Spirit Airlines A320neo Fleet Investment: A Cost-Cutting Strategy

Introduction

Taking into consideration Spirit Airlines' current financial position and operational factors, a specific cost-cutting investment will be proposed in this paper. It is important to note, from the outset, 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 especially true in the airline industry, where competition for passengers continues to be fierce and airlines adopt various strategies to attract travelers.

The Case for Airbus A320neo Adoption

As 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, which would effectively cement its 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." The ability of an airline to cut labor or fuel costs could therefore have a significant impact on the bottom line.

Currently, the airline's fleet consists of a total of 119 aircraft, comprising entirely of the Airbus A320 class. This aircraft family, manufactured by Airbus, has strong fuel efficiency economics and has been a favorite of airline companies for decades, with the first of its type launched in the 1980s. In seeking to further enhance the fuel efficiency of its A320 aircraft family, Airbus introduced the A320neo in 2015. Billed as having one of the most fuel-efficient engines among its peers, the A320neo "delivers up to 15 percent reduction in fuel consumption" (Mansvelt, 2011, p. 111). This enhanced fuel efficiency was made possible by incorporating the latest engine technologies into the design of the new addition to the A320 family. The aircraft also features numerous other additions, including various cabin innovations, and its environmental credentials are impressive — particularly with regard to reduced CO2 emissions.

Fleet Transition Proposal and Cost Benefits

Currently, Spirit Airlines has a total of 5 Airbus A320neo models in service. The airline's fleet also consists 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. At present, the A320neo model makes up approximately 4% of the airline's fleet. This paper proposes that the airline phase out and retire at least 50% of all non-A320neo aircraft and replace them with the A320neo within the next seven years.

At the current fleet level, and if the same ratio of specific aircraft models being disposed of were to be maintained, this would effectively require placing orders for approximately 60 new A320neo aircraft and retiring approximately 15 Airbus A319-100, 26 Airbus A320-200, and 15 Airbus A321-200. It is important to note that other disposal and acquisition combinations could be adopted — including the retirement of existing aircraft 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 through the further reduction of one of its major expenses — fuel costs. As noted above, the A320neo would result in a fuel saving of approximately 15%, a significant cost saving that could be passed on to customers in the form of even lower prices.

The move to ensure that 50% of the Spirit Airlines fleet comprises A320neo aircraft carries several critical benefits. The key motivation is the need to further reduce the airline's operational costs. Historically, as Beers (2018) observes, the airline industry has been intensively competitive. As an ultra-low-cost carrier, Spirit Airlines seeks to compete on the basis of cost. According to Michael Porter's generic strategies, a business can base its competitive advantage on several fronts: focus, differentiation, and cost leadership (Eldring, 2017). With regard to cost leadership, Spirit Airlines has several possible courses of action: reduce costs while selling tickets at the same prices as competitors (hence enhancing the bottom line); undercut the competition by offering lower-priced tickets (which could enhance market share); or adopt a hybrid of the two approaches, simultaneously reducing costs and charging lower prices than those of its closest competitor. This paper proposes that the airline adopt the hybrid approach, which would ideally increase the airline's market share without necessarily negatively impacting its immediate profit level.

Conclusion

It is clear from this discussion that the acquisition of a significant number of Airbus A320neo model aircraft is likely to be a successful cost-cutting investment for Spirit Airlines. The move would further reinforce the competitive strategy the company has elected to adopt — a cost leadership strategy. Lease financing was identified as the most viable acquisition option, meaning Spirit Airlines would not need to allocate a large amount of capital upfront for aircraft acquisition. It should also be noted that, since lease payments are deemed a business expense, Spirit Airlines will reap significant tax benefits as a consequence of this financing approach.

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

Appendix: Spirit Airlines Fleet Matrix

The table below summarizes Spirit Airlines' fleet composition at the time of this proposal.

Aircraft Type | Current Units | Average Age

Airbus A319-100 | 31 | 11.8 years

Airbus A320 (total, incl. A320-200 and A320neo) | 58 | 4.1 years

Airbus A321-200 | 30 | 1.5 years

Total | 119 | 5.4 years

Source: Planespotters. Note: The Airbus A320 total of 58 includes both the A320neo (5 units) and the A320-200 (53 units).