193: Lessons From The Fall And Rise Of Spirit Airlines With Ben Baldanza
If your strategy aims at changing the world, then it can surely encourage a positive domino effect. In this episode, Mitch Russo interviews Ben Baldanza the CEO of Diemacher LLC, Independent Board Director of JetBlue Airways and Six Flags Entertainment, and podcast host of Airlines Confidential. As an accomplished leader, Ben first worked with American Airlines. From there, at an increasing level of responsibility, he went to Northwest, Continental, Taca, and US Airways until 2005, when he accepted the role of President of Spirit Airlines. Ben’s journey paved the way to standing out and changing how airlines function. He shares the four pillars that make any consumer-facing business a powerful proposition. He also narrates how he and his Spirit Airline team converted over time from an airline that was low-cost by default to an airline that was low-cost by design.
Lessons From The Fall And Rise Of Spirit Airlines With Ben Baldanza
Do you know any other show that’s a two-way conversation? You can talk to me anytime you want and I will respond back to you. I’ve had voice messages from all over the world. I want you to click on the button that’s on every show page that says, “Speak to Mitch,” and I’ll return the favor with an honest, prompt answer. This episode is sponsored by VEA, the Virtual Entrepreneurs Association. Finally, a place with all the tools, resources, discounts, education and community to help you on your entrepreneurial mission. Think of VEA as the AAA or Swiss Army knife for business. This is an incredible value and while the price is still super low, check out this resource-rich asset that can make you money by saving you money on the things you already buy. For a limited time, you can get your 30-day trial of VEA, as well as a copy of the Founder Daven Michaels’ book, The Virtual Entrepreneur at VEABusiness.com/mitch. Now, onto my guest and his incredible story.
He started selling subscriptions at age eleven, delivering newspapers. After he became fascinated with selling, after he tripled the number of subscriptions on his route, he fell in love with customers and his pathway through the cosmic universe was lining up for him. He worked for Amtrak and became fascinated with the transportation business. He decided to make this area his great expansion into the future and he was on target. From college, he went to American Airlines and from there at an increasing level of responsibility, he went to Narthwest, Continental, Taca, and US Airways until 2005, when he accepted the role of President of Spirit Airlines. Now, Spirit Airlines is still probably one of the most profitable airlines in the business. When he took control of the company, it was losing $80 million a year. Spirit is also a controversial company, luring people in with low-cost fares and then slamming them with huge charges for additional services. Do people love Spirit or do they hate them? It’s a surprising answer and some of the wisdom you are about to learn is going to help you build your company. Welcome, Ben Baldanza to the show.
Thank you, Mitch. It’s wonderful to be here.
I also wanted to mention that you’re no longer the president of Spirit. You were until 2016, but a lot of the interesting information that we were about to share is quite current in the way that the airlines operate. We don’t do a show about airlines, that’s your business. I know you do an amazing podcast called Airlines Confidential. This is more about business building. What I’d like to do is get started with your life story of coming starting at the beginning. I also want to get into some of the stuff you did and how you were able to make these controversial decisions at Spirit, but it turned out to be good in the end. Let’s start with how you ended up in this business. Tell us from the beginning what happened.
I grew up in a small town in Upstate New York called Rome, New York. I went to college in Upstate New York at Syracuse University. While I was there, I spent one semester in Washington, DC as part of the program. That’s where I did the work at Amtrak. I realized at that point that transportation was fascinating because there are big capital costs, there’s big labor and there’s a big government role. I liked the network aspect of it and a strong customer service aspect as well. When I went to graduate school, I focused on transportation, transportation policy and transportation economics at Princeton University. I went to go work for American Airlines in the middle 1980s. As some of you may know, but probably most don’t, the airlines in the United States were deregulated by the US government in 1978.
The middle 1980s were a real Wild West time for US airlines. They were starting this experiment of deregulation. Many airlines were starting, the whole business had changed and airlines could fly wherever they want and charge whatever they want. This was all new because prior to that, the government regulated where you could fly and what you could charge. Working at American Airlines in the 1980s was almost like a postgraduate work, in the sense that I worked for a pioneering leader in the airline industry named Robert Crandall, who lives a little bit north of you in Florida. American in the 1980s was responsible for many innovations that seem very common in the industry nowadays. They created the first frequent-flyer program for example and they pioneered the use of computer reservation systems, which are pervasive nowadays. They pushed the idea of carrying traffic to big hubs and connecting and built Dallas/Fort Worth International Airport that way. These things had be taken on by the industry by the middle ‘90s. Later, American lost some of that leadership position, but they’re still as a result of consolidations one of the largest airlines in the world.
I left American after about five years. I spent time in finance and a quirky area of marketing called yield management and I went to work for Northwest Airlines. They had been purchased, at the time, in a large LBO (leveraged buy-out) at the end of 1989. They were trying to figure out what they could do with their airline. They were the fourth-largest airline in the US at that time. It was funny to me because in my first six months at Northwest, I probably did more than in almost six years with American Airlines. Even though I certainly learned a lot from American Airlines, but American Airlines had many resources, smart people, and data. Northwest flew by the seat of its pants in a way, metaphorically, in terms of the way they ran their business. I felt much more entrepreneurial there. It was a great experience.
I then went to work for Continental Airlines. They had a well-reported turnaround in the 1990s, led by a dynamic CEO named Gordon Bethune. I ran the pricing department of Continental initially. I then ran the scheduling department, which decides where the airplanes fly and such. That was an exciting role. I’m already in my early 30s and I was a big executive vice president of a big US company, but I had never managed a P&L or anything like that. I got the opportunity to move to El Salvador, which some people might wonder why I would say that’s an opportunity. There was a private company operating there called TACA. It is now part of Avianca, a Colombian airline. TACA was a private company that was run by two smart guys. They owned it privately and they asked me to come down to help them put their airlines together. They owned five different airlines that were all small.
My wife and I spent three years in El Salvador. I ran the company. I had to think about operations, customers, marketing, finance, and cashflow. While I had done some of those things in my career in the past, I had never put it all together. I realized how fun it could be working in a smaller company. TACA at the time had 35 airplanes, but we made a lot of change. We converted the fleet, changed where we flew, and we combined different operating certificates into a single one. It was an exciting time. After that, I went to work for US Airways in Washington, DC. US Airways was the sixth-largest airline at that time. They’re now part of the American Airlines Group. At US Airways, I was trying to figure out how a smaller company could compete against much larger companies. How do you take the competence of a smaller airline? How do you position yourself against a certain customer group so that you can be the preferred choice when, in fact, there are bigger competitors out there that want to eat your lunch?
In 2005, I got the opportunity to go to Spirit Airlines. Spirit was a money-losing airline that had been bought by a private equity group called Oaktree Capital. When I told people that I was accepting this job at that time as the President of Spirit, most people thought I was crazy. Most people thought that Spirit Airlines shouldn’t even exist as an airline. They have no strategy and were small with 32 airplanes. They are like, “Why would you go and do something like that when you’ve got this nice role at USA Airways and such?” My experience at TACA had lit the fire in my belly about working for a little smaller place and being able to control the strings a bit more.
Ben, could we talk a little bit about that? I find that fascinating. It’s interesting and it reflects a lot of my own experience. When I ended up going to work for a large company, I felt limited, but I learned much. I learned all about markets and channels and distribution. None of that was my job. My job was in engineering, but I learned all of these things because it was part of understanding how my products would flow through the marketplace. I never realized how valuable that info would be and how that experience would change my world a few years later. It was only when I started my own company and I can relate that to your TACA experience. I started my own company and all of a sudden I didn’t even know what to do. I just started doing it. A lot of us who create businesses are in that situation as well, like when you are with TACA. You probably noticed and you might have been surprised by how much you knew at the time, how much information was there, the wisdom that you leveraged to take TACA and change the airline so dramatically. As your story continued, here you are, at Spirit with all of this wisdom, all this experience, the joy of being involved in the small enterprise and in playing with the Monopoly pieces that are the size of airplanes. That’s got to be a lot of fun.
It was a lot of fun, but it was a lot of late nights too. The twelve months prior to my joining Spirit, the airline lost almost $80 million and the private equity group that had bought the airline was looking for someone who could help reverse that. Over the first year, we changed a lot of things. One of the great things about airplanes compared to hotels or factories or things is that they move. If they’re not working in one place, you could try it someplace else. Spirit was an airline at that time that was low cost by default. In 2005, Spirit was a low cost because it was cheap. They didn’t spend money. Their airplanes were cheap. They didn’t pay people well. They didn’t spend money on anything important. In fact, one of their positions at the Fort Lauderdale Airport at that time was in the international terminal of Fort Lauderdale when there were almost no international flights from Fort Lauderdale. They moved into that terminal because space was cheaper. Nobody wanted to be there.
When we were there in the 2005 time frame, we realized, one of the things I learned working for a guy named John Dasburg at Northwest Airlines was he once quoted this saying, “The fastest way to stop losing money is to stop doing things that lose money.” While everybody laughed at that statement, I realized the brilliance of that statement. We were doing lots of things that lost money. We said, “Let’s stop doing those things.” We changed where the airline was flying first. Initially, Spirit was flying from the Midwest and Northeast, mostly to Florida, different points in Florida. Some of that flying worked, but a lot of it didn’t. By work, I mean financially work.
We had this position in the international terminal and we had low costs, even though it wasn’t low cost the right way, it was cheap. It wasn’t low cost production-wise. We said, “Why don’t we start flying into the Caribbean where the fares are high and there’s no Southwest there. There are no other low fare carriers.” It’s pretty much American Airlines out of Miami was the dominant carrier from South Florida to the Caribbean at that time. We said, “Maybe we can make a go of it with a little lower fare where nobody’s tried to go before.” These markets are all close to the same plane that can fly to New York and also find Puerto Rico and the Dominican Republic and places like that. That was positive.
We started to reverse the trend of the P&L a little bit. A year later, we had started a process of converting the fleet from older MD-80 airplanes to the modern Airbus A320 airplanes, which is an airline flown all over the world, like the Boeing 737, a popular plane. The private equity owners that had bought Spirit had made an order for this plane and their investment thesis was, “If we can bring in new airplanes and someone who knows how to run an airline, maybe we can make some money and turn this thing around.”
From 2005 to 2006, oil prices started to tip up a bit. Oil prices are important input costs for an airline as you would expect. We had accelerated the pace of the conversion from the older MD-80 airplanes to the A320 and that put a strain on the company’s cashflow. That required the equity partners to put a little more money in. It also meant we had to retrain all of our pilots because if you were qualified to fly an MD-80 airplane, that didn’t automatically make you qualified to fly an A320 plane. It’s known as a fly-by-wire airplane, which means when the pilot moves the control surfaces or instruments in the cockpit, they’re not physically connected to the control surfaces. They’re attached to a computer. I don’t want to say it’s a video game because it’s not a game, but when they move a stick, it sends an electronic signal to something that sends an electronic signal that moves a servo, that moves a part on the wing or on the elevator.
That was new for pilots. For about pone and half years, almost 20% of our total pilot costs, which is a high cost for an airline, was paid to pilots who didn’t fly $1 of revenue because what they were doing was learning to fly the new airplane. About that time, in 2006, Oaktree Capital partnered with another equity firm called Indigo Partners, which had a good experience in low-cost airlines around the world. That’s when we decided that we’re going to take a different approach to be an airline. We had an epiphany, Mitch. This epiphany was, “What if we stopped competing for customers the way most airlines compete for customers?”
The way most airlines competed for customers was trying to explain why their flights were the best time, why their service on board was the best, why they would be the most comfortable, why their lounge in the airport was better than the other guys, or why their frequent flyer program was better than the other guy. All these incentives to say, “Here’s why you should fly with me because my overall product to you is better for you.” We said, “What if we throw that out the window?” We’ve only got 32 airplanes. American, United, Delta and Southwest have hundreds each. We can’t play their game. If we play their game, we’re going to lose.
What if we say, “We’re going to be the lowest price. We recognize every customer won’t want to fly with us that way, but we know that some certainly will.” We looked at all these surveys that we found and all these surveys said, “If you ask people how you choose the airline, you fly?” Overwhelmingly, the price was the number one reason that they picked one airline over another. Some people wanted a business class cabin. Some people cared about the frequent-flyer program, some people cared about the time of the flight or nonstop service versus connect service or other attributes.
Overwhelmingly we said, “We think that if we can have a very simple four-part customer proposition, we can win a good share of a segment of the market.” That proposition was to have the lowest total price. If you fly on Spirit, you’re going to pay less in total than if you fly on another airline. Secondly, it will be clean, third, we’ll be friendly, and fourth, we will be reliable. If we said, “With those four things, we can win a lot of business.” There certainly will be people who don’t want to fly us because some things we have to do to make those four things come true will be alienating to some customers. We had this epiphany and we said, “That’s the way we’re going to compete for customers, lowest fare, clean, reliable, and friendly.”
Ben, those are the four pillars of what I would imagine will make about any consumer-facing business a powerful proposition. When you did this and you used the term low-cost, where did the idea to advertise flights for $9 come from?
Let me tell you what we had to do to make that vision come true. We had to do two things. We had to lower our cost of production and that meant to produce seats going places for a lower cost than we were producing them. That doesn’t mean to pay people less or buy cheap airplanes. That means do it with high productivity. We converted ourselves over time from an airline that was low-cost by default to an airline that was low-cost by design. For example, the FAA overseas safety in the airline industry. They said it’s safe to put 145 seats on an Airbus A319 airplane. We had 138 or 135 seats on our MD-80s. We said, “If the FAA says it’s safe for the 145, couldn’t we charge everyone a lower price if we put more seats in the airplane?” We put more seats on the airplane. We took all of our airplanes and we put as many seats in them as the FAA said was safe. That allowed us to charge a lower price to everyone. We looked at every physical gate and facility that we had.
In New York’s LaGuardia Airport, for example, we flew eleven flights a day. LaGuardia is one of only three airports in the United States that is slot controlled, meaning, you have to have a government right to land or take off at a certain time. Most airports in the US aren’t like that, but LaGuardia is. We had eleven and we couldn’t make it twelve. We couldn’t grow because we didn’t have any more slots, but we used two gates and we said, “What if we reschedule this so we fly all eleven out of one gate and one will come in and then the next one will come in? We’ll stretch the day a bit. We’ll do a model for one gate,” and we were able to do that.
All of a sudden, our cost of the airport was cut in half in LaGuardia because we operated everything out of one gate, instead of two. We looked through everything like that and we said, “Let’s look at everything we do and can we do it more efficiently? Why do we have to charge customers for everything if they don’t use everything?” It’s funny, I see all these ads for Liberty Mutual with the emu saying, “Only pay for what you use.” I was like, “I was saying that back in 2007.”
We had this idea that we noticed that fewer than 70% of our customers checked bags, and yet it was expensive for us to carry bags. We said, “What if we lowered the price for everyone and then charged the people who carry the bags? Make them pay for the infrastructure for the bags, for the bag belts, the insurance, the people to move the bags, things like that.” We were able to lower the fares and put in that charge and the media hated it, but it worked okay, in terms of economics, people got that. Fewer people carried bags, which was okay because when people carry fewer bags, we burned less fuel because there was less weight on the plane. That was synergistic with a low cost of operation.
Over the three years, from 2007 to 2010, we stripped out a whole bunch of things that used to be included with the fare and made them all separable products. In the process, let me give you a couple of numbers that explained what happened. When I got to Spirit, our average ticket price was $105, one way. After the ticket, we sold about $5 of other stuff, which might’ve been rum and Coke on-board or maybe an excess baggage charge if somebody brought more than the allowable bags. By 2010, our average price was about $75. We were collecting about $37 in other stuff. The total price customer paid during that time went from $105 and $5. That’s $110 to $112 and yet, the fuel price had gone up a lot in that time and yet, we were making money on that.
We said, “This is nice.” In 2008, oil went up from $57 to $147 a barrel and the US airline industry lost $10 billion but we made money. My CFO and I used to joke that we outperformed our industry by $10.1 billion because they lost $10 billion and we made $0.1 billion. In 2009, there was a fairly major recession for business travel and large airlines in the US saw their revenues from business travel drop in double-digit territory in the first quarter. Our unit revenue was flat year over year because we weren’t carrying business travel. We started realizing there’s a lot of resilience in this model.
People reading this have probably at one point or another flown on Spirit. For me, years ago, I had a particular Spirit flight where I vowed never to fly on that airline again. Let me tell you why. I’d love for you to address these things. I got on Spirit Airlines. The first thing I experienced is the seat size. The cushions are about two inches thick compared to the average airline seat. I sat down and had planned to work on my manuscript while flying, but I couldn’t do that because the tray cable wouldn’t come down far enough. While I was on the flight, there are no free meals. There are no free snacks, nothing at all, but it is totally fine. On the way home, the flight was canceled because of weather in a particular city. It turns out that there wasn’t going to be another flight for three days. You can imagine how that must’ve felt as a flyer trying to come home with all the obligations that a business owner might have. Here you are on Spirit Airlines and you’ve got a three-day delay before you can return home. I was furious.
The people at the counter, admittedly they were handling throngs of traffic that were all furious of being delayed by that much time. How does that work in the real world? How can you put people on a plane that is more uncomfortable than they’ve ever been on before where you can’t get any work done because the tray table won’t go down? Frankly, the plane was clean. One of your pillars was in place there. It was low-cost. It was clean. I wouldn’t have called it friendly, but it wasn’t hostile. Unfortunately, it’s not reliable at that time. It probably wasn’t Spirit’s fault because of the weather, but at the same time, it wasn’t conducive to building what I would call a customer relationship. Talk to me a little bit about these types of reactions. I might not be the only one to have said these things before.
No, you’re not, but having worked for many airlines before Spirit, it’s not only Spirit that those things get said about either. I will say that the airline business is a tough business for a couple of reasons. One of them is when you take machines and Mother Nature and people, all of those things are ripe for failure at times. Sometimes they all fail together and sometimes one or two of them fail at the same time. That creates difficult situations. In Spirit’s case, this was their own doing. This isn’t an excuse saying that they should be absolved for that and you shouldn’t be mad at them for that. You should be mad at them for canceling your flight and saying, “The best we can do for you is three days later.” That’s a failure of the system, clearly, but part of their issue or part of their business model was because they had the lowest price and they weren’t carrying business travelers for the most part.
Let me say what I mean here, Mitch. When I say business travelers in the airline industry, I’m talking about people for whom their company buys their ticket for them as opposed to you, who bought your own ticket for your business. That’s a little different and Spirit carried a lot of customers like you, in that sense that they paid for their own tickets. In fact, we thought of ourselves when people asked us, “Who’s the customer for Spirit Airlines?” We would say, “Anyone who pays for their own ticket.” If somebody else is buying your ticket, go at the time you want, sit in the more comfortable seat, get yourself an upgrade to business class, stay in a nice lounge. That’s fine, but at Spirit, we’re for the guy or the woman who pays for the ticket themselves and wants to get there safely. In your case, you didn’t get there when the flight was canceled and there clearly was a failure, but because of Spirit’s model, they tended to fly only about once a day everywhere they flew.
An exception to that was Fort Lauderdale to LaGuardia, which they flew 4 to 5 times a day, but few routes looked like that. Most of them were once a day and also Spirit tended to fly or still tends to fly full. If a flight cancels, the reason they can’t get you out for a couple of days is that all the planes the next couple of days are full too. They can only get a few more people on each plane and that’s a terrible situation. For many years with Spirit, the decision that we made was to bias us against the on-time performance, in favor of better cancellation performance. We would run a flight 4 to 5 hours late rather than cancel. Even though that would make customers mad, we thought it made them less mad than if we cancel. That puts the company in a difficult position where it was always coming up last in the on-time performance. We would say, “We canceled fewer flights than our competitors.” People would say, “Don’t talk to us about that. You’re only 60% on-time and everybody else was 80% on-time.”
There’s some incredible logic that you’re explaining and once again, I’m going to broaden this topic a bit to anybody who’s reading and all businesses. It’s been a tenant of most of us who runs businesses that the most important thing is to make people happy. Yet, you’ve clearly pointed out that the most important thing that any business has to do is make a profit. Here’s the difference Spirit has made, they have chosen to make a profit at the altar of customer satisfaction. Where I have the disconnect is that I might be the lowest priced business consultant on the block and I won’t return your phone calls on time, but I’m smart and you’ll get lots of great ideas and great guidance when working with me. That doesn’t seem to resonate that well with me. The thing that I’m interested in most is, even though the seats were crappy, the tray tables were too small, the flights were delayed, even though that was the case, your business was booming. In fact, you went from an $80 million loss to $100 million in profits. There’s the part that I want to get a little bit deeper with you on. Is that okay?
Mitch, I’m not going to say to you that everything we did while I was CEO of Spirit was perfect. We were testing, we were learning. We made mistakes and we recognized that we needed to be better to customers than we were being. We liked the fact that we were giving them the lowest fare and that was important to us. Not just the lowest fare, the lowest total price because we could see with data that even after hitting you with your bag charges and your seat charges and things like that, that the total price people paid was less than the total price they paid on other airlines. That kept us going in the sense that we knew we were meeting that goal, but at the same time, we knew we needed to be more reliable, to be more on-time, cancel fewer flights, and lose fewer bags. We didn’t lose that many bags because few Spirit customers connect.
Within the airline industry, most of the time, the bag is lost or mishandled because you connect, but your bag doesn’t. We didn’t overbook a lot of people either. We didn’t bump a lot of people, but we didn’t run that on-time and we canceled too many flights. We knew we had to do better than that. There’s one thing that we learned in spades in Spirit. This is going to sound maybe not as customer-friendly as I mean it to be, but I do mean it to be friendly. We realized at Spirit that we have to be a little less concerned about what people say and watch carefully what people do. That’s an important point. It’s not that if they’re willing to fly us, even though we’re terrible, we should accept being terrible. I don’t mean that at all.
Spirit Airlines: If everybody had the view of serving other people better, it would make the world a better place.
What I meant is that having the lowest price in a business that many people see as a commodity, nobody goes to dinner to a place they think is a commodity or buys a car that they think is a commodity. For an airline, many people think, “I use the airline to get to my vacation or to get to my business. I’m not doing my business or on my vacation until I’m off the airplane.” In that sense, the price is important to many people when they choose which airline they’re going to fly. We felt we did everything we could to make that price as low as possible. Did we get ahead of our skis on the customer issues for that? We absolutely did.
After the company became a public company in 2011, we started investing in exactly the problem you had. We started trying to be much more transparent about what our business model was. We had a challenge that people would buy Spirit and they’d like the fare, but when they got on-board and it wasn’t Delta or JetBlue, they’d say, “What is this?” I remember one flight where I was flying the airline, a woman sitting across the aisle from me said to the flight attendant, “Is there a movie on this flight?” I wanted to kiss her after she said this, “You’re having a Delta moment.” That was funny that she handled it well. She didn’t get defensive about it, but we realize that we felt we had a strong value proposition that you’ll pay less money on us than anywhere else. You’ll get to the same airport, spend more money on your meal, stay in a nicer hotel, go for an extra dive and hit an extra nine holes.
However you want to spend your money, spend it on those things rather than on a flight, but at the same time, we took many costs out and we made many decisions against that four-part proposition like, “Not everybody does this, let’s take that out of the fare and let’s charge it.” By the time I left, that $70 average fare was down to $60 average fare. The $37 in after the fare collections were over $50. We were still at an average of around $110, but more of it was the customer choosing to buy the bag or pick the seat or eat the food or whatever. We thought the core of that work, but we had to operate better.
What happened is starting in 2011, when the company had enough cash and the cash was coming from the IPO. When the company was liquidity-constrained during most of that transition, we were paying for maintenance on airplanes that weren’t going to be done for another 5 or 6 years because we leased our airplanes and maintenance. It would need to be done in years or so. The people who leased us, the airplane, required that we paid them escrow each hour we flew so that if we defaulted on that plane, they could return it to its original condition and maintenance. We were buying new airplanes from Airbus and they required that we start paying them for two years before they arrived. We are sending a lot of money out of the company for business that wasn’t happening, not only in that week but even in a year.
That put us in a tough position. The IPO largely fixed that because it brought more working capital to the company and that’s when we could say, “We’ve lowered all these costs.” We’ve made all the things we need to do to make this model work, but there are parts of the model that aren’t working well enough. That’s when we started investing and we hired a branding company and branded the fare as Bare Fare, which Spirit is still using. We talked about wanting to explain to people, “Here’s the value proposition. You’re going to pay a low rate, but you can’t expect what you get on another airline, but here’s why this is all good for you.” That’s been a slow process. After I left, the guy who replaced me, Bob Fornaro, who’s a good leader in the airline industry, pushed that even further and he pushed operational things that I hadn’t pushed when I was there to make the airline more on time and fewer cancellations. That’s been good. I think the Spirit nowadays is not the airline that you flew a couple of years ago. It’s still a low price, but they do a good job for customers for the most.
You’re absolutely right. It turns out that I put my daughter on Spirit to come up and visit me here in Florida. She had a nice experience. She did not buy extra seats. She came with her backpack. She put it under the seat in front of her so she didn’t have any luggage charges. It turns out that the flight was on time and she had a great experience. The real question is, particularly for those of us who run businesses, how can we adapt what you did at Spirit to make our businesses more successful? I want to ask, part of it is the marketing, part of it is what you deliver and part of it is what you charge. Do you believe that there is a price sensitivity that most businesses have that could be fixed with some of the ideas that we talked about on the show?
Mitch, that’s a great question and there are a lot of lessons that we learned at Spirit. A lot of lessons we learned the hard way too. We made mistakes for sure, but there are a couple of things that were good about the process we used at Spirit. I would highly recommend this process to people running businesses and especially if they’re starting in business. One of those things was to understand who the customer is that you’re trying to serve and recognize you don’t need to serve the world. You can have a business that caters to a specific type of customer. In our case, it was the customer who paid for the airline tickets themselves. In your business’ case, you can define it the way you want, but think about it, I want to be the business that does the best job for this group of customers. That doesn’t mean you won’t serve other customers, but you’re going to make decisions all around, “Can I make what that customer needs better for them?” That’s important.
Once you’ve made that decision, who it is you’re trying to serve, think about the things in your business that do that and the things that detract from doing that. Stop doing those things that detract from that and add more things that make things best for those customers. At Spirit, if the people are paying for tickets themselves, they want to pay a lower fare. This sounds silly, but I went to bed every night thinking, “How can we make the fare lower? What can we do to make that fare lower?” It was all about the price. Not every business needs to think that way. Not every business is a price-driven business. Even airlines are not all price-driven, but a segment of the business is, and that’s where Spirit excelled on the price-side.
Still, you can think about what am I doing? I’ll give you a great example. There’s a store not far from our house, I won’t even give you the name because that’s not fair. It’s one of these stores that processes packages and things like that. I had a package to send and it was already labeled. I could drop it off. I went to do that and I walked in the door and there were four people working there. Literally, nobody came to take my package for over five minutes. Within those five minutes, several times, I said, “Can I leave this here? It’s ready to go. It’s all labeled.” They were like, “We’ll get to you.” They were doing things on their computer. I’m sure they were doing things that were important to them, processing something or responding to some feedback or paying an invoice or something.
Finally, when they got around to it, they took my package. I’ve literally never brought a package back to them again because I was the kind of customer I would think they would like — somebody who comes in fully prepared. All they got to do is take the box and let the shipper pick it up and they get paid for it. They didn’t even have to print a label for me. They didn’t have to spend a dollar. They couldn’t even get that right. I think it’s important for businesses to know who your customers are and what do what those customers want.
The second thing is in any company’s cost structure, often businesses have what I call lots of safety nets. By a safety net, I mean redundancies in expenses because they develop that way or people might’ve thought it was easier to do it that way and such. If you scrape your income statement with a fine-tooth comb and say, “What are we doing in each thing? Are we doing it as efficiently as we can? Can we do less of it? Do we need to do it?” Almost every business can take some percentage of their costs out without affecting their customer service. In fact, they can use those savings to invest more in their customer service if they feel that overall they’re doing more things. The last thing is to recognize that different customers have different price elasticity. That’s an economic term that people’s demand for a product changes as the price change. That’s different for different products and for different people. Whatever business you’re running, know your price elasticity.
If you sell wine and you sell cheese, know how price changes in the cheese change your demand for cheese. Know how the price changes in wine change your demand for wine and those may be different. They may be different for some customers than others. The more you can learn about that by tracking what people do and not what they say. If you track that, then you’ll get smarter over time about where you need to be vigilant to make sure that you have a good price that will attract the business and where you can afford to take an extra few dollars because people will pay it. You’ll learn by getting the data, studying it and figuring that out.
These are some incredible lessons, some great wisdom that you’re sharing with us. To summarize, know who your customers are, do what those customers want. Get rid of the redundancies and recognize that different customers have different price elasticity. Finally, track what they do and not what they say. I think using some of the tools that you provided for us, we can all have a much more profitable business. Ben, one of the things we do with every single guest on the show is we ask them a couple of questions. Usually, these questions are interesting and the answers are always entertaining. We’ve got the first question for you, which is, “Who in all of space and time would you like to have one hour to enjoy a walk in the park, a quick lunch or an intense conversation with?”
In all of history, I would say that I would like it to be Galileo Galilei because he figured things out that the world hadn’t accepted yet. Rather than stay in his lab or his home and know the truth that was not believed by the rest of the world, he accepted that he would be ridiculed, that he would be considered a heretic for saying things like the earth moves around the sun, not the other way around. He had a conviction that his knowledge and that his process was correct and he took a lot of grief for that. That is an important thing for people to realize. Sometimes, conviction is important for any business person to have. If you believe you’re doing the right thing because you’ve designed it properly. If people say, “You’re doing the wrong thing or we don’t like it,” look at how people react to it. Over time, we learned that Galileo was right. I think that Spirit learned that as long as you don’t cancel the flight and as long as the tray table is big enough, that you can win a lot of people at a low price. I’m in awe of what he did for society and the world. I’m in awe of what he discovered and I’m in awe of how convicted he was once he learned that.
I’ve never had anyone say Galileo before, and yet, your reasoning is perfect. It fits well into the rest of the story that we’ve been discussing. Thank you for bringing that up. I love that. In fact, I might do a little research into that because I’m fascinated by what you said. Here is the grand finale and you’re going to like this question because you are a guy who is a world changer. It’s called the change the world question. What is it that you were doing or would like to do that truly has the potential to literally change the world?
I’d almost have to be a narcissist to think I could do that. I would say that if you can understand people, what people need and what people want, then you can, either through government policy or through a business that you create, make life better for people, then that will change the world. A lot of the tension in the world is because there are massive differences in income, massive differences in the way people live. One of the things I like to do is to read classic novels. It always amazes me how technology maybe has changed or certainly has changed. We all have smartphones and we drive nice cars and things like that, but the human brain hasn’t changed that much. If you read novels from 1600 to 1800, the things that make people happy, scared and afraid are all the same pretty much. If we’re all the same, why are we polarized? To fix that problem would change the world. That comes from everybody taking a view of how I can serve other people better. If everybody had that view, it would make the world a better place.
I happen to agree with you, Ben. You do have a strategy for changing the world and you’ve made it pretty clear. If we follow that strategy, if we join you in your mission then together, all of us readers, all of us can change the world. Ben, thank you for being my guest. I loved what you shared. Readers, if you enjoyed this episode, two things. Please go to iTunes and leave me a five-star review and to click the “Speak to Mitch” button and tell me you liked this episode. Tell me you liked having the former Spirit Airlines president on this show because I want to bring you what you want. Ben, it’s my pleasure having you as a guest. It was absolutely delightful. I can’t wait until we get a chance to talk again soon.
I appreciate being your guest, Mitch. Thanks for doing such a great show. I wish all of your readers’ great success with their businesses.
Resources Mentioned in This Episode:
- Spirit Airlines
- Ben Baldanza
- Airlines Confidential
- iTunes – Your First Thousand Clients
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