Published in April 2016 issue
By Rohan Anand
Airlines (NK) kicked off 2016 with the gamechanging announcement that former CEO Ben Baldanza was being replaced with Robert Fornaro, an airline veteran with prior executive leadership at AirTran (FL), Northwest (NW), and US Airways (US).
Baldanza’s departure from Spirit, albeit sudden, comes at a time of transition for America’s largest ultra-low-cost Carrier (ULCC). Regardless of how Spirit is perceived in the marketplace, for better or worse, he revolutionized the lowcost carrier (LCC) concept in the US. The time may be right for Spirit to embrace a new leader, but Baldanza’s impact is likely to be a lasting one.
On paper, Baldanza is an ordinary, all-American guy; he graduated in economics from Syracuse University and earned a master’s degree from Princeton University. He cherishes his family time—he once told an interviewer that he prefers to stay home and read, or play Scrabble, rather than take his family on vacation.
Perhaps most American of all is his dismissive demeanor towards passengers who gripe about Spirit’s polarizing ‘nofrills’ service. His philosophy, mildly paraphrased, has always been, “[they can] tell the world how bad we are; they’ll be back when we save them a penny.”
Such a capitalist mentality is a far cry from the more democratic approach embraced by Baldanza’s prototypes. One such is Herb Kelleher, Chairman Emeritus and former CEO of Southwest Airlines (WN), who arguably wrote the original playbook for creating and operating a successful US discount carrier. Not only was Kelleher renowned for creating a low-fare airline that was profitable and sustainable, but also one wellloved by its customers.
Baldanza took an entirely different approach, taking Spirit’s fledgling business model and turning it on its head, monetizing virtually every single transaction involved in the end-to-end travel lifecycle. Even direct distribution comes at a charge: Spirit customers pay an $18 fee to book their own tickets online as opposed to buying them at the airport ticket counters. In other words, anything other than a ‘butt-in-seat’ plus small carry-on item was passed off as a charge.
Baldanza’s unapologetic approach to revolutionizing air travel gained notoriety in 2006, when he took control of the company. It’s safe to say that, at the time, NK was fairly directionless; its hubs were concentrated in Fort Lauderdale (FLL), with secondary bases in Detroit (DTW) and Atlantic City (ACY). Its fleet was spread across multiple types, including McDonnell-Douglas DC-9 and MD-80 series, as well as Airbus A320 family aircraft. Its network was largely concentrated in the Eastern part of the US, with a small presence in Central America and the Caribbean.
More broadly speaking, there was nothing about Spirit’s business model that separated it from its domestic peers, other than that it was lumped under the vaguely defined ‘low-cost carrier’ umbrella that still bundled fees such as checked-bags, seat assignments, and itinerary changes into the base fare. The same ambiguity would eventually gobble up other US airlines that fit in this same aimless category, including Aloha Airlines (AQ), ATA Airlines (TZ), Independence Air (DH), Midwest Express (YX), United’s low-cost offshoot TED, and Delta’s Song.
When Baldanza took the lead at Spirit, the airline was practically unheard of outside of Florida and a few cities in the Northeastern US. Ten years later, Spirit Airlines is a household name. In his 10-year tenure at Spirit, Baldanza essentially rewrote the playbook on airline fee bundling, moderately adapting the business model utilized by the highly successful Ryanair (FR) in Europe. He also realized the value of free publicity that comes from making flamboyant comments—again, a tactic employed by the mastermind behind Ryanair, CEO Michael O’Leary— endorsing Spirit’s provocative advertising campaigns that used lewd language and satirized political scandals.
In theory, Baldanza’s 2006 vision for Spirit—focused on profits and processes before people—was a risky decision that could have had vastly negative consequences for the airline. But Spirit was at a crossroads during an era of undesirable circumstances. The airline industry was still jarred by the September 11, 2001, terrorist attacks. Virtually every major US carrier had filed in Chapter 11 bankruptcy court. Oil prices were skyrocketing. A glut of hybrid and low-cost carriers was flooding the domestic US market with seats at self-destructive fare levels. Such carriers were saddled with unsustainable cost structures, unattainable revenue goals, late-generation aircraft, disgruntled labor forces, and a woeful economic outlook.
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At first, owing to the vast strength of the leisure and visiting friends and relatives (VFR) market from its home base in Southern Florida, Spirit focused its network attention towards the Caribbean and Latin America. It built up brand awareness in markets that had hitherto been dominated by American Airlines’ (AA) high-fare monopoly between South Florida and Latin America. Then, Spirit discovered that its brand was palatable to disgruntled customers who were being subjected to higher ticket fares by fewer market competitors due to the consolidation among the network carriers. Spirit moved quickly to build bases in legacy carrier strongholds such as Dallas/Ft. Worth (DFW), Chicago (ORD), Atlanta (ATL), Houston (IAH), Denver (DEN), Minneapolis (MSP), and Los Angeles (LAX).
It’s almost ironic that Spirit fully unbundled its product and became an ultra-no-frills carrier the same year that Virgin America (VX)—philosophically quite the opposite in every possible way—entered into the market. However, while profitability eluded Virgin for several years, Spirit bedded it down by sacrificing popularity (which is one of the few areas in which Virgin has shined).
But, once again, Spirit found itself at a crossroads and, while it can now breathe more easily than it could 10 years ago with a healthier financial, network, and brand-awareness outlook, it was time for Baldanza’s leadership chapter to come to a conclusion.
Beyond a certain point, profit margins start to wear out when people and processes are not put into the right places and the operation becomes severely constrained. Cascading from this, popularity does become a concern to the viability of a business. One could argue that Spirit continually glances across the Atlantic to look to Ryanair as the blueprint based on which to execute its major business decisions. The aftermath of Ryanair’s new customer-service and gentler fee-oriented approach has delivered marvelous returns for the Irish carrier. What precludes Spirit from attaining the same prosperity?
In that same vein, in the modern world of the twitterverse, in which customers are more mobile and technically empowered than they were 10 years ago, Spirit can no longer fail to re-invest in its own product. Mobilizing its solutions, for example, will help to automate much of the customer service processes and to reduce reliance on the human interactions between its passengers and airport and booking agents, thus achieving salient cost-savings. From these, Spirit can dedicate more resources to its operations and improve its on-time performance and reliability, instead of running a notoriously ‘too-lean’ operation in which a single delay or cancellation causes a massive domino effect across its network.
Finally, and perhaps most importantly, Spirit can also invest more in its people. Without question, Baldanza was able to marshal the right executives to drive the company through its transition period from the late 2000s all the way up to the current era. But retaining and growing that pool of talent requires taking it to the next level, as well as building a bench to attract the next generation of airline movers and shakers. Otherwise, you risk losing the smartest guys in the room, those who helped you to build a great airline operation.
It is now time for Spirit to move away from its ultra-capitalist mentality and strike the right balance between adhering to its strengths and perhaps adopting a more egalitarian persona that will actually grow its customer base, rather than churn and burn and only retain those fliers who would otherwise travel by road (or not travel at all).
Baldanza deserves a place in the Airline CEO Hall of Fame for taking Spirit’s business model and turning it on its head. Without his vision, ambition and delivery, Spirit may have succumbed to the fate that befell several airlines when oil prices soared above $100 per barrel and the Global Financial Crisis hit in 2008.
Ten years later, Baldanza is leaving the throne in good hands. Spirit has a strong balance sheet and a plethora of opportunities for further growth. He was able to make people sit up and take notice of a practically unheard-of airline based in Miramar, Florida. Both internally and externally, people have bought in to Spirit’s goals and mission. Now, it is time for Spirit to undertake a refinement of its habits that, if executed correctly by the highly experienced Fornaro, should craft a new chapter of culture, appreciation, and thought leadership, while preserving the core competencies and scale that Baldanza anchored in the company from day one. Ben Baldanza leaves behind a lasting impact and will not be forgotten.