How Spirit Airlines Makes Money While Being Hated

Spirit Airlines Inc. (NASDAQ: SAVE) could not have done much worse in the widely regarded American Customer Satisfaction Index for the airline carrier business. Against an industry average 71 on a scale for which 100 is the highest, Spirit received a 54 and industry satisfaction leader JetBlue Airways Corp. (NASDAQ: JBLU) an 81. Spirit’s stock has surged over the past five years. By comparison, JetBlue’s have languished.

The same comparison among the stocks of major airlines and Spirit’s holds true. However, it is hard to measure the performance of United Continental Holdings Inc. (NYSE: UAL) and American Airlines Group Inc. (NASDAQ: AAL) since each was created by mergers within the past five years. That means a comparison based on share price against these carriers may not be fair.

Spirit’s revenue last year was $1.9 billion, up 17% from 2013. Net income rose over 27% to $225 million. JetBlue’s revenue rose 7% last year to $5.8 billion. Net income was $401 million, up from $168 million the year before. Most airline executives, and investors, would rather have Spirit’s numbers, and particularly its margins.

The primary criticism of Spirit is that it nickel and dimes customers to death. Leg room is poor. Spirit charges for bags, tickets printed at the airport, water and large seats. However, many travelers do not mind enough to stop traveling Spirit, as its financial results show.

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Spirit has taken a gamble most companies have not. Coca-Cola Co. (NYSE: KO) does not charge for bottles. McDonald’s Corp. (NYSE: MCD) does not charge for ketchup. General Motors Co. (NYSE: GM) does not charge for tires. Each of these companies might want to reconsider its business model.

The presumption about most businesses and industries is that service matters. Spirit’s success challenges that notion and wins. It does not operate as a monopoly. It operates in one of the most competitive industries in America. Service, it seems, is overrated, at least in the airline business. That is why Spirit’s management can ignore the American Customer Satisfaction Index.

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