#1597 2010 · Spirit Airlines · airlines
Charge for Everything, Cut the Fare Below Everyone
the problem
Airline fares bundled bags, seats and services, so price-sensitive travelers overpaid for frills they never chose.
background
Spirit's S-1 describes an unbundled pricing strategy: passengers pay separately for components of air travel traditionally included in the base fare, and non-ticket revenue lets the airline further lower base fares and stimulate demand.
The filing reports an average base fare of about 85 dollars in 2009 with promotional fares of 9 dollars or less, and an operating margin of 15.9 percent that year, among the industry's best — while noting that competitors adopting unbundling generally made no corresponding reduction in base fares.
what everyone would do
Match rivals' fares and compete on service quality.
what they saw
A bundled fare forces the light traveler to subsidize the heavy one. Unbundle, and each passenger pays for what they take — the headline fare drops below every rival, yet the components make the economics work.
the move
Unbundle the fare into its parts and price each: the seat is cheap enough to win the search-engine sort, and every component — bags, seat selection, boarding — is a voluntary purchase that reveals willingness to pay. Travelers who travel light fly for less than any bundled fare could offer; those who want more pay for exactly what they take. Demand is stimulated twice: by the headline fare and by the transparency.
why it works
Price-sensitive travelers book on the displayed fare; ancillary purchases are voluntary and visible; lower base fares stimulate new demand; and each component's price can track its true cost.
the payoff
An average base fare near $85 in 2009 with promos at $9 or less, and a 15.9% operating margin among the industry's best.
where it breaks
It fails when fees feel like traps rather than choices — regulatory and consumer backlash follows; when comparison sites start showing total prices; and when service perception crosses from frugal to hostile.
what came after
A la carte pricing swept the industry — though as Spirit's own filing notes, most carriers kept the fees without cutting the fare, which is precisely the imitation that misses the mechanism.
references
- [1]Spirit Airlines Form S-1 (2010 IPO registration)SEC EDGAR (Spirit Airlines Inc.), 2010sec.gov