What America's most hated airline needs to fix

Spirit operated only 68 per cent of its flights on time for the 12 months ended April 2016. Photo / File

Spirit Airlines is the carrier that leads the pack when it comes to customer gripes. With that in mind, its new boss is trying to repair one crucial aspect of the business: getting to your destination on time.

Spirit operated only 68 percent of its flights on time for the 12 months ended April 2016, as defined by the US metric of a flight that gets to the gate within 14 minutes of scheduled arrival.

Chief Executive Officer Bob Fornaro says he's been focused on reliability since his first day on the job six months ago. So has his board: In January, they amended executive compensation plans for 2016 to give on-time rate a 20 percent weighting in calculating managers' bonuses, up from 10 percent.

"Over the years, we've never put enough emphasis on service," Fornaro said June 20 in an interview with Bloomberg editors in New York. Now that's changing.

Spirit's official on-time showing improved to 73.8 percent in April but was still the worst in the U.S. airline industry and almost 11 percentage points below the average, according to the most recent Department of Transportation statistics. Spirit also canceled a higher percentage of its flights in April than any other carrier-1.7 percent.

Amid all these operational fixes, though, Spirit doesn't want to get too good at showing up on time: A high on-time percentage can be expensive, especially for an ultra-low-cost operator.

You spend a lot of money on recovery. You're better off spending the money keeping customers happy.

Spirit chief executive Bob Fornaro

Getting closer to the 90th percentile means allotting more time for flights and ensuring everything goes right on the ground. Some airline experts equate it to "buying" on-time performance. This is why Spirit won't challenge the industry leaders-Hawaiian , Alaska, and Delta -at 90 percent and higher.

The goal is to find the right balance between cost and punctuality, the kind of calculus every carrier performs when building schedules.

"What is the right on-time performance number?" asks Steve Hozdulick, managing director of operational performance at Southwest Airlines Inc., which battled rampant delays in 2013-14. "What's the right number to be competitive?" These are the questions airlines ask themselves.

This issue has gained new urgency beyond just Spirit. United Continental Holdings Inc. is working to smooth reliability shortfalls that triggered customer defections dating to its 2010 merger, and American Airlines is melding two mainline fleets and schedules while fixing weaknesses in its regional unit.

Both labor under the shadow of a widely praised operation at Delta Air Lines, which has begun aggressively marketing its performance and commanding higher fares because of it.

At Miramar, Florida-based Spirit, the lack of emphasis on service, in part, spurred the board to bring in Fornaro, 63. With the airline's cost mandates, the new CEO decided he had to prioritise.

Delays tend to have an outsize impact on Spirit because of how its network is configured, with some cities seeing only one flight per day and others a few per week. Stranding passengers and trying to get an 87-jet fleet on track following, say, a big winter storm, can quickly snowball into an expensive mess.

"You spend a lot of money on recovery. You're better off spending the money keeping customers happy," by avoiding delays and other service problems when possible, Fornaro said.

There's passenger re-accommodation, airport food vouchers, employee overtime, and aircraft that aren't flying and thus not earning. And because Spirit has no agreements to book passengers on other airlines when a Spirit flight has a problem, the carrier has to buy them expensive tickets, priced for same-day travel.

"We're going off and buying tickets on the competition ... and you may get there, but you're still not happy," Fornaro said. A lose-lose for Spirit, in other words.

That dissatisfaction shows up in complaints: Almost seven out of 100,000 Spirit customers made their displeasure known in April, about three times the number of complaints at Frontier Airlines, a rival ultra-low-cost carrier (Frontier was No. 2, at almost 3 per 100,000).

And those seven complaining Spirit customers are the passengers who sought out the federal complaint form-many, many more complain directly to Spirit. A lousy reputation on reliability can drive customers to choose other, more punctual carriers.

Wall Street seems to be noticing the shift under Fornaro and his recognition of this reality. "Improved operational performance should result in better load factors for [Spirit] over time and is a natural evolution of the model to improve the brand and take greater share from legacy carriers," Credit Suisse Group analyst Julie Yates wrote in a June 20 client report upgrading Spirit to outperform. Shares have gained 6 percent this year following a 47 percent tumble in 2015.

Spirit has a few other tools in its kit as it works to repair its operations. It can reduce its Airbus planes' "utilization," which was about 13 hours per day in the first quarter. That allows for greater fleet flexibility.

It also can increase staffing to alleviate overtime expenses and amass more spare aircraft to help address disrupted flights.

Getting the first flight each day dispatched exactly on time-a big push at Southwest and American-can also keep planes on schedule. Additionally, there are a certain number of flights that miss the federal on-time window by mere minutes. Airlines can often "harvest" those flights for on-time performance by pressing them into the 14-minute window, without added cost, Hozdulick said.

Spirit's advantage when it takes on behemoths such as American and Delta isn't chipper staff or fancy snacks but its leaner cost structure. Fornaro said five months of operating data have convinced him that Spirit can boost its on-time performance in a "cost-neutral" manner.

The airline's cost per available seat mile, 7.3¢ in the first quarter, is below all other carriers save for Allegiant Travel. Spirit boasts that its cost base is one-third below that of the next lowest, Southwest, on a stage-length-adjusted basis (which allows for Spirit's generally shorter flights compared with the bigger carriers), and 114 percent below United's.

This low overhead is why Spirit executives "never want to be No. 1 in on-time," Fornaro said. Another factor is the addition of block time to schedules. This is the duration carriers allot for actual aircraft movement from a departure gate to the arrival gate and is one of an airline's most valuable and expensive resources.

Block time is the period when an airline generates revenue, so adding any that isn't actually needed costs money-along with the cost of crews, who are on the clock when the plane moves. Fornaro said a "small component" of Spirit's fixes will be from adding block time. (The classic example of block padding is when airlines allocate 90-95 minutes for the 40-minute flight from Washington Reagan National to New York's LaGuardia Airport, given airspace congestion and frequent delays.)

Airlines also schedule-and try to reduce-the amount of "turn time" between departures. At Southwest, for example, the average fleetwide turn time this summer is 40 minutes, skewed higher by more passengers, more families with more bags, and the Boeing 737-800, the largest plane in Southwest's fleet.

That model has a minimum turn time of 45 minutes. (In the 1970s, Southwest touted its 10-minute turns.) The more time spent turning a plane around on the ground, the less money the airline is generating in the sky.

By year's end, Fornaro says 75-80 percent of Spirit's flights should be on time, which is just below the trailing 12-month performance at Southwest and United. "Next year at this time we're going to run a very reliable operation," he said.

-Bloomberg