Why Spirit is highly profitable despite low customer satisfaction
Spirit Airlines has high profit despite low customer satisfaction
Lone Pine Capital disclosed a brand new position in Spirit Airlines (SAVE) through a 13G filing this week. According to the filing, the fund owns a 6% stake in the airline company with 4,373,632 shares. Spirit’s operating margins are higher than its peers, but its customer satisfaction ratings have been below expectations.
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Spirit is considered to be America’s most profitable airline based on operating margin. A comparison of its peers shows that the company has a high operating margin of 17%, followed by Allegiant Travel which has an operating margin of 15%. The airline doubled its earnings in 4Q13 driven by increased capacity, continued strong demand for ultra-low fares, and growth in ancillary revenues. According to a recent investor update, Spirit expects an operating margin of 20.6%–21.3% in 2Q14, and an operating margin of 17.5%–18.5% in fiscal year 2014. The stock is up 45% year-to-date (or YTD).
Despite the profitable growth, the airline has scored poorly when it comes to customer satisfaction. Spirit was ranked as the least favorite by a Consumer Reports survey last year, with the magazine noting that Spirit’s overall score was one of the lowest received for any business.
A report by the U.S. Public Interest Research Group Education Fund (or PIRG) in April said Spirit generated the most complaints to the Department of Transportation (or DOT) between 2009 and 2013. A release from PIRG said “passengers were about three times as likely to file a complaint as the second-place airline, and its complaints volume was trending upward over time.” It also added that “since 2008, the DOT has hit Spirit with five different fines totaling $565,000 for violating various consumer protection laws concerning overseas, baggage, and multiple cases of deceptive advertising.”
In response, the airline has decided to take all the criticism positively and “hug the haters.” In April, it said it’s celebrating the fact that over “99.99% of our customers didn’t file a complaint with the Department of Transportation in 2013” and offered a $24 discount on bookings. The management added on the first quarter earnings call that, “The industry averages about two complaints for every 100,000 customers while we currently average about five complaints per 100,000 customers. That means that 99.995% of our customers didn’t file a complaint.”
Spirit also launched a campaign recently to give “away up to one billion FREE SPIRIT miles to those who feel wronged by an airline.” In a letter to aviationblog, the company said “customers are surprised by our unbundled, a la carte model” and therefore it is committed to two objectives, “helping all of our customers learn how to fly on Spirit while keeping more money in their pockets and sustaining our great safety record, while we continue to improve our operational reliability which is already competitive with other airlines.”
The annual American Customer Satisfaction Index’s (or ASCI) travel report for 2014 found that airlines’ passenger satisfaction remained unchanged in 2013 with a score of 69 on a 100-point scale. Airlines with the highest satisfaction scores were JetBlue Airways (JBLU), Southwest Airlines (LUV), and Delta Air Lines (DAL). United Continental (UAL) had the lowest score of 60 while Spirit, which was clubbed with Alaska Air (or ALK) and Frontier—under the others category—saw its satisfaction score dip 3% to 70.