Motley Fool
0
All posts from Motley Fool
Motley Fool in Motley Fool,

Spirit Airlines Bets on Florida

For the past six months, new Spirit Airlines (NASDAQ: SAVE) CEO Bob Fornaro has talked frequently about changing the company's route planning strategy. But until recently, Spirit Airlines hadn't announced a single new route during 2016. This made it hard for investors to gauge just what Fornaro had in mind.

Last week, Spirit finally announced seven new routes scheduled to begin this fall. If they are any indication of Spirit's new strategy, the company is about to make a big bet on Florida. That's probably a wise move, as Florida has been a very successful market for other leisure-oriented airlines like JetBlue Airways (NASDAQ: JBLU).

Two key themes in Fornaro's comments

In his first public comments to the analyst community, during Spirit's February earnings call, Fornaro touched on two related themes as he explained how Spirit would change its route selection strategy.

First, Fornaro expressed interest in serving more small and mid-sized markets. He noted that Spirit's recent strategy of flying between other airlines' hubs was starting to provoke nasty fare wars, making those routes less attractive than they were a few years ago.

Spirit Airlines plans to pivot away from attacking legacy carriers in their hubs. Image source: Spirit Airlines.

Second, he stated that Spirit Airlines needs to be less "predictable" in selecting new routes going forward. While Fornaro didn't fully explain what this meant, it was clear that he wants to reduce Spirit's emphasis on routes that legacy carriers are sure to defend with steep price cuts.

It's all about Florida

Based on the route announcements Spirit made last week, it appears that Fornaro could have described Spirit's new route strategy more simply as "Florida." All seven routes are designed to bring leisure travelers to Florida.

First, Spirit plans to expand its portfolio of Florida routes at Baltimore-Washington International Airport. Spirit already flies from BWI to Fort Lauderdale and Orlando, and as of early November, it will add daily flights to Tampa and Fort Myers.

Second, Spirit Airlines is building out its presence in Orlando, adding five more routes to the 12 it already serves from this massive leisure market. In October, it will launch daily flights from Boston and Philadelphia, and in November it will start daily service from Kansas City, Niagara Falls, and Plattsburgh.

Of these new markets, only Philadelphia is a legacy carrier hub. But other than that, they don't represent a huge strategy shift. None of these airports are new to Spirit's route network -- the carrier is "connecting the dots" rather than opening up new cities. The only cities that are off the beaten path are Niagara Falls and Plattsburgh -- and those actually function as alternate airports for Toronto and Montreal, respectively.

By contrast, AirTran -- where Fornaro was previously the CEO -- historically flew to Orlando from many small and mid-size cities. These included Allentown, Pennsylvania; Flint, Michigan; Dayton, Ohio; Huntsville, Alabama; and Knoxville, Tennessee, just to give a few examples.

Good route choices for the winter season

The seven new routes to Florida announced last week represent a significant chunk of Spirit's planned capacity growth for the fall. While Spirit's route choices don't fit neatly with its stated interest in becoming less predictable and serving more small and mid-size markets, growing in Florida is probably a smart move.

In recent years, much of Spirit's growth has come from "east-west" flying between major cities. These routes tend to have highly seasonal demand, performing well in the spring and summer and poorly during the colder months.

By contrast, most leisure-focused airlines have much more of a "north-south" focus. JetBlue is a great example. Two of its six focus cities are in Florida (Fort Lauderdale and Orlando). JetBlue also has a huge presence in the Caribbean.

JetBlue has thrived due in part to its large footprint in Florida. Image source: JetBlue Airways.

These warm weather markets tend to be less seasonal. Some even have counter-seasonal demand, performing better during the winter as travelers from the Northeast and Midwest head south to escape the cold.

JetBlue's huge presence in Florida helps even out seasonal variation in revenue per available seat mile (RASM). In Q1 2016 (a seasonal trough) JetBlue's RASM was $0.1241: down 4.6% from the seasonal peak of $0.1301 in Q3 2015. By contrast, Spirit Airlines' RASM in Q1 2016 was $0.0899: down 12.5% from the seasonal peak of $0.1027 in Q3 2015.

Thus, aside from Spirit's efforts to avoid legacy carriers' hubs, expanding in Florida could bolster its profit margin during the seasonally weaker first and fourth quarters of the year. With all seven new routes starting in October and November, Spirit Airlines is setting itself up to capitalize on north-south leisure demand during the coming winter season.

A secret billion-dollar stock opportunity
The world's biggest tech company forgot to show you something, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early in-the-know investors! To be one of them, just click here.

Adam Levine-Weinberg owns shares of JetBlue Airways and Spirit Airlines and is long January 2017 $17 calls on JetBlue Airways and long December 2016 $30 calls on Spirit Airlines. The Motley Fool recommends Spirit Airlines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.