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Spirit Airlines: Assessing the Benefits of Unbundled Services

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ULCC model

The pioneer of the ULCC or ultra-low-cost carrier model in the United States, Spirit (SAVE) started unbundling services as early as 2006. The company’s policy of targeting price-conscious customers has worked, and the company is able to attract customers who wouldn’t have otherwise chosen air travel. This strategy, along with its relatively small revenue, has led to double-digit revenue growth. However, its revenue still remains very low compared to American Airlines (AAL) at $42.3 billion, Southwest at 18.6 billion (LUV), and JetBlue (JBLU) at $5.8 billion for 2014.

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Growth in non-ticket revenue

Non-ticket revenue covers proceeds from baggage, booking from other distribution channels, advance seat selection, itinerary changes, and loyalty programs. It accounted for more than 40% of the company’s total operating revenue in 2014. This number has grown from $243 million in 2010 to $787 million in 2014, recording a CAGR or compound annual growth rate of 26.45% and outpacing the company’s revenue growth. Spirit’s average non-ticket revenue per passenger in 2006 was $5, which grew to $55 in 2014.

How Spirit is growing its non-ticket revenue

The growth in Spirit’s non-ticket revenue reflects the amazing success the company had in its unbundling strategy. The company’s policy of charging for both checked and carry-on baggage, charging for premium seats and advance seat selection, charging for its loyalty program, and selling third-party travel insurance has ensured that the airline grows its non-ticket revenue while its low base fares attract a large base of price-conscious customers. Allegiant (ALGT) also uses an unbundling strategy to attract more customers. Spirit’s ancillary revenues only formed 32.3% of the total revenues in 2014 and grew by just 13.3% from 2013, when it recorded $368 million.

Investors can gain exposure to Spirit and its peers such as JetBlue (JBLU), Allegiant (ALGT) and American (AAL) through the iShares Dow Jones Transportation Average ETF (IYT), the U.S. Global Jets ETF (JETS), and the SPDR S&P Transportation ETF (XTN).

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