Non-ticket revenue growth
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. The ultra low cost carrier (or ULCC) has been growing its non-ticket revenue over the years. As reported in the previous part of this series, the carrier has unbundled components of its air travel service that have traditionally been included in base fares, such as baggage and advance seat selection. It offered them as optional, ancillary services so that passengers can identify, select, and pay only for the services they want to use.
During 2013, its total non-ticket revenue increased by 24.8% to $668.4 million. The average non-ticket revenue per passenger flight segment increased 4.8% to $53.84. For 1Q14, non-ticket revenue per passenger segment increased 3% to $56.4 while non-ticket revenue increased by 22% to $184.1 million. A presentation in March noted that the company’s ancillary revenue as a percentage of total revenue is above that of its ultra low cost peer Ryanair (or RYAAY) in Europe and Allegiant (ALGT).
Spirit said this increase in non-ticket revenue was mainly driven by changes made late in 2012 to the bag fee schedule to optimize revenue by channel, a change made in July 2013 to align its foreign passenger usage fee with domestic passenger usage fee, and an increase in service charges collected as a result of increased volume of third-party bookings. The non-ticket revenue growth also included an increase in travel package sales including the offering of third-party travel-related options such as hotels and rental cars for sale through Spirit’s website, subscriptions to the $9 Fare Club, and other options designed to enhance the customers’ travel experience.
The airline offers an unbundled pricing strategy to generate significant non-ticket revenue, which allows it to stimulate passenger demand for its product by lowering base fares. Spirit noted that by focusing on price-sensitive travelers, it has maintained relatively stable unit revenue and profitability during volatile economic periods since it isn’t highly dependent on premium-fare business traffic. It believes its customer base is more resilient because its low fares and unbundled service offer appeal to price-sensitive passengers.
A survey of global airline ancillary revenue by IdeaWorksCompany and CarTrawler showed the revenue has surged 1,200% to $31.5 billion for 2013 from the first survey in 2007. The release added that the average ancillary revenue per passenger for the 59 airlines disclosing results for 2013 was $16. The survey said that when ancillary revenue is described as a percentage of revenue, it’s low cost carriers that dominate the results in 2007 and 2013. While United Airlines (UAL), Delta Air Lines (DAL), and American Airlines (AAL) led the list for the most non-ticket revenue in 2013, the survey said that over 38.4% of Spirit Airlines’ revenue came from fees.