As it expanded rapidly in the years following its 2011 IPO, Spirit Airlines (NYSE: SAVE) acquired a well-deserved reputation for lousy customer service. In its drive to maximize profits while keeping costs as low as possible, the ultra-low-cost carrier implemented unreasonably high fees, while failing to prioritize on-time performance or friendly service.
As a result, it was no surprise that Spirit Airlines ranked last or second to last in each of the first three years that it was included in the annual Airline Quality Rating report.
However, Spirit Airlines has worked hard to improve the quality of its service over the past year and a half or so. Those efforts clearly paid off, as evidenced by a big improvement in Spirit Airlines' score in the 2019 edition of the Airline Quality Rating study.
Spirit Airlines is rapidly improving the quality of its service. Image source: Spirit Airlines.
What does the report measure?
The Airline Quality Rating report is compiled annually by researchers at Embry-Riddle Aeronautical University and Wichita State University. It creates a composite quality score for each airline using government data on four objective metrics important to air travelers:
- On-time performance.
- The frequency with which passengers are involuntarily "bumped" from their flights.
- The rate of mishandled (i.e. lost, destroyed, or delayed) baggage.
- The number of official customer complaints made to the U.S. Department of Transportation.
Scores are reported as negative numbers, with numbers closer to zero representing higher-quality service.
Spirit Airlines moves up
In the 2019 Airline Quality Rating study, which covers the 2018 calendar year, Spirit Airlines took the No. 7 spot among the nine airlines tracked. In addition to beating fellow ultra-low cost carrier Frontier Airlines for the second time in three years, Spirit also outperformed American Airlines (NASDAQ: AAL) in 2018.
For 2018 as a whole, Spirit's AQR score was negative 1.00, up from negative-1.66 in 2017. This continued a trend of improving performance over the past few years: Spirit Airlines scored negative 2.01 in 2016 and negative 3.18 in 2015.
Most other U.S. airlines have been getting better, too. The industry average score improved to negative 0.66 last year, up from negative 0.79 in 2017, negative 0.95 in 2016, and negative 1.21 in 2015. However, Spirit Airlines has certainly achieved the most dramatic improvement in its AQR score over this period.
Digging into Spirit's performance improvements
A big driver of Spirit's improving AQR score has been better on-time performance, which has been a key area of focus for management. In 2018, 81.1% of Spirit's flights arrived within 15 minutes of their scheduled arrival times, ahead of the industry average of 79.6%. That followed three straight years of improvement. Back in 2015, only 69% of Spirit's flights arrived on time, compared to an average of 79.9% for the industry.
Spirit has also significantly reduced the number of official customer complaints over time. The airline received 2.83 complaints per 100,000 passengers carried last year, down from 11.73 complaints per 100,000 passengers in 2015. However, that was still considerably worse than the 2018 industry average of 1.04 official complaints per 100,000 passengers.
Meanwhile, Spirit Airlines has always had better-than-average baggage performance. In fact, it has had the lowest rate of mishandled bags in the industry for the past two years. On the other hand, it bumped passengers at a higher rate in 2018 than it did three years earlier.
In a particularly welcome development, Spirit's AQR score improved as 2018 progressed, averaging about negative 0.77 in the fourth quarter. This was driven primarily by a sharp drop in the number of passengers bumped and stellar on-time performance. It will be interesting to see if the carrier can maintain this momentum in 2019. Initiatives to boost profitability by increasing aircraft utilization and encouraging more connecting itineraries could lead to more frequent delays and more mishandled bags if they are not executed with precision.
Bad news for American Airlines
Spirit Airlines' service improvements don't bode well for American Airlines. The No. 1 U.S. airline hasn't been known for excellent customer service in recent years. While its AQR score improved between 2015 and 2018 -- moving up from negative 1.73 to negative 1.10 -- it has gone from leading both ultra-low cost carriers by a wide margin to trailing Spirit Airlines in the AQR rankings.
American Airlines fell behind Spirit Airlines in the 2019 AQR rankings. Image source: American Airlines.
If American Airlines comes to be seen as equal to, let alone to inferior to, Spirit Airlines in the eyes of air travelers, its pricing power will deteriorate. This is not just a theoretical concern. There is substantial route overlap between the two carriers, particularly at American's Miami, Chicago, Dallas-Fort Worth, and Los Angeles hubs.
The silver lining is that American Airlines executives recognize the importance of improving the carrier's operational performance and customer service. Investors will have to wait and see if the world's largest airline can make meaningful progress on that front in 2019.
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Adam Levine-Weinberg owns shares of Spirit Airlines and is long January 2020 $20 calls on American Airlines Group. The Motley Fool owns shares of Spirit Airlines. The Motley Fool has a disclosure policy.