Spirit Airlines Milestone Three Business Opportunities

Introduction
Taking into consideration Spirit Airline’s current financial position and operational factors, a specific cost-cutting investment will be proposed in this paper. It is important to note, from the onset, that to remain relevant in an increasingly competitive business environment, entities must continuously embrace approaches that not only enhance their efficiency, but also reduce their costs. This is more so the case in the Airline business where competition for passengers continues to be tough – with entities adopting various strategies to win over the said passengers.
Discussion
An ultra-low-cost carrier, Spirit Airlines remains one of America’s most competitive commercial airlines. To guarantee its place on this front, the airline ought to further cut its costs. This would effectively cement the airline’s position as the cost leader in the industry. In the words of Beers (2018), “the major expenses that affect companies in the airline industry are labor and fuel costs.” In that regard, therefore, the ability of an airline to cut labor or fuel costs could have a significant impact on the bottom-line. Currently, the airline’s fleet consists of a total of 119 aircraft – entirely comprising of the Airbus A320 class/category. This specific aircraft family, manufactured by Airbus, has good fuel efficiency economics and has been a favorite of airline companies for a significant period of time, with the first of this type of aircraft having been launched in the 80s. In seeking to further enhance the fuel-efficiency of its A320 aircraft family, Airbus in 2015 introduced the A320neo. Billed as having one of the most fuel-efficient engines amongst its peers, the A320neo “delivers up to 15 percent reduction in fuel consumption” (Mansvelt, 2011, p. 111). The enhanced fuel efficiency was in this case made possible thanks to the move by airbus to incorporate the latest engine technologies in the design of the new addition to the A320 family. It is also important to note that the new aircraft features numerous other additions including, but not limited to, various cabin innovations. The aircraft’s credentials on the environmental front are also impressive, more specifically when it comes to reduced Co2 emissions.
Currently Spirit Airlines has a total of 5 Airbus A320neo models in service. The airline’s fleet also consist of 31 Airbus A319-100, 53 Airbus A320-200, and 30 Airbus A321-200. The fleet matrix of Spirit Airlines has been highlighted in the appendices section. Towards this end, therefore, at present, the A320neo model makes up 4% of the airline’s fleet. In this text, a proposal is being made for the airline to phase out and retire at least 50% of all the other non-A320neo aircrafts, and replace the phased aircrafts with the A320neo within the next 7 years. At the current fleet level, and if the same ratio of specific aircraft models being disposed were to be maintained, this will effectively call the placement of orders for approximately 60 new A320neo aircrafts and the retirement of approximately 15 Airbus A319-100, 26 Airbus A320-200, and 15 Airbus A321-200. It is, however, important to note that other aircraft disposal/acquisition combinations could be adopted – including, but not limited to, the retirement/disposal of existing aircrafts on the basis of engine age. In essence, this proposal is largely founded on the need to make Spirit Airlines a cost leader in the industry via the further reduction of one of its major expenses – i.e. fuel costs. As it has been pointed out elsewhere in this text, the A320neo would result in a fuel saving of approximately 15%. This is a significant cost saving that could be passed on to customers in terms of even lower prices.
The move to ensure that 50% of the Spirit Airlines fleet comprises of the A320neo aircraft has several critical benefits. To begin with, as it has been pointed out above, the key motivation for the proposal highlighted herein is the need to further reduce the airline’s operational costs. Historically, as Beers (2018) observes, the airline industry has been intensively competitive. Being an ultra-low-cost carrier, Spirit Airlines seeks to compete on the basis of cost. According to Michael Porter, a business could base its competitive advantage on several fronts: i.e. focus, differentiation, and cost leadership strategies (Eldring, 2017). It is also important to note that with regard to cost leadership, Spirit Airlines has several possible courses of action it could adopt. These are; reduce costs while at the same time selling its tickets at the same prices offered competitors (hence enhancing its bottom-line), undercut the competition by offering lower-priced tickets (in a move that could enhance its market share), or adopt a hybrid of the two approaches whereby the company both reduces its costs and charges lower prices than those of its closest competitor. In this text, the proposal is for the airline to adopt the hybrid approach. Ideally, this would increase the market share of the airline without necessarily negatively impacting the entity’s immediate profit level.
Next, the specific aircraft model proposed is seen as being friendlier to the environment than other models. It addition to having a significantly reduced noise footprint, A320neo also boasts of reduced CO2 emissions. In essence, “the lower fuel consumption results in lower CO2 emissions and gives the A320neo a significantly improved carbon footprint” (Lufthansa Group, 2018). There are several benefits that Spirit Airlines could reap by virtue of running a business that is deemed to be environmentally friendly. One of these is that “environmentally friendly companies have high brand recognition” (Mansvelt, 2011, p. 130). Here, the example of Shell is given - in which case it is pointed out that in comparison to Esso, its commitment to the environment has benefited its brand (Mansvelt, 2011). Spirit Airlines is likely to reap the same benefits by way of being deemed a more environment conscious business as a consequence of its acquisition of planes that have lower CO2 emissions. Essentially, in addition to further enhancing the credibility of an entity, brand recognition benefits an entity in that customers are more likely to choose a brand that they are familiar with. In that regard, therefore, the move proposed herein is likely to not only further enhance the loyalty of customers the airline serves, but also help towards the further enhancement of the company’s market share. This is more so the case if Spirit Airlines succeeds in the creation of the profile of an industry leader on the carbon footprint reduction front.
Lastly, it is also important to note that in comparison to the majority of the A320 models that comprise of more than 90% of the current Spirit Airlines fleet, the A320neo has new cabin arrangement that further enhances the customer experience while adding several seats that have the impact of increasing revenues for the company. In essence, the additional space gives more legroom to Business Class flyers (Lufthansa Group, 2018). These are additional benefits whose relevance cannot be overstated on the market share and bottom line enhancement fronts.
It is, however, important to note that despite the benefits highlighted above, seeking to ensure that 50% of the Spirit Airlines fleet comprises of the A320neo aircraft does have its costs and downsides. To begin with, the move ought to be implemented with strict timelines in mind. This is more so the case given that with advances in technology, delays in the adoption of new technology could result in significant future costs, i.e. in terms of a specific item or machinery being rendered operationally obsolete. In this case, better and more efficient plane engines could be produced in future – effectively rendering the model acquired inefficient in comparison to newer models. Therefore, the proposed move in this case both bears the cost of the significant initial cost outlay in the acquisition of the aircraft and the risk of the current engines being rendered obsolete as a consequence of advances in technology leading to the production of engines that are even more fuel efficient. The timeline for the implementation of the move has been fixed at 7 years (2018-2025).
In seeking to implement this proposal, there are various approaches that Spirit Airlines could adopt. To begin with, the company could pay cash for the A320neo models. On average, each aircraft would cost the airline approximately $108 million. All things held constant, 60 A320neo models would cost the company approximately $6.4 billion over the seven year period. At the current profitability levels, the company may not be able to pay for the planes using its cash flows. This leaves the company with the option of financing the acquisition with a loan. However, although the debt-to-equity ratio of the airline is within comfortable limits, i.e. at 0.6, significant debt could have a negative impact on the company’s balance sheet going forward. The industry average happens to be 0.9 (Nickolas, 2017). The debt-to-equity ratio seeks to measure the extent to which credit financing is utilized, in relation to investor financing. It should be noted that a high debt-to-equity is not a rarity in the airline industry. This is more so the case given that “since the major airline industry is highly capital-intensive, companies in this industry tend to have high debt/equity ratio” (Nickolas, 2017).
The most viable option in this case with regard to the acquisition of the A320neo aircrafts would be lease. In essence, an airline could lease the entire batch of the aircraft it needs at the same time, or spread the delivery of the models over a certain period of time. In the case of Spirit Airlines, the delivery of the aircrafts will be spread over a 7 year period. This period of time was selected with the timeline for the disposal/retirement of the other units from the A320 Airbus family in mind. Primarily, those models that the company already owns and are fully paid for will be offered for sale to other airline companies. On the other hand, those aircrafts on operating leases will have their lease agreements terminated on expiry. If need be, operating leases extending far beyond the seven year time period envisioned in this proposal will be renegotiated for early/premature termination.
Conclusion
In the final analysis, it is clear from this discussion that the acquisition of a significant number of Airbus A320neo model aircrafts is likely to be a successful cost-cutting investment for Spirit Airlines. It is effectively a move that will further reinforce the competitive strategy the company has elected to adopt over time, i.e. a low cost strategy. Towards this end, lease financing was deemed to be the most viable option. In this case, Spirit Airlines does not have to allocate a lot of funds towards the acquisition of the aircraft. It should also be noted that given that lease payments are deemed to be a business expense, Spirit Airlines will also reap significant tax benefits as a consequence of the financing option adopted.













References
Beers, B. (2018). Which Major Expenses Affect Airline Companies? Retrieved from https://www.investopedia.com/ask/answers/040715/what-are-major-expenses-affect-companies-airline-industry.asp
Eldring, J. (2017). Porter’s (1980) Generic Strategies, Performance and Risk. Mason, OH: Diplomica Verlag
Lufthansa Group (2018). Lufthansa Takes Possession of the First Airbus A320neo in the World. Retrieved from https://www.lufthansagroup.com/en/themes/airbus-a320neo.html
Mansvelt, J. (Ed.). (2011). Green Consumerism: An A-to-Z Guide. Washington, DC: SAGE
Nickolas, S. (2017). What is the Average Debt/Equity Ratio of Airline Companies? Retrieved from https://www.investopedia.com/ask/answers/061615/what-average-debtequity-ratio-airline-companies.asp

















Appendices
Aircraft Type
Current
Avg. Age

Airbus A319
31
11.8 Years

Airbus A320
58
4.1 Years

Airbus A321
30
1.5 Years

McDonnell Douglas DC-9



McDonnell Douglas MD-80



Total
119
5.4 Years


Source: Planespotters
NB: the number of Airbus aircrafts A320 type highlighted above is inclusive of both A320neo and A320-200 aircrafts, in totals of 5 and 53 respectively.