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Spirit Airlines Takes on American Airlines With Miami Expansion

For years, Spirit Airlines (NYSE: SAVE) and American Airlines (NASDAQ: AAL) have coexisted in South Florida with minimal drama. American Airlines dominates Miami International Airport, carrying about 75% of domestic traffic there in 2019. Meanwhile, Spirit Airlines has offered its low-fare service at Fort Lauderdale-Hollywood International Airport, about 30 miles north, typically as the largest or second-largest carrier there.

However, Spirit Airlines is about to shatter this delicate balance. Earlier this week, it announced plans to begin flying to Miami, launching 30 routes this fall.

A popular pandemic destination

Air travel demand to Miami has recovered much faster than most of the country, as Florida has reopened its economy faster than most states and leisure travelers have flocked to beaches and other outdoor-focused vacation destinations.

For the 12-month period ending in February 2021 -- representing the peak of the pandemic -- domestic traffic at Miami International Airport fell 60% compared to the previous 12-month period. For comparison, domestic traffic fell 74% in Los Angeles and plunged 79% in Boston. In March, domestic traffic recovered to just 19% below 2019 levels in Miami.

Strong demand in the Miami market has been a boon to American Airlines. But it has also stimulated an uptick in competition. Since last fall, two of the biggest low-fare airlines in the U.S. -- Southwest Airlines and JetBlue Airways -- have begun flying to Miami after previously serving the market via Fort Lauderdale. Now, Spirit Airlines is poised to join them.

Image source: Spirit Airlines.

Spirit Airlines goes big in Miami

While Spirit won't be the first airline to start serving Miami as the U.S. airline industry recovers, the scale of its ambitions there is unique. Southwest Airlines entered Miami last November with 12 daily departures and now offers up to 20 daily departures. Meanwhile, JetBlue operates up to 14 daily departures from Miami.

By contrast, Spirit Airlines plans to launch its Miami service in early October with nine flights a day spread across 10 routes. By the second half of November, it expects to operate 29 daily flights on 30 routes from Miami. (The airline needs to finalize agreements with the airport for gate space and ticket counters before firming up its flight schedule.) Management anticipates that this will instantly make Spirit the second-largest airline at Miami International Airport.

Of course, Spirit will still be dramatically smaller than American Airlines in Miami. But it will force the airline giant to either match its rock-bottom fares on a broad selection of routes or risk losing price-sensitive customers. Both options could slow American Airlines' recovery in this key market.

An important move to restore capacity

Spirit Airlines' entry into the Miami market could spark a brutal fare war with American Airlines. However, the budget carrier has a built-in customer base in Miami in the form of cost-conscious travelers who previously drove to Fort Lauderdale to catch Spirit Airlines flights. Additionally, Spirit's rock-bottom cost structure and its large stream of ancillary revenue enable it to make money even with extremely low base fares.

Image source: American Airlines.

All things considered, this makes Miami a promising growth market for Spirit Airlines. And finding growth markets is essential for the company. As of late April, Spirit estimated that capacity would be within 2% of 2019 levels by this month. But the carrier expects to end this month with 164 aircraft in its fleet, up 21% from two years earlier. It plans to continue expanding its fleet rapidly in the near term, ending 2022 with 194 planes.

This means Spirit can't content itself with restoring capacity to 2019 levels. Due to the growth of its fleet, keeping capacity in line with 2019 would entail reducing aircraft utilization, pressuring unit costs.

Instead, Spirit Airlines needs to grow. In fact, it's aiming to increase capacity more than 30% from 2019 levels next year. Spirit's bold growth plan in Miami looks like a promising way to make progress toward that ambitious target -- mainly at the expense of American Airlines.

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Adam Levine-Weinberg owns shares of JetBlue Airways and Spirit Airlines and is long January 2022 $10 calls on JetBlue Airways and short January 2022 $40 calls on Spirit Airlines. The Motley Fool owns shares of and recommends Spirit Airlines. The Motley Fool recommends JetBlue Airways and Southwest Airlines. The Motley Fool has a disclosure policy.


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