Spirit Airlines (SAVE) is a fast-growing “ultradiscount” carrier known for its no-frills service. The stock, which is in our small cap fund, reached a new high this week after being up strongly the last two days in a row.
Dow Jones Newswires reported that the company recently raised guidance for the year, saying it will have a higher profit margin and lower costs than previously expected. Because of its low cost model, Spirit has the highest profit margins in the industry. Another recent report on the airline industry by IdeaWorks Company reported that Spirit’s recent success has been largely due to its ancillary charges, that is charges other than the ticket itself. According to the report, ancillary charges accounted for 38% of Spirit’s overall revenue, the highest in the industry.
Though some customers have complained about all the fees, Spirit maintains that its “unbundled” model allows people to pay only for what they use. With the normal all-inclusive model on the other hand, your higher ticket price might include drinks or extra bags that you don’t actually use. The challenge for Spirit is explaining to people the benefits of their model. Judging from the airline’s tremendous growth, the company seems to be successful so far in getting the word out. For their success to continue, they will have to continue to fight the negative backlash. Here’s a recent video the company made to explain their controversial model: