Growing Spirit Airlines Prefers Texas Economy Over Florida's

CHARLOTTE, N.C. ( TheStreet) -- Three decades after the deregulation of the airline industry, consolidation seemingly has been completed and capacity growth largely has ceased.

Spirit Airlines ( SAVE) is the exception to the trend. The carrier, now the country's 11th largest in terms of revenue passenger miles, expects to grow about 22% this year and 15% to 20% over the next several years. Recently, the growth has been focused on Texas, where the economy is expanding faster than in Spirit's Florida home.

"We are a growth company," said CEO Ben Baldanza, in an interview. "The industry is shrinking through consolidation, but we have positioned ourselves with investors as a growth company. Investors who invest in Spirit buy good returns with a growth portfolio."

On Tuesday, shares rose 4.6%, leading the airline industry after the carrier beat estimates and reported a series of improved metrics, which would have improved even more if not for the impact of Hurricane Sandy. For the year, Spirit shares are up 12%.

"The growth has been excluding Florida," said Executive Vice President Barry Biffle. "We're about maximizing profits and return on invested capital. This environment (South Florida) doesn't call for more capacity. (For instance) New York to Florida is cheap and has been relatively cheap for 30 to 40 years."

Between March 2012 and March 2013, Spirit's capacity at Dallas/Fort Worth International Airport grew by 7%; it now accounts for 16% of total capacity. During the same period, the carrier's capacity at Fort Lauderdale International Airport declined 6% to 41% of its capacity.

Texas has "a really good economy (and) that generates better things from an airline perspective," Biffle said. Since October, Spirit has added 14 new routes including Houston to Chicago, Las Vegas and Orlando, and Dallas to Fort Myers, Fla. and New Orleans. In the coming four months, the carrier will add 11 routes including Houston to Los Angeles and Dallas to Minneapolis, Philadelphia, Oakland, Calif., Los Angeles, Cancun, Los Cabos and Latrobe, Pa.

Clearly, the carrier does not fear other carrier's hubs or even flying between a single carrier's hubs. "We today fly Dallas/Chicago," which connects two American ( AAMRQ.PK) hubs, Biffle said. "We are not allergic to flying between two hubs." He said Spirit will look at Dallas/Charlotte, given that the merger between US Airways ( LCC) and American may lead to pricing changes on the route.

"We look routinely at the fares paid on every route we can fly," he said. "We look at demand compared to capacity: Is it over-served or underserved? With Charlotte/Dallas, you have to wait and see what the merged airline will do. Will they fly 20 times a day? Or will they pare down and squeeze yields? You have a lot of Dividend Miles and Advantage fliers, a lot of loyalty, on that route. It's too early to say what will happen."

Not only the growth strategy, but also the pricing model, runs counter to industry trends. Spirit appeals to passenger who want less, not more. It charges rock-bottom fares for seats and fees for everything else. In the first quarter, the average ticket revenue per passenger flight segment was $71.30, while the average non-ticket revenue per passenger flight segment was $52.73, meaning 42% of per passenger revenue was derived from fees.

Spirit can charge less for seats because it puts 178 of them on an Airbus A320, one below the Federal Aviation Administration limit. US Airways, the biggest A320 operator, has 150 seats on the same airplane, including 12 in first class. You needn't mention "first class" to Spirit executives. Baldanza insisted the carrier will resist the historic tendency of low-cost airlines to increase service levels as they seek higher ticket prices.

"In general, we are not going to consciously increase our costs in the hopes of generating higher ticket prices," Baldanza said. "We will never look to take seats out. We are not going to look to add TV screens. The historical implication is that everyone will have Wi-Fi and we won't. If we have Wi-Fi, it will be because some Wi-Fi provider pays us to put it on our airplanes."

-- Written by Ted Reed in Charlotte.

>To contact the writer of this article, click here: Ted Reed

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