liquid current assets that we can use to convert

to faster cash (cash & cash equivalents, short-term investments & accounts receivable)

(Loft, 2014). This ratio excludes inventory & other current assets because those take

longer to convert into cash. If the current ratio is considerably higher than the quick ratio,

this means that the current assets are highly dependent on inventory & prepaid expenses

where these assets take longer to convert into faster cash. Spirit’s current ratio is 1.93 and

their quick ratio is 1.65. This states that Spirit is not highly dependent on other current

assets.

2013 2012

CASH RATIO 1.58 1.51Cash + Cash & Equivalents + Invested Funds / Current Liabilities

Explanation:

The cash ratio further refines the current and quick ratio by measuring the amount

of cash, cash equivalents/invested funds that are in the current assets to cover current

liabilities (Loft, 2013). Spirit has a 1.58 cash ratio which is considerably higher by

double from both its competitors and industry average.


2013 2012 WORKING CAPITAL $313,082 (millions) $270,463 (millions)

Working Capital = Current Assets – Current Liabilities

Explanation:

The working capital is the liquidity resources left over to continue to financially operate

the company. So after the current debt has been paid off, whatever amount that is left

over is the amount used to continue to fund operations. With current assets of $649,075

million and $$335,993 current liabilities, it brings us a working capital of $313,082.

2013 2012 OPERATING CASH FLOW $195.376 (millions) $113,631 (millions)

Explanation:

This shows any operating cash flow the company makes from continuing operations.

With a net income of $176,918 million in 2013 and net income adjustments of $18,458 of

net cash provided by operations, we get a positive cash flow from continuing operations

of $195,376 million.

Profitability Ratio

Is Spirit Airlines profitable comparing to its competitors?

Spirit Airlines gross profit margin is 47.7% which is just below the industry average of 50.66%.

The operating profit margin for Spirit is 17.1% which is much higher than its competitors such as

American Airlines with an operating profit margin of 5.24%. This shows that Spirit comparing

to its competition carries less expenses that results on having a greater operating profit margin.

Its net profit margin is greater than most of its competitors by double, but Delta hits first place in


carrying a net profit margin of 27.9%. Spirit still does a pretty good job on converting their

revenue into profit. Overall, Spirit Airlines is becoming very profitable and has planned to

double their fleet by financing. They currently have 54 aircrafts and plan to carry 143 of them

by 2021.

2013 2012 GROSS PROFIT MARGIN 47.7% 44.4%

Gross Profit / Net Sales (Revenue)

47.70% 58.80% 49.20% 44.50% 53.10% 50.66%

Gross Profit MarginSeries1

Explanation:

The gross profit reveals the company’s financial health by showing the money left over

from revenues after accounting for the costs of goods sold. (Investopedia, 2014). This

shows how they can use this money to pay any other expenses or build for the future. This

gives them opportunity to calculate how they can finance more fleet in order to expand

their company. Spirit is just below the average gross profit margin line but so is their

competition.


2013 2012 OPERATING PROFIT MARGIN 17.1% 13.2%

Operating Profit / Net Sales (Revenue)

17.06%5.24% 7.90% 9.00% 7.20% 9.28%

Operating Profit MarginSeries1

Explanation:

The operating profit shows how much money a company is earning for each dollar of sales

(before interest & taxes). Clearly Spirit is earning double the money for each dollar of

sales from its competition with $0.17 cents on the dollar. This gives them an idea of on

how to strategize their pricing in order to increase operation and become more profitable.


2013 2012 NET PROFIT MARGIN 10.7% 8.2%

Net Income / Net Sales (Revenue)

Explanation:

The net profit margin shows how effective a company converts its revenue into profit.

Spirit has the second highest net profit margin of 10.7% where most of its competition is

fewer than 5%.

2013 2012 RETURN ON ASSETS 16.84% 13.02%

Net Income / Average Total Assets

Explanation:

The return on assets shows how good the company is using its assets to create profit.

Investors like to see ROA greater than 5% in which Spirit Airlines have surpassed that by

a 16.84% ROA.

2013 2012 RETURN ON EQUITY 26.18% 20.67%

Net Income / Average Shareholder’s Equity

Explanation:

The return on equity ratio calculates how much the shareholders have made for investing

in the company. This represents how good the managers in the company are operating

the equity to give a better result to its investors. Spirit increased its ROE with 26.18%

from 20.67% in 2013 and 2012 respectively.


Financial Leverage Ratio

Is the company borrowing while creating profit?

Spirit debt and debt-to-equity ratios are much lower than its competition which shows that the

company does not depend much on its creditors to keep the company running. They also carry

the highest cash flow to debt ratio in the industry which represents that the company is capable

of covering their debt with its operational cash flow.

2013 2012 DEBT RATIO 34.86% 36.67

Total Liabilities/ Total Assets

Explanation:

The debt ratio compares both the total liabilities by its total assets to figure out how much

leverage a company is using. Comparing from its competition, Spirit carries a 34.86%

debt ratio which steadily decreased from the previous year. It also carries a half the debt

ratio from its competitors. This shows their competitors have as much liabilities as their

assets.

2013 2012

DEBT-TO-EQUITY 53.52% 57.91%

Total Liabilities / Shareholder’s Equity

Explanation:

The debt to equity ratio shows how much a company is financed by credit, so the higher

the ratio the higher the risk for its investors. Their debt to equity ratio has decreased

which shows a good sign that their equity has increased. Comparing to its competitors,


Spirit airline carries a far lower ratio meaning that the company does not depend much on

its creditors to keep the company running. Spirit has a 53.52% debt-to-equity ratio

comparing to its competitors of over 150 percent.

2013 2012 CASH FLOW TO DEBT RATIO 47.46% 33.68%

Operating Cash Flow / Total Liabilities

Explanation:

The cash flow to debt ratio shows how the company is capable of covering their total debt

with the yearly cash flow they are making from their operations. Comparing to its

competition, Spirit has a 47.46% chance to be able to pay its debt from its yearly cash

flow operations. This is double the difference from its competition.


Efficiency Ratio

Is Spirit effectively using its assets and liabilities?

Spirit carries a very high receivable turnover ratio by double from its competitors. This shows

that they know who to extend their credit plus know how to collect their client’s debts in a timely

fashion.

2013 2012

RECEIVABLE TURNOVER RATIO 44.22 36.88

Net Sales / Average Accounts Receivable (net)

Explanation:

The receivable turnover ratio shows how a company gives credit or collects debts from its

clients. Having a high ratio means that they are giving out credit plus getting back money

from their clients efficiently.


Conclusions

Conclusion A

As a nation, we must all make a conscious effort to show that we on the home front still

appreciate the bravery of each and everyone in the Armed Forces. As an organization, Spirit

Airlines has failed to do so. It does not take much to show a little support to the members of the

Armed Forces. Competitors such as U.S .Airways offers bag fees to be waived for Active U.S.

military. If military members are on personal travel and have military ID, U.S. Airways will

waive 1st and 2nd checked bag fees. Also, according to a source, “Active U.S. military with ID

and dependents traveling on orders (1st through 4th bags up to 100 lbs. /45 kg each free of

charge)” (U.S. Airways. 2014). The source explains U.S. Airways’ efforts to be considered as a

company that supports the Armed Forces. Showing support may go a long way. Therefore, we

recommend you become an organization that is a part of the Support Our Troops Movement.

Conclusion B

The current flight plan for the organization focuses on seven major cities to

accommodate to; Fort Lauderdale, Atlantic City, Dallas/Fort Worth, Detroit, O’Hare, McCarran,

and Myrtle Beach , along with 50 other locations. As successful as the current schedule is, see

(Appendix 4), increasing the locations that are popular to the U.S. would present Spirit Airlines

to a larger demographic that would travel at a lower fare than others.

Being able to focus at least to airports within each region of the U.S. would make the

expansion plan of other major cities worthwhile because they are familiar airports and mostly

likely international just as six of the focus locations that are part of their schedule is at this time.

Spirit Airlines operates from two of the busiest airports in the U.S.; McCarran, ranked eighth,


and Dallas/Fort Worth, ranked fourth. To bring attention to at least two other on the top ten, such

as Phoenix, San Francisco or Hartsfield-Jackson, which is number one, would be beneficial for

business exposure. Southwest Airlines currently focuses operation from five of the busiest

airports. To compete with them directly from the same airport would draw more attention to

Spirit because of the lower fares.

As with any plans for increasing the destinations, there is the process of cost of fuel to

afford the expansion. Spirit Airlines has one of the best rated systems in place for controlling the

cost of fuel, as displayed in (Appendix 5). Competitor Southwest Airlines does make the list

above the average, but others such as JetBlue and Delta are below the average. It also may

appear with increasing the destinations with put the organization at a level of being over-budget,

but the idea of moving forward has already been introduced with the fleet expansion that is

planned for completion by 2021. Part of the moving forward project also illustrates the

destination increase as well, but it is presented more as a season action. As favorable as that

strategy is, continue to be mindful of the fuel cost to ensure the status of being fuel conscious of

spending.

Conclusion C

Spirit Airline's strategy when it comes to fees is causing a nightmare to certain customer.

Most customers rather pay a bundled price with another airline, rather than going through the

trials and tribulations with Spirit. Although the fees strategy is working for spirit, that’s

something they need to consider reconstructing, if they want to keep their ratings up. Passengers

have to pay a carry on fee of $100 both ways, if check in at the gate. Spirit charges a fee for just

about everything they can think of. And I do recommend changing the structure for pricing, so it

accommodates passengers better. Compared to their competitor JetBlue, when it comes to


baggage fee, spirit charges $50 more than JetBlue. They offer free carry-on, free checked bag at

the gate and first checked bag free, while spirits continues to rip customers off. If Spirit makes

changes to just some of the areas pertaining to charging fees, they can increase their rating, avoid

customer complaints, gain a better reputation. After all a company builds and maintains their

brand by the reputation it holds.

Conclusion D

Spirit Airlines not only carries a bad reputation on customer service, they also carry a bad

reputation on advertising. For example, they had an ad that stated, “The wiener sale with fares

too HARD to resist” (Punny Airline Ad Offers Fares Too Hard To Resist, 2011). These ads are

not only provocative, they are also tacky. We know that Spirit is trying to get clientele by

creating attention, but this kind of attention is not the right direction.

For example, McDonalds does not sell cheeseburgers, they sell Big Macs. Coca-Cola

does not sell soda, they sell Coca-Cola. Therefore, companies do not sell products or services,

they sell brands. This is the reason why one of our recommendations for this airline is to create

an actual brand for the company. Sure, Spirit Airlines is known for having ultra-low fares, but

they are more known for their horrible customer service. By creating a slogan or a theme line,

customers can remember the airline. The same way when we hear “I’m Lovin It”, we

automatically know the slogan comes from McDonalds and we are actually “lovin it”. We need

to make up a good slogan involving our ultra-low fares plus show our customers that flying with

our airlines can be a great experience. We need to improve our appearance and how we are

perceived in order for customers to decide that we are the right airlines for them.


Spirit Airlines also needs to spend more money on advertising for themselves than

advertising for others. Apparently they have been using their fleet and anything inside it to

advertise for a profit. From napkins, to cups, to the actual outside of the plane, Spirit Airlines

receives millions in profits for advertising for others but only spends $2 million in company

money to advertise for the company.

Since Spirit Airlines main destinations are main tourist locations throughout the United

States, the demographics of their customers can vary. Many of our booked flights can come

from third parties where their websites are not as clear as our own. We need to confirm and

match the third party websites and create them as similar as our own so customers can see the

full price with detail and avoid any hidden charges. Lastly, what are the true benefits on flying

with Spirit? We do carry the best prices and still come out cheaper than our competitors.

Overall, in order for our customers to receive a better experience, we need to reinvent

ourselves by creating a new catchy slogan, we need to advertise better and more efficiently, we

need to network and use social media to spread our business, and most importantly have our

clients recommend us to their family and friends by word of mouth. If a company receives good

reviews, there are more chances a client will fly with us because we will offer the best customer

service, the best ultra-low fares, offer a variety of destinations to our clients, and the best

experience your money can buy.


References

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Appendices

Appendix 1


Appendix 2


Appendix 3


Appendix 4


Appendix 5


Appendix 6

Jet Blue Baggage fees

Carry on Free

Bag checked at gate Free

First bag checked Free

2nd checked $40

Additional checked $75 each for bags 3+

Over weight baggage $50 each for 51-70lbs and %100 each for 71-

99lbs

Over sized baggage $75 each for 63”-80

Booking online

Booking by phone

Food

Services

Free

$20

$0-$5.99


Appendix 7

Spirit Airlines Baggage fees

Carry on $40

Checked bag at gate $100

1st checked bag $35

2nd checked bag $45

Additional checked $90 each for bags 3-5

Overweight baggage $25 each for 41-50 lbs.

$50 each for 51-70 lbs.

$100 each for 71-99 lbs.

Oversized baggage $100 each for 62"-80"

$150 each for more than 81"

Fine print 1. The fee increases to $50 if booked at

the airport counter.

2. The fee increases to $45 if purchased at


3. The fee increases to $55 if purchased at


4. The fee increases to $100 if purchased

at the airport counter.