Spirit Airlines unbundled fares to undercut rivals and profit

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.

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.

Unbundled the fare into a cheap seat plus voluntary add-ons, so light travelers pay less than any bundled fare and heavy travelers reveal their willingness to pay.

Price-sensitive travelers book on the displayed fare, so a low headline wins searches.

Ancillary purchases are voluntary and reveal willingness to pay, capturing revenue from those who value extras.

Lower base fares stimulate new demand from travelers who previously couldn't afford to fly.

Each component's price can track its true cost, keeping margins healthy despite low base fares.

Unbundle a bundled price into a low headline plus voluntary components, and pass the savings through; the mechanism fails if you keep fees without cutting the base price.

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. 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.