MIAMI — As we reported yesterday, Ben Baldanza is no longer the CEO of ultra-low cost carrier (ULCC) Spirit Airlines. Baldanza has been replaced, effective immediately, by Robert Fornaro, former CEO of AirTran Airways. The move comes after Sprit’s share price declined 47.9% in 2015 due to investor worries over capacity increases and declines in passenger revenue per available seat mile (PRASM) for each quarter of the past year.

A scalp for investors – lower growth to come

Indeed much of the internal pressure on Baldanza appears to have been driven by worries over Spirit’s declining reputation amongst investors, who pummeled Spirit over the past year due to its refusal to reduce capacity growth. Throughout the year, Baldanza maintained that while margins and PRASM had contracted at Spirit due to the growth and increased competitions, the sharp reduction in fuel prices allowed Spirit to grow total profits. True to his word, Spirit’s profits through the first nine months of 2015 came in at $242.8 million, up 44.6% year-over-year (YOY), outstripping the 25% reduction in fuel expenses. Spirit’s operating margins over the same period was a sparkling 24.0%, peaking at an absurd 27.3% in the third quarter of 2015. As a point of comparison for just how good that is, Apple’s operating margin for the trailing twelve months was 30.5%.

But despite his seemingly lucrative stewardship, investors worried about Spirit’s sharp capacity growth during the period. For the nine months ending September 30, Spirit’s capacity as measured by available seat miles (ASMs) was up 29.9%, outpacing demand growth of 26.9% (in revenue passenger miles – RPMs), yielding a reduction in load factor of 1.9 percentage points. And PRASM tumbled substantially over the period by 14.4%. Despite record headline profitability, Baldanza’s Spirit was no longer delivering the numbers that investors wanted on the metrics that they actually cared about.

A natural conclusion to draw from this is Spirit’s plans for the future and network changes in 2016 will necessarily feature tamped down capacity growth (perhaps in the low teens percentage-wise). This will almost certainly reduce aggregate profit and free cash flow growth, and it will also be bad for consumers, who won’t be able to benefit from the Spirit Effect (now magnified by legacy carriers matching Spirit) in as many new markets or to as high of a degree (as Spirit attempts to stave off PRASM declines).

Fornaro is perhaps better positioned to compete with legacies than Baldanza

In fact one reason why Fornaro might be better positioned to lead Spirit might be the change in Spirit’s competitive environment. Much of Spirit’s initial success after it converted over to become a ULCC was driven by its cost advantage over competing low cost carriers (LCCs) and even legacy carriers. This cost advantage, as well as a technological lag in revenue management prevented most US competitors from fully matching Spirit’s base fares and even out of pocket travel costs. But thanks to the precipitous drop in oil prices in 2015, the legacies and LCCs (like JetBlue and Southwest) are now better able to match Spirit’s fares in competitive markets, particularly due to the introduction of stripped down fare classes such as Delta’s Basic Economy that offer a comparable product.

Robert Fornaro, President & Chief Operating Officer
Robert Fornaro Spirit Airlines President & CEO. (Credits: IAC)

2015 was a year in which legacy carriers began to aggressively compete with Spirit in specific markets such as Chicago and the Dallas-Fort Worth metroplex, and there is no reason not to expect that trend to deepen in 2016. With that in mind, Spirit cannot expect to solely win customers on the basis of price anymore. Instead, it will have to begin to compete head to head with carriers that offer superior products on overall value proposition for at least a subset of its current customers. Fornaro’s experience at AirTran lends itself nicely to this kind of competition.

While he was at AirTran, the carrier’s three largest hubs including its dominant one at Atlanta were in direct competition with Southwest and Delta. So Fornaro has plenty of experience in competing head to head as the lower cost secondary carrier in fortress hubs. One particular area of executional expertise that Fornaro brings is definitely operational excellence. During his tenure at the head of AirTran (2007-2011), the airline consistently ranked either first or second in the Airline Quality Rating, which measures a blend of operational and customer facing metrics. Spirit could benefit from moving up in those ranks as it aims to compete with the broader airline market.

Is Spirit now a consolidation candidate?

Another potential driver behind the choice of Fornaro is the fact that he was at the helm of AirTran, and allowed the merger with Southwest with minimal objection. Throughout his tenure, Baldanza was notably outspoken in rejecting the notion that Spirit wanted or was even a candidate for consolidation. But investors are quick to pounce on the value generated by mergers (in terms of share price appreciation even if none of the other metrics), and many in the industry have privately mused that Spirit and rival ULCC Frontier Airlines could make interesting bedfellows given their complimentary products and route networks. Perhaps Fornaro will be more open to the prospects of such a merger.

Baldanza was America’s answer to Michael O’Leary

Regardless of the new strategic direction that Fornaro leads Spirit in, it is important to acknowledge the impact that Baldanza has had on the US airline industry. In more ways than one, he was the US analogue to Ryanair’s Michael O’Leary. In business terms, Spirit under his leadership was the first U.S. airline to recognize and capitalize on the potential for the ULCC business model in the United States, much as Ryanair blazed a similar trail in Europe earlier in the decade.

Beyond the similarities of their business, Baldanza also emulated O’Leary in his public demeanor. Spirit went even further than Ryanair in adopting an audacious customer-facing tone, and he was unique among the U.S. airline executives, normally a close-to-the-vest bunch, in his willingness to be candid with the media.

The U.S. airline industry without Baldanza will be less interesting and colorful. And jus for that alone, Ben Baldanza will be missed.