Our Price Is Our Product!
Ramesh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I traveled to the West Coast this past week on United Airlines (NYSE: UAL), flying coach (or Cattle Class as jovially referred to by frequent flyers). As the hours went by, I wanted to have a snack and the flight attendant told me about a few items that were available for purchase. Pointing to the airline’s magazine, he said that the descriptions and pricing could be found on the last page. I did, and I was surprised by a note at the bottom of their so called “Choice Menu.” It said, “A portion of the proceeds from the Choice Menu program will go to organizations that promote breast cancer awareness and greater access to screening services.” I was stunned at the brazenness of that note! First, you charge me an outrageously ridiculous amount for some light snacks and then you tell me that I am donating to charity in the process? I was flabbergasted at that thought. I felt that I was being literally ripped off and the airline was telling me to feel good about it! Furthermore, this was December, NOT October which is the designated National Breast Cancer Awareness Month. Was the airlines capitalizing on this just recently passed event and counting on the passenger getting possibly confused? What kind of message was the airline wanting to convey? That they care? I don't think so.
Feel Good Subliminal Message
I think United figured that as long as they put that message out there, a passenger like myself could be counted on to be “supportive,” feel good about where the snack money was going and acknowledge the airline’s altruistic intentions while forking anywhere between $3 to $9 or so for a bunch of peanuts and maybe a few raisins and almonds! The words of the representatives of Spirit Airlines (NASDAQ: SAVE) with whom I had just spoken to recently, flashed across my mind, “Other airlines break up fares and fees in a manner similar to what we do and still charge more on the base fare. They just put a different spin on it and market their fees and charges in an entirely different way. We on the other hand, feel that the lowest base fare is paramount to get new business and repeat business and position ourselves as the carrier with the lowest possible base fare. Trust us!” Well, “trusting them” became easier as it slowly dawned upon me that I really felt cheated as a passenger and a customer with that kind of marketing. For any United Public Relations person reading this post, I want you to know – please don’t shove a charity down my throat (analogy intended). The next time I fly United, I don’t want my purchasing decision and my conscience to be weighed by the act of deciding to buy an overpriced snack. I do donate to Charity, and my belly is already full with the charities that I support, thank you! Just charge me what you wish without any pretense and please skip the feel good message! For the record, United’s stock price has been about as flat as it can get during the same time period that I wrote about Spirit’s performance after their IPO (May 2011 to December 2012)
Unjust Characterization or Realistic Description?
In response to my recent post – Dollar Store of the American Skies, I was approached by Ms. DeAnne Gabel, Director, Investor Relations for Spirit Airlines. She wrote, “I read your article on Spirit Airlines dated 11/28/2012 and wanted to offer an opposing view to your characterizing Spirit’s a la carte model as nickel and diming. If you are open to having a dialogue, please contact me at the number below.” I took her up on the offer, made an appointment and called her a few days later.
On the call, DeAnne also had with her, Misty Pinson, Director, Corporate Communications for Spirit. We got off on a hearty “dialogue,” as DeAnne wanted in an effort to address my characterization of Spirit’s strategy as “Nickel and Diming.” Since I had recommended Spirit Airlines as a Buy, naturally, my first question was, “Why are you so unhappy at the characterization? After all, I recommended your airline!” DeAnne’s response was, “Well, because, that is a negative characterization that does not give a positive image to Investors and the flying public. We are not out to rip off the customer, rather, we are trying to offer the lowest base fare by stripping out all the extras. That gives anyone a chance to fly.” “The word - Nickel and Diming used colloquially conveys a negative impression and we are really not trying to treat our customers with disrespect,” offered Misty. Just to be sure, I looked up the definition at Merriam Webster and yes, the term is not flattering to say the least.
Sustainable, Consistent, Repeatable
I pointed out to Misty and DeAnne that lots of articles on the Internet (and in print) refer to Spirit’s policies, procedures and fees as Nickel and Diming and I was not the only one to refer to it that way. In fact, I pointed out to them an article by the New Jersey Star Ledger that similarly described Spirit’s a la carte pricing. “That is the kind of impression, and unfair characterization that we are seeking to avoid,” said DeAnne. “We are concerned that investors might be led to believe that our lowest base price model turns off customers and might not be repeatable or sustainable,” she said. She continued, “In fact, the opposite is true. How else can one explain the average 84% load factor from Atlantic City to Fort Lauderdale?” Misty also pointed out that the policies and fees were consistent and there were no surprises since everything is disclosed to the customer during the booking process. Later, upon research, I found out that all airlines need to disclose additional baggage fees and all mandatory fees and taxes to the customer per the new USDOT regulations .
However, going back to United Airlines, what I experienced during my cross country trip last week shows how little the DOT can actually protect the customer. On the outbound trip to California, United flew an older Airbus aircraft that did not have individual TV consoles on each seat. So, they were forced to “give away” free TV viewing along with “free” headphones. On the return trip however, United wanted to charge “only” $7.99 for TV viewing using the headrest console. I had assumed that the TV viewing would be free for long haul flights and with so little disclosure, this was absolutely unacceptable. So, I did start to feel some sympathy for Spirit. I also fly Delta Airlines (NYSE: DAL) and American Airlines and they both charge fees for TV viewing and to my knowledge, neither discloses those types of fees during ticket purchases.
During our conversation, Spirit’s representatives told me that they have full disclosure of mandatory fees and taxes during the booking process and full transparency at their website under the “optional fees” section. Misty told me that the passenger is kept informed during the booking process, through follow-up emails and signage at the airport to ensure that there are no surprises. To be fair, I did a Google search using the same search terms to find out how US Airways, Delta, United and American fared on the optional fees front along with Southwest Airlines (NYSE: LUV). The search term was the airline name and optional fees, such as “Spirit Airlines optional fees”. Corresponding webpages turned up for US Airways, Delta, United, American and Southwest.
It’s all About the Price!
Misty and DeAnne did make it clear that the objective of the airline was to provide the lowest base fare and although they did not explicitly try to stay away from catering to the corporate business traveler, the majority of their traveling public were leisure travelers and many of them were likely first time flyers who liked Spirit’s affordability. They told me that Spirit has a reputation as a family friendly and price friendly airline. To ensure they offered the lowest fare, they described how the airline went to great lengths to ensure that the “fuel burden” was reduced through extreme weight reduction measures.
Spirit does not carry any magazines, including one of my favorites – SkyMall because of the added weight that they represent, they said. “We have offered vendors such as SkyMall and others to pick up a portion of the fuel burden in order to reduce our cost as well as subsidize their own marketing and we have had no takers,” said Misty. I was told that the airline planned very carefully for every flight day after analyzing how much water to carry in the lavatories, how many times a plane had to refuel, how much snacks to carry and so on. To help reduce weight, the airline has no entertainment system since the added weight leads to a need to burn more fuel and thus higher flight costs. “We do so much to reduce the base cost to the lowest number that it is really unfair to compare us to other airlines who bundle all those additional expenses and carry the cost into their so called base fare,” said DeAnne. I suspect that vendors such as SkyMall “give back” to the other airlines through lucrative mileage loyalty programs which allow frequent flyers like me to earn airline frequent flyer miles while shopping at designated websites. SkyMall in turn pays the airline for the “privilege” of getting the customers who are redirected to the website. How do they do it? Companies such as SkyMall buy airline mileage points in bulk from the airline and then parcel them out to customers for some type of mileage to dollar ratio. That mileage then gets deposited into the frequent flyer's airline mileage account. Spirit has no such comparable program through SkyMall.
To be sure, weight reduction is not the only trick up Spirit's sleeve. The company is extremely frugal about its marketing too, I was told. "We have almost negligible advertising via traditional TV advertising, magazine placements and Newspaper ads," said Misty. Apparently, the airline relies heavily on word of mouth referrals, articles and posts (like this one perhaps) that dwell upon the pros and cons of targeting the consumer's bottomline dollar. Opt in email marketing is also a preferred method although the airline maintains a minimalist presence in social media such as Facebook and Twitter (one cannot post to Spirit's timeline on Facebook and the airline follows nobody on Twitter). "This is to allow us to abide by USDOT rules that stipulate that we must respond to every passenger inquiry and this is extremely difficult to do," said DeAnne. So, social media is not their marketing vehicle of choice! Still, their revenue performance is impressive, given this information. Perhaps, the media is doing their marketing for them? Hmm..
Still a Good Investment
As I said to the representatives of Spirit Airlines, I did recommend Spirit as a Buy and I stand by it. My opinion is unchanged and that really wasn’t the issue in the first place. At heart was my characterization of Spirit as a “Nickel and Dime” shop and while I was not the one to come up with that reference in the first place, I do understand why they would be upset at that term. “We treat all customers equally and do not offer tiered status like other airlines so that we can single out a few for preferential treatment,” said DeAnne. She continued, "Our Price is Our Product! We provide exceptional value to our customers and in the process, we stimulate market traffic." As much as I would like to say that our “Spirited Dialogue” gave me a new perspective of the airline, I must say that my flight experience on United this past week did more to adopt a more understanding stance towards Spirit’s policies. Investing in airline stocks is always a risky bet and yours truly has burnt his hand more than once after having faith in a couple that went through the bankruptcy wringer.
Tell me what you think about Spirit’s fees, policies and marketing strategy? Do you feel that they are being portrayed unfairly in the media? Do you think the media is doing so is unwittingly acting as Spirit's marketing surrogate?
malayappan has no positions in the stocks mentioned above. The Motley Fool owns shares of SPIRIT AIRLINES INC. Motley Fool newsletter services recommend Southwest Airlines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!