- The only actually annoying part of our recent round trip flight between Chicago and New
Orleans on Spirit Airlines was when, just prior to take off, the captain suggested we sit back, relax and enjoy the flight. First, you can't sit
back on a Spirit flight. (audience member laughing) The discount carrier got rid
of reclining seats in 2009, the replacement seats are
lighter, cheaper to maintain, and make it possible for Spirit to jam a few extra seats into the cabin. Second, it's hard to
relax on a Spirit flight, passenger leg room is 28 inches, the shortest in the industry, so even if you're shorter than I am, and I'm six feet four, you feel rigidly shoehorned
into a confined space. Finally, enjoyment isn't the
point of a Spirit flight. The point is to fly from point to point as cheaply as possible, enjoyment comes later when
you get to spend the money that you have saved. And then toward the end
of the column, I say, I admire the fairness of the a la carte unbundling of air travel costs, bags don't fly "free" on other
airlines, snacks, and water, and in-flight entertainment
systems aren't free, space in the overhead bins
isn't free, never was. Other airlines simply
pass those general costs along in their ticket prices. And the days are long gone when I expect or even want to be pampered, fussed over, entertained and fed on domestic flights. Comfort may not be overrated, but it certainly is overpriced. To my right is Ben Baldanza, he's the President and
CEO of Spirit Airlines. Prior to joining Spirit in 2005, he served as Senior Vice President of Marketing and Planning at US Airways, and he holds a bachelor of
arts degree in economics from Syracuse University, and a master of public affairs, specializing in
transportation and economics from Princeton University. John Paul Rollert, on my left, teaches Ethics in Business here at Booth. His research focuses on the moral consequences of capitalism. He's a graduate of Harvard College, earned his JD from Yale Law School, and MA from the Committee
on Social Thought at the University of Chicago. The real reason that he is here, however, is that in April in The New Republic, he published an article titled "Flying Spirit, the Worst
Airline in America." (Ben chuckling) We are going to begin with
some opening statements, and we'll have some conversation. I'm going to try to keep
the conversation going, and then we'll conclude
with maybe 15, 20 minutes of questions from the audience. So because Mr. Rollert has
thrown down the gauntlet, I'm going to ask him to go
first with an opening statement. So tell us why Spirit is the
worst airline in America. - I think business
schools at their very best are both kind of laboratories,
and temples of capitalism. What do I mean by that? The people that we send out, right, those of you who are
receiving your MBAs right now become both evangelists for capitalism by your actions and your words, as well as the face of capitalism, what people identify with it. And I think that was the way
I'd like to kind of think about this broader discussion, because a lot of, I think,
what we'll be discussing today as I see it, is a kind of
contest over capitalism. When we consider the practices of Spirit, we'll discuss the business model, the approach to customer service. Is that consistent with
capitalism as you understand it? Is it an aberrancy? And does it ultimately
reflect you capitalists, or the capitalists you will one day be? Those are the kinds of ideas I'd like you to keep in
mind as we go through this. Now, Eric said a little bit
about how this came about. In the fall, in order to
teach Ethics of Business, I was commuting back and forth
between New York and Chicago, and I was using exclusively
Spirit Airlines. The timing was tremendously convenient. I was flying on the university's
dime, and by 10$ each way, it was cheaper than Southwest. And also the reaction that I
got to flying Spirit Airlines from my friends, which we'll
get into a little bit later, was such that I thought, particularly as someone who
teaches business ethics, this was worth doing. So in the fall, I ended
up flying Spirit 13 times, and I wrote a pretty tough article maybe, to put it lightly in The New Republic. And if you doubt that, a
slightly extended version is in "Capital Ideas", which
you'll find on each chair, and so you can look at
it yourself. (laughing) After I wrote it, in about two hours, Ben was kind enough and
wrote me a lovely email and invited me to kind of
have a general discussion. - A lovely email. (laughing) - Lovely email, not as
aggressive as I might be, were I in his position, and he suggested we have
a discussion like this. And what better place to have that kind of a discussion than Booth. Now, in answer to Eric's question, for me, what I argue in the article and what I'll be talking about here is that there are two centers
of gravity in capitalism that orient customer service, how you think about the customer. The first is the customer is always right, and in order to kind of
create a loyal customer who's connected to your business, you want to generate that
strong sense of loyalty. The second orientation toward a customer, classically in customer
service in capitalism is caveat emptor, or buyer beware. And the logic of that approach
is that taking advantage of the ignorance and
necessity of your customer is not only permissible, in
fact it occasionally becomes standard operating procedure. I argue in the article
from my own experience and what I've seen, that
the legacy of Spirit, which I think is the most
important airlines flying today in terms of setting trends
in the airline industry, is that it's becoming a
center of moral gravity for this second approach of caveat emptor. From my standpoint, looking
across the policies, they seem to often eccentric, opaque, or simply indecipherable, and the practices
themselves shabby, shady, and occasionally scandalous. Now these are very strong claims and they make for a very
sorry welcome to Booth, but hopefully they make
for a great debate. - All right, shabby, scandalous, shady, Ben. (audience laughing) - Thank you all for being here, and thanks to Booth for hosting this and Professor Rollert, appreciate it, and Eric, greatly appreciate you sitting in the middle of us here. (John Paul laughing) - Someone's got to be. - Caveat emptor means a couple of things, it means buyer beware, and what you really need to
beware of is other airlines who charge you ridiculous fares for things you may not even care about. So we've got a couple of
slides here that talk about what Spirit really is, Spirit who has the smartest
customers in the business, and who think of their customers as the smartest people in the world. Because we are different, we are the first ultra-low
cost carrier by design, we're different by design, and all of our differences are about saving our customers money. We go to sleep at night saying, "How do we save you all money?" So you can pay back your loans. (laughing) We think about the world this way, when you ask customers
what they care about, they care about price
more than any single thing when choosing their airline. That doesn't mean they
don't want leg room, that doesn't mean they don't
want a free bottle of water, it doesn't mean they don't want to earn frequent flyer miles, but economists call airlines
an intermediate good. An Intermediate good is the kind of good you consume as a means to something else. People aren't on airplanes because they want to be in the airplane, they want to be at their meeting, they want to be at grandma's house, they want to be on vacation,
wherever they want to be. And so we've decided
to dedicate our airline to service that big yellow bar, customers who pay for tickets themselves and worry about how much
money am I going to have when I land, not what is my experience in the two to three hours
I'm on the airplane. So we do this in a couple of ways. First of all, we have the
lowest costs in the industry, and there's a really outdated
narrative in the United States that there's big legacy airlines
like United and American, and there's low-cost carriers
like Southwest and Jet Blue, but they're not low cost at all. They're actually quite
expensive to travel. In fact, yesterday we
flew through Columbus and a gentleman who lives in Columbus had come down to visit us. And he paid $600 round trip from Columbus to Fort Lauderdale, and he had bought the
tickets six months earlier, I mean, six weeks earlier, $600. I don't know that we've ever
charged a fair that high. But anyway, so our costs are really low. Secondly, our lowest total price is low. Customers who fly Spirit pay less than they pay on other airlines. I'm not telling you that you couldn't go to the Spirit website
and create a total price that's higher than Southwest or American, you certainly could, but what customers actually do, the number of bags they
actually choose to check, the amount of water or Coca-Cola they choose to buy on board, whether they choose to pick where they sit on the plane or not, ends
up being a total price that is in every route we fly less than our next best competitor. And if you look at our price
plus bags, fees, and seat fees, which are the two largest
things that we charge for other than the ticket, our
total price is about $106. Southwest is 150, jet Blue's hundred 153, and the big guys are
between 160 and 200 bucks. And so we think that this approach creates an enormous win-win win. This is a fairly complicated chart. The black line across is
the average fair total price that Spirit collects,
not the ticket price, the total price for the ticket, plus all the extras that we charge for. And if you look at that price, no other airline in the U.S. can even make money at that price. If Southwest were to match
our price, for example, they would give up all of their profits and a little more, and then to
actually make us lose money, they'd have to get about
a negative 20% margin. Jet Blue would have to
lose all their profits, cut their fairs another 20%, they're about an 8% margin company, so they'd become a minus
12% margin company, so they can't match our fares. And the big guys aren't even
in the same business we are, they're trying to attract customers not who pay for tickets themselves, but who have their corporation
buying their ticket for them. And therefore they do all kinds
of things to attract them, to choose me American,
instead of you United, or me Delta, instead of you American. So they put fewer seats in the planes, and they put business class cabins, and lounges in the airport, and give you frequent flier miles, but they charge you for all that. So the last slide here, and this is the last slide I'll show, really shows just how different we are. What the bottom scale of this chart shows is it takes all ticket
prices in the United States and groups them into five quintiles, the lowest 20% of fares
in the United States, all the way up to the highest 20% of fares in the United States. Then it maps the traffic
that airlines carry and the yellow bars, of course are Spirit. And you can see that over
80% of our customers, that we carry, are paying in the range of the lowest 20% of
fare in the United States and the rest of the industry, American, United, Delta, Southwest, they are now 85% of all the
traffic in the United States, those four carriers. They carry less than 20% of
their traffic in that bucket. What they're really trying
to do is charge you more the 20-40 to 40-60, the 60-80, the 80-100, to cover their absolutely
bloated cost structures, which they incur because
they're trying to make sure the customer is always right, and give them everything
the customer says they want, even if the customer is
not willing to pay for it. So that's the basis of Spirit,
our customers are brilliant, and that's why we have
lots of repeat customers. - Before, I'm going to
get John Paul to respond to what you just said, but
Airline Weekly ranking, released in January showed Spirit is the most profitable
carrier in North America, an 18% profit margin. UAL had a 6% margin, and it's
the second most profitable airline in the world. So you guys are making money too, you're not passing all these savings along to your customers, are you? - But that's why we call it a win-win win because investors win. (audience laughing) Well look it, if you had
bought the Spirit IPO in 2011, you'd have paid $12, today you could sell that stock for $65. That's a pretty good return for investors over three and a half years. So our investors win. Our employees win, because they work for a stable growing company,
they can get promoted, they can earn fair pay
for a hard day's work. First officers can become captains, they can manage their life well, and most of all our customers win because they pay a lower total price. So investors win, employees
win, and customers win, and every corporation has at
least those three constituents that they have to serve, their investors, their employees, and their customers. And I think at Spirit we do
an awesome job at all three. - Let me ask you to elaborate on, and you can respond to anything you want, but I want to specifically
for you to elaborate on the sort of final charge that you lob, which is that their
economic model is opaque, shabby, shady, and scandalous. What did you mean by that? And then if you would engage with what he'd said about the cost issue. - Sure, sure. So the interesting thing, so Ben says that the passengers of Spirit are
the smartest in the industry. They also are the most disgruntled, and statistics consistently show that, let me give you a few. So consumer reports, when it did its first assessment
of the airline industry two years ago, found Spirit
ranking at the very bottom, receiving one of the lowest overall scores for any company we've ever rated. And it's important to know
this is overall satisfaction. So you're saying how satisfied were you without any specifics whatsoever, not limited to the factors of the survey, cause you could break it down. One of the lowest they've ever received, now among the highest, number
two is actually Southwest, not an ultra-low cost carrier,
but a low cost carrier. Spirit is the only two star airline based in the United States, according to Sky Tracks, an
airline travel consultancy. What other two star carriers do you have? You have such carriers as Yemenia, the national airlines of Yemen, and Syria Airlines, and a
third airlines from Indonesia, which was de-listed last year
for not paying its pilots for three full months. What makes for a two-star airlines? A two star rating normally signifies a poor standard of product,
and or poor or inconsistent standards of staff service delivery in the onboard or airport environment. Most stunning to me is
Department of Transportation airline complaints between 2009-2013, passengers on Spirit were
nearly three times as likely to go to the trouble of filing a complaint with the Department of Transportation on passengers as any other airlines. The number two airlines has only 1/3 the number of complaints, and the most remarkable thing
is that between 2009-2013, the volume of complaints grew each year, which to me is tremendously stunning. So now why might that in fact be the case? And I think one thing
Ben says about Spirit to me washes, right? And this is about kind of the bargain opportunity they afford you. I think, to some extent,
it's a misnomer to suggest that they offer a flight that's in any way consistent with the experience most of you have had who
have not flown Spirit, right. If you're using Spirit
as a commuter vehicle, you're getting to point A to point B, and you need to take
nothing with you, right? Because you're only allowed
a good that is the size, according to the website,
of a laptop or a purse. that I don't know how
many of you have traveled carrying goods that only
fit in a laptop or a purse, Spirit works well. It's like a public bus in that
way, and it functions well. And it is at the margins
a little bit cheaper. Now I actually went through last night and looked at different fairs. I'm a bargain hunter myself, looked through five flights
from Chicago to Atlanta, Chicago, to New York City, Chicago to LA, Chicago to Boston, Chicago to Miami. In two of those cases,
Spirit was actually cheaper than anything afforded by
either Kayak or Southwest. It saved you $6 between
Chicago and New York City, and $21 between Chicago and Boston. However, to a certain extent, this is an apples to oranges comparison because in any other airlines you at least get a carry-on bag. You factor in a carry-on bag, which tends to be the
very least you can ask for when you're traveling anywhere. And Spirit is actually not
cheaper on any of these flights. It's between $14 more expensive
to $64 more expensive. And if you do an apples to
apples comparison with Southwest in each of these cases, it's between $139 more expensive,
and $239 more expensive. Now, why then would that actually end up frustrating people a great deal? Well, the fact is it's,
as far as I can see it, Ben, in 2013, in April,
described his travelers as follows they're
discretionary travelers, they're not corporate business travelers who got to make the
trip to close the sale, or to fix a problem. There are people who are
generally taking the trip to see family or friends, or do something that on average is an enjoyable part of their life to do. So we get these customers
when they want to be in a good mood about their travel. What I suggest to you that this also means is that they're the kind of traveler who does not fly very much every year. 73% of Americans fly
one-time or less each year, and I think, I actually
don't have it down here, 89% of Americans fly only
two or three times each year. They're not remotely
as accustomed to flying as all of you are, who fly into Booth each and every weekend. Well, what does that mean? When they're flying they have at best a kind of rough, customary understanding of what a flight involves. They see a ticket, they buy it, and then after time they
realize what they get. Now, of course in the airline industry, you get 24 hours to cancel your ticket, although I would note
Spirit, in I believe 2012, after this regulation was brought in launched a court case,
which was ultimately thrown out by the DC Circuit
to try to erase that. And why is that the case? Once you have someone on the hook and they've put that money
down, you've got them. And then what do you do? Well, if you look at Spirit, I actually don't know if
this factoid was here, but I think it was last year about, let me get it right here, 40% of Spirit's revenue is
non-ticket revenue, right. That's extraordinary. Ryan Air, which many of
you are familiar with which to some extent is
the inspiration for Spirit, in Europe, a very similar business model, only 25% of their revenue
is non-ticket, right. That means this is revenue
that you are paying beyond your ticket. And once you have bought
the ticket on Spirit, everything else you're
buying makes the ticket more, and more, and more expensive. I'll give you two examples
of the kinds of things that I think frustrate people. The first is I would suggest an example of a customary expectation
being taken advantage of. When you fly these days how
many of you use e-tickets? Right, you get it on your
phone, and you swipe through. Basically everyone. This is not available on Spirit. This to me was the most remarkable thing you expect to get an
e-ticket, not available. So then you have the expectation that you could just print it out when you get to the airport. You can, Spirit will
charge you $10 to do that. If you are a, I would say, fixed-income or low-income person, you're
probably finding this out just the day before, right, maybe earlier. You don't actually have a printer at hand, the price is low enough. you're willing to pay out an extra $10. But the idea that you buy
a ticket on an airlines and you actually don't get
the ticket to me is absurd. That's one example of kind
of customary expectations being taken advantage of. The more remarkable to me,
and the funnier of the two, can I actually get, Craig, the slides? So I'll talk a little bit here
about Spirits Miles Program, which to me is a great example
of the kind of bait and pull. So when you fly Spirit Airlines, at the very end of the
flight, the stewardesses, or the flight attendants come through, and they say, if you fly Spirit Airlines with only 2,500 miles
you get a free flight. Now I pay close attention to these things, being the bargain hunter I am. This is a look at my Spirit profile page, and you can see each flight there. How many, raise your
hand if you think I get 733 miles for each flight, according to what you see up there, right. I think that would be reasonable. So in October of last year,
I could not understand this, that not withstanding the fact that by my kind of rough count, I should have about 4,500 miles. And so, because I have
the wherewithal, the time, and the research interest,
I ended up calling Spirit. It actually took two phone calls to get all this information. So I call Spirit, I
get someone on the line and I say, "You know,
I'm trying to figure out "what's going on here,
because it seems like "I should have 4,500 miles. "Don't don't I get 733
miles for each flight?" The woman I was speaking
to, a lovely woman said, "No, actually you get 366 miles.". And I said, "What do you mean? "It says 733 on the webpage,
how can I only get 366 miles?" And she said, "Well, you only get it "under certain circumstances. "If, for example, you have
the Spirit Card, right." So apparently the 766 is aspirational. And I said, "Okay, well, that
seems to me questionable, "since you say consistently it's 733, "but be that as it may, it still doesn't, "the math doesn't make any sense. "I only seem to have about
1400 miles even by your math, "I should have 2200." They said, "Well,
actually in certain cases "you don't get the miles." Can I have the next slide, please? "You have to affirmatively
go and request the miles." Now over two phone calls, it's still actually not clear to me under what terms I have to request, particularly because Spirit actually has all of my flights listed. So what I have to do is
I have to take the code, I have to put it in the box here, and I have to request the miles, and I'm not still clear
under which circumstances I need to request them. So then I say to her,
"well, how do I know? "Because all of those flights
that are listed there, "it's not clear to me which
one you need to request for." And she said, "well, we
don't tell you that." (audience laughing) And I said, "So what you're saying to me "is I have to affirmatively
go through for each flight "and request those miles." And she said, "Yes, that's
exactly what you have to do." I will not even get
into, for lack of time, what you actually have to
do to redeem those miles. I will say that we're now in, I believe, a five month blackout period where you cannot get your miles, your flight redeemed for 2,500 miles. It's only, I believe in most cases, for 25,000 miles plus a $20 fee. - You've gotten a lot here, can we let Ben respond? (laughing) - Sure, we'll go, we'll go. - But I've been looking forward to- - So I guess, by way of question, do you think your miles
policy is transparent? - We get no complaints
about it until this. So I would suggest that if any of you were in Dr. Rollert's class, and you submitted an economic analysis like he just did, he would give you a D, or maybe even fail you, because it's absolutely
absurd what he is claiming. The fact is the Department
of Transportation, which collects money from
all of us who pay taxes, tells you where people
fly, and how much they pay, and how much they pay for their bags, and their seats, and everything. And the customers who fly Spirit, their tickets are generally 35-40% less than the other carrier,
and their total price is about 25% less. I'm not saying that
you can't find examples where we may be more expensive because maybe our plane is full, and the other guy's empty. I flew a flight out of Los Angeles last week to Fort Lauderdale. We had a 9:41 PM to Fort Lauderdale, Virgin America had a 10:00
PM, Jet Blue had a 10:05 PM. We had 178 seats on our
plane, we were four oversold, so there were, every seat
on that plane was full. Jet Blue had 150 seats, they
had 82 people on their plane. Virgin America had 150 seats, they had 47 people on their plane. But everybody loves Virgin America, everybody loves Jet Blue
because they're wonderful, but why were more people on Spirit than on Jet Blue and Virgin combined? The answer is because
they paid less money. Secondly, the idea of Spirit being opaque is absolutely absurd. Why in the heck would I
be here If we were opaque. I'd be hiding somewhere. The reality is you go to our website, you can pick a man or a
woman to undress for you to tell you how you can pack and not pay baggage fees on Spirit. And you can take a much
larger bag than a laptop, that bag would go for free. That bag would go for free. 16 by 14 by 12, you can
pack two nights of travel in that bag, and you can
take it for free on Spirit, and our customers do it all the time. So the reality is we
don't prey on customers. The reason the 24 hour
rule that we fought it, and still will win that, and by the way you didn't give us credit
for charging all customers with a $2 Department of Transportation, Unintended Consequences Fee, which goes on every one of our tickets as a result of that rule, is that airlines sell a spoilable product. When that door closes, we get no chance to sell that seat again. And when somebody can hold
the seat out of inventory and then churn it, hold
it another 24 hours, hold it another 24 hours, we lose all the ability to sell it. That costs the airline money, and that raises everybody's fares, and Spirit will absolutely
fight for customers to get the lowest possible fare. So look at real data, look
at what people really do, not what you can create from the website. Look at what customers are really buying, Look at what customers
are really repeating, and that's where the core
of really Spirit Airline is. All of you, when searching for truth, in whatever businesses
or philanthropic efforts, or whatever you try to do. You probably know today, but
you will learn over time, you don't listen to anything people say, you just watch what they do. Behavior tells you everything. And the customers on Spirit behave in ways that saved them less money, they complain about us in the
ways they think are important. We have two types of complaints at Spirit. We have service complaints,
which is we're late, we lost your bag, we
spilled coffee on you, we were rude to you,
right, things like that. Our service level complaints look just like everybody
else's in the industry. Our service level
complaints are not higher than Southwest, or Jet Blue,
or American, or anybody else. But we have a whole category of complaints that they don't have, which
are business model complaints. So we have customers who complain to us because why should I have
to pay for my carry-on bag? Or why wouldn't you pour me
a drink of water on board when I needed to take my
life affirming medicine. We get that complaint once in a while. Or why do you do things the way you do? And in that case, we don't
ignore those complaints, but what we say is "How
do we better manage "that customer's expectation?" You know, someday I want
to walk into a Chick-fil-A and look at the menu and just scream, "What do you mean you don't
tell hamburgers here?" Because you don't fly Spirit for leg room, you don't fly Spirit for a cushy seat, you fly Spirit to save money,
and that's why people fly us. They understand the frequent flyer rules, they understand the a la carte pricing, We explain the a la carte
pricing ad nauseum to them. We almost have a Surgeon
General's warning on our website, "Make sure you know what you're
getting, go to Spirit.com, "click the Spirit 101
League, watch the videos. "And then tell me if you don't understand "how the model works." You're all clearly smart enough, our customers are smart enough. Real data doesn't comport with
what Dr. Rollert just said, emotion comports with
that, but data do not. - Did you have a question
for him that you wanted to? I mean, he can respond to that, or you have a question you want? - I have one question. Would you like to tell a Haitian
cab driver in South Florida who makes $20,000 a year, that he should pay more for his ticket, he should pay the $700 round trip that American used to charge
when they were the only carrier from South Florida to Port-au-Prince. Now Spirit flies that route about $89, plus we charge you for a
bag, shame on us, all right. But would you like to tell that driver who makes 25 grand a year,
that he can't go see his mom because he needs to pay more money so that he can check a free bag, or that he can get a free Coca-Cola, that is not ethical at all. Every customer who flies
Spirit is filing a complaint against every other airline that their prices are too high. The government should
track that complaint rate. (audience laughing) - It is, my anecdotal experiences is that Spirit flights are full. When we flew down to New Orleans and back, that thing, that plane
was jammed both ways. And so people are voting
with their feet, right? I mean, in terms of
filling these airplanes. - Sure, I think the question becomes what, for me at least, the moral
significance of that is, right. Spirit is offering the
lowest flight available, most of the time I would confess, although I would argue again, if you went to a restaurant
and you ordered dinner and when dinner was served and you noticed the table was bare, and you said, "Wait a minute, I'm supposed to, "how do I eat the spaghetti I ordered? "There's no napkin, there's no
utensils, there's no plate," and they said, "Well,
you can purchase those." "I ordered a $10 spaghetti dinner." "Well, the napkin will be $2. "The utensils will be $3,
and the plate will be $15." You would be outraged, and you would ask for your money back, and you'd feel that you
have a right to get that. My problem is to the degree that you're describing a situation where people feel consistently as though they've been taken advantage of. When you are a bargain hunter, and you feel like you've
gotten a wrong deal, that deeply frustrates you. - But why do you think that
Spirit customers feel that way? They don't. - I would say, how else would you square all of the complaint data you receive? - We can explain it in three ways. First of all, value is defined by price versus got, right. When you hear someone say
"Value for the money," you know they're an idiot. That's like saying Abe Lincoln was tall for his height, all right? (laughing) Value incorporates how
much you pay for something. It's what did you receive
for the money you paid? That's what value is. When consumer reports tells
you about which toaster to buy, they say "This toaster costs
$120, this one costs $70. "This one burns the toast,
this one toasts it nicely, "buy this one, it's a better value." When they tell you about
what airline to fly, they make an incredibly elitist view. They basically say "Every
airline costs the same price, "or everyone can afford
anything they want." Because what they tell you is "This airline has more comfortable seats," or "This airline is more on time," or "This airline has better
frequent flyer programs." They don't tell you the value proposition customers choose Spirit every day. Our planes are in are hugely full because it's the best value
proposition they can take. The last thing I'll say about complaints is our DOT complaint rate
is three times higher, it absolutely is, we'll own that. But let me ask you, say
you run a restaurant and you serve 100,000 customers a year. It's a really nice restaurant,
a lot of people like it. Eight of those customers of the 100,000 come in complain to you and say, "I really don't like your food." Are you going to really
change your restaurant? Are you going to say my menu is wrong? My service is wrong, when eight out of 100,000
tell you something's wrong? That's that's what your tax dollars pay the government to report, that eight out of every
100,000 Spirit customers complained to them. It's true that they complained at a rate of less than 2/100,000 for everybody else, so we are three times worse. The Empire State Building, I should say the Sears Tower,
since we're in Chicago, is a lot taller than me. - Willis Tower, excuse me. - Oh, the Willis Tower.
I'm sorry, that's right. The Willis Tower is a lot taller than me, but if we're measuring the
distance from here to Mars, that's really not that relevant. - Can you talk a little bit
more about this moral question you're talking about? I mean, what is, do you feel, I mean, I guess I feel like you
look at Spirit's website and when we first checked in
we were looking at it to see, and it's all there. And yeah, I mean, the
example of a restaurant charging you extra for everything is true, but this restaurant, to use that analogy, these people are coming
back to this restaurant and they're paying for their plates, and they're paying for their
silverware, and their napkins. You're talking about
you'd get up and walk out, you probably would,
probably wouldn't go back, but they are coming back. So what is the moral dimension,
if you can talk about that? - So, I would give two examples. The first is one thing
I was actually struck by looking over Spirit's website
over the last few days, is that it's changed in,
to me, surprising ways, even in the last couple of months. One of the things that
was recently introduced, I believe in early April, was now, and this is a pricing
structure that is more complex than bidding on courses
for Booth, I think. There are five tier structure for how you pay for your carry on. So it used to be the case with a carry-on, that if you buy the carry-on when you purchase the
ticket it's one price, if you purchase it when you
check in, it's a second price. If you get to the airport,
at this point, your carry-on before the gate is $55, if
you make the big mistake, and when you sit at Spirit,
you watch people do this. This kind of look of horror,
that carry-on is 100$. Now there is actually a fifth
price point, which is to say, when you actually buy your carry-on, when you get your ticket,
and between when you check in there's another pricing point, I think it goes from 50 to
$55, I may be wrong on that. If you are spending an
enormous amount of time, calling Spirit, going through the website, trying to figure all of
these things out, yes, although I would suggest in
cases like the miles example, I still can't figure
out what the program is. But do people typically
have that kind of time and should they be expected
to put out that time and to the degree that you
are incentivizing making money off taking advantage of the ignorance and necessity of people, that
to me is morally problematic. There is a lot of money
to be made in world by figuring out what people expect and exploiting it as best you
can consistent with the law. - Is there, is there- - Which is exactly, by the way, what Southwest Airlines does every day. Because Southwest
airlines lies to the world and says, "Bags fly free." Bags aren't free. You pay people to load the bags, you pay insurance costs to carry the bags, you burn fuel because of
the weight of the bags. You pay the airport for bag
systems to move the bags around. What Southwest does, it says
"You're paying for two bags, "whether you check two bags or not." And they make everybody
on the plane buy two bags, that is morally reprehensible. - Well, let me ask you a
question about these fees when you get to the airport, and you know, the extra, as you get closer to the gate, you pay more and more. Is there any degree to which
you kind of count on people not being attentive, not showing it? So that you're taking
advantage, as Paul says, of people's lack of attention? That this is part of
your business strategy, that you know that a
certain percentage of people are just not going to print
out their boarding passes, or are not going to have printers at home. - No, and in fact you
can print a boarding pass for free at our airport, you
just go to a kiosk and do it. You don't need to have a printer. The charge for a boarding
pass at the airport comes when you go to a human being and ask them to print your ticket for you. And the reason for that
is because you're choosing not to self-service, because you're choosing not to check in on your own computer, or on the kiosk that we provide for you. You're making us pay that
employee, rent that space, and so you're covering that cost. One of the realities of
Spirit's business model is we have this kind of
contract with our customers. We say, if you behave in a way
that is lowest cost for us, so you don't carry many bags, you buy the ticket on our website, you check you self-service where you can, you buy early rather than later, all those things make it cheaper for us. When you do all those things,
you don't pay anything extra. If you choose to behave in ways that are more expensive for us, you buy us on Expedia,
instead of on Spirit.com. You carry lots of bags, you
bring the big bag to the gate, which delays our flight, and screws everybody on the plane because of your selfishness, right. When you do those things, we're going to charge you for that. That 100$ bag fee at the gate should probably be 1,000$. - Wow.
- It's not a fee, it's a fine. We don't want it to happen. Why are speeding tickets expensive? If it cost you $2 to speed, there'd be no incentive not to speed. Speeding tickets are expensive
because if you get caught, there's a real consequences,
you don't want to do it, you don't want to get caught,
so you don't speed as much. We don't want people to
check bags at the gate because it delays the flights. - This is the wrong town
to talk about profits and parking, traffic, by the way. - Yeah. (laughing) I want to open this
conversation up to questions from the audience, which will come after, but I want to give Paul a
chance to respond to that. - No, I mean, for me,
so in Milton Friedman's "Capitalism and Freedom," which is a book that I assign in my class, he says "Competitive
capitalism depends on exchanges "that are voluntary and informed." Voluntary, as well as informed. This is revelatory to me that you actually don't have to pay $10 at the airport, because I've talked to a lot of people, I've looked at the website, honestly, you can't
figure these things out. So to the degree they change, your ability to be informed,
the price for being informed can't be stratospherically high, that then fundamentally
undermines capitalism and the faith people have in the system. - I guess, so it seems
to me your primary issue with them, is it transparency, or lack of transparency? - I would say that's
probably the strongest claim I would make, yeah.
- Okay, all right, there will be, I think I saw a hand go up
for a question, right there. Go ahead.
- Cool, My name's Jake, I'm a second year MBA student,
I'm graduating next week. Thank you so much for coming,
I really appreciate it, and honestly, like, appreciate the courage because I know that
most people hate Spirit. (audience laughing) So it's good that you would come here. - That's not a true statement. (laughing) - [Jake] Should we take a straw pole? I think Professor Rollert's comment about kind of these two binary
approaches to capitalism of buyer beware and the
customer's always right. I really don't like the
customer's always right approach, but I think there's a middle ground there, and I'll get to what I think
that is in just a second, but I think that, like there's two issues that concern me about Spirit. And I think, it's not, I love
like the a la carte model. In fact, I'm like a very light traveler, and I love that I don't
have to subsidize people who are checking bags, so that's great. I think the transparency is
by far the biggest thing. And I think what a lot
of kind of the slides, the Spirits slides to me
are extremely disingenuous in that they're reflecting
the sticker price, but not the cost to the consumer. Because when I go to the airport, I don't, there's nothing on the website that says that the employees, that Spirit, if you're talking about labor markets, if you're going to pay people less, you're going to get worse employees. The employees that Spirit
has at the airport, they're fewer, and they're
awful, quite frankly. And that my experience is
going to be terrible at O'Hare. It's literally a madhouse if
you go to the Spirit gate, no idea what's going on,
there's no one working there. And so that's like, to
me, the biggest issue of the ticket price does not
in any way reflect the cost. And then the other issue is I think a lot of the kind of slides really
left me feeling a little icky because they're so disingenuous, and they might've flown over, like, but I don't think anyone
did, they're not flying over, flying over anyone in this room's head. Because like you said, you are at Booth. You're comparing apples to oranges, right So when you're comparing
average sticker price, you don't have first class tickets, right? So other airlines do, which
skews average ticket price up. You're talking about 8 out of 100,000, I didn't even know that this complaint to the transportation department exists. So I mean, but why don't we talk about how many complaints in a much
lower friction place you get, which is to your website. So the question is the middle ground, the middle ground of Professor
Eppley's Middle Ground. Do you kind of, just because
you can do something, do you think you should? Because I think that's
like the golden rule. That I wonder how you'd think about that. - That's a fair question, and I would push back a little bit. I think we're extremely transparent, and there was nothing
disingenuous in those slides. We showed you what customers actually do. We told you the total price they pay, not our ticket price versus
the other airlines price. When we charge them for more things after the fact than others. we told you, we do total revenue
divided by total customers. So that includes the bag revenue, the seat revenue, the others. So we weren't disingenuous in those sides. Our planes are full because customers save money flying Spirit. I'm sorry you've had
poor service at Chicago. One of our problems at
Chicago, quite frankly, is that we're packing a lot
into just a couple of gates. And we have a meeting
with your mayor next week to talk about how do we get
a few more gates at Chicago. But the reality is the city of Chicago has responded fantastically to Spirit because they're tired, quite frankly, of paying the ridiculous
rates of American, and United, for getting not that much more. They get a little more,
another two inches of leg room, a Coca-Cola, a bag of
peanuts in some cases, but they don't get a lot more,
but they charge a lot more. So we are really jammed at O'Hare, and Concourse L where we
operate at is really jammed. And we put our people under
a lot of pressure there, and I'm sorry, you've
had bad service there. But I'll tell you, we compete for labor, just like we compete for everything. And we can't pay our people less than the market allows us to pay them. And if we have huge
turnover, that costs us, and we don't have that kind of turnover. The people who work at Spirit work hard, they have a tough job, and we're working to make
it better everywhere we are. So our slides aren't disingenuous. I hope you have a better experience at the airport next time you fly us, but you get what you pay for, don't pay for things you don't want. - I think the question was
probably more directed to, man, I mean I do think
transparency is not synonymous with not legally fraudulent, right. That's a different matter whether or not Spirit airlines is committing fraud. Although I would note that it has paid the largest civil penalty in Department of Transportation history in 2009 I believe, for fraudulent
pricing practices in part, and two years later, in
2011, another $50,000 fine. So there are points at
which it has clearly crossed the threshold of legality. But I think the important
thing to hammer home again, is the idea that
transparency is synonymous with not legally fraudulent
is deeply problematic. - Yes, you're question, please? - [Ross] Hi, my name is Roz Bryant, I'm an evening student here,
I'm not graduating yet. My question is about customers,
and repeat customers. So do you have data that indicates that people are continuing to fly? Specific people are
continuing to fly Spirit? Because I have a lot
of evidence that people are flying once, having a bad experience, and not returning to the airline, including a personal experience where I put a teenage son on a flight home from boarding school, and was quite surprised
at the experience he had. - The answer is we do, and customers do repeat on
Spirit at a very good rate. They join our loyalty programs, they renew in our loyalty programs. Our planes are very full, they're more full the longer we fly. We would have run out of
customers a long time ago between Chicago and Fort Myers if everyone was one and done, because we've been flying
that route for 15 years and it's jammed every day. So the reality is we
do have a lot of repeat because most customers, now look, we're in a business where
there's people, machines, and mother nature, things go
wrong in the airline business. And there's absolutely, you can have a bad experience on Spirit because of something that happened as a result of delays, or
cancellations, and such. But on average, our flights
are middle of the pack on time, our flight attendants are
nice, generally. (laughing) The seats don't recline, but
nobody reclines on you either, and you pay a lower price. So most people don't have the one and done experience on Spirit. Some of them do, but I can tell you, I worked at US airways,
I worked at Continental, I worked at Northwest,
and I worked at American, and I got one and done
complaints all the time, and I got complaints all the time about how ridiculous my fares were. That's one complaint
we never get at Spirit. - Do you think there should
be, a quick question from me, should there be more regulation to address some of your concerns about transparency and information? Should there be say standards on websites, and information, and so on, so the customers at least
know what they're getting? - So this is gonna be the academic in me. I'm not a student of airline regulation, so I'm somewhat loath to comment. What I will say, is that for anyone who kind of is a believer in free markets to the degree that people feel as though they're being
taken advantage of, that they're not getting
the deal they signed up for, they're going to ask
government to regulate, and they have every good reason to do so. - Okay. - What I was going to say
is there's a gentleman named Charlie Leocha, and Charlie runs a consumer
travelers advocacy group. Charlie hates Spirit, but what Charlie has said to people is "As much as I hate Spirit, "I want the industry
to use Spirit's website "as a model for transparency, "because they do a better
job than any other airline "explaining exactly what
the value proposition is." - Your question. - [Paul] Mr. Baldanza, John
Paul, thanks for being here, thanks for putting on the debate. It's very entertaining. (group laughing) You mentioned Mr. Baldanza,
that people checking bags at the gate is a major problem, hence the 100$ fee. But I'm on Spirits website on my phone, checking out the baggage fees. There are different,
as John Paul mentioned, different prices, depending
on when you tell Spirit that you're going to check a bag, and it varies quite a bit. If you tell them prior to
purchasing your ticket, it's on the order of
$25 for the first bag. If you tell them when you are
in the process of checking in, however, it jumps the
price for some reason, it jumps to $55. Is that, does that increase in price accurately reflect the
incremental cost to Spirit? It seems like if I check it
at any time prior to the gate, it ought to be about the same. - Well, pricing in
anything doesn't reflect incremental cost, except in a pure Microeconomics 101 class, price drives to to
marginal cost, I get that. But the reality is is what you, what I think everybody
sort of internalizes is that if you buy a ticket
six weeks in advance, it's less expensive than if
you buy for the next day, or you buy on the same day. So if that's true for the seat, why is it different for the bag? It's the same spoilable product, there's still a fixed
size of the overhead bins, There's a fixed size of
the things underneath. When we know how many bags are
coming, we can plan better. We can maybe even change the
gauge of the airplane better. So I can't tell you exactly
that it is $20 or $26 more to tell me on day one, than
on day 60 before the flight, I can't tell you that, but I can tell you that economically the cost to the company goes up, and economically we reward
people who plan in advance. And that's the biggest point. Many of the charges that Spirit, many of the options that Spirit offers, that have a charge, act
as economic incentives for customers to say, "I'm
gonna find a way to save money." You can fly other airlines, and there's nothing you can
do to lower your total price. It is what it is. At Spirit you can make conscious
decisions to pack lighter, to self-service, to make
other conscious decisions, to bring your own food. You can make those decisions, and positively save money doing that, and we think that that's
incredibly customer friendly. That's not taking advantage of customers. That's giving customers
more pricing power. You decide what you want to pay for. And we'll show you the ways
to walk through this maze in the least expensive way for you, that's what our website does. - I have a question, from
back in the way back, standing up against the pillar. And I'll leave you a chance, while we're getting the microphone to him, for you to respond to that. - Yeah, I mean, I think Tom's question is more
directed toward Ben. I mean, to me the problem is my, when I interpret fees like that, because you can't back out
of the ticket, you're stuck. And the question is, will you walk away. Obviously the fee for the bag can't be 1,000$, you'll walk away. The fee has to be just enough
for you to go to yourself "Oh, this is terrible. "I'll pay it." But then you feel you've
been taken advantage of, and that's precisely the kind of feeling, penny wise, pound foolish. That to me is too consistent
with my experience when you're on Spirit. - Yep. - [Audience Member] It's
pretty apparent to me, by what you're saying, and
how you're presenting this, that your underlying customer service, the customer service that you're providing to the everyday client is price, and after that kinda it's up to us, we're kind of in a we're screwed, we've already paid the price, and that's our customer
service is the price. Nothing else, everything
after that is a la carte. But do you, when you train
the customer facing people, is that the attitude
that you bring to them? Because that's what it seemingly reflects down to the everyday customer. - That's a very good question,
and training is important, and when we started sort of the rebranding of the airline about two years ago with an aim toward more transparency, that's what the rebranding
has all been based on is let customers understand
the value proposition better. Because what you clearly see
from our own internal data is customers who understand
the model like us, and fly us a lot, and those frustrated by the
model are the one and done-ers. So we don't want that frustration. We train our customer service agents and our people who deal
with customers directly, our flight attendants,
and the airport people, in a service parameter we call SMILES, which is an acronym that stands for, each thing stands for something. And what we really do is train them to educate the customers, to help explain to customers
why we charge bag fees, why it's more expensive
if you ask me to do it than if you just walk over to
that kiosk and do it for free. So what we train them to do is to understand the model well enough, and internalize the model well enough so that they can educate the customers so that the customer can behave in ways to save them money. That's what our training is all based on, beyond the sort of technical training of make sure you know how to
actually check someone in. - Way over here, right,
yes you right there, get the microphone. Do you do you have
anything you want to add while we're getting the microphone? - No, no, I'd love to get
in more questions if we can. - I know we're a little bit pressed, we're gonna try to wrap up right at 1:30, and I want to give these guys both the chance for some closing statements. - Probably 1:25.
- 1:25. - Yeah, just so people can get to class. - All right, so we're going to get some closing statements here
really quickly, but go ahead. - [Audience Member] Okay,
well thank you so much for your time today. I think your website hits have
gone, in the last 20 minutes. (panel laughing) My question is, could you talk about some specific initiatives
that you've taken to change the perception of people who want the price, but have taken everything else for granted? - Yeah, that's a great question. And that's a business
school question too, right? Because a couple of
years ago we were faced with this reality, that
customers who knew the model and understood the model
liked us, repeated on us, gave us high net promoter
scores, and things like that. And the customers who didn't were a complete opposite from that. So we said, how do we address
this problem, as a business? So we've done a couple of things. We, for a long time, have been really an advocate
of price transparency. And we've taken that idea
of price transparency, and say "Let's apply that to
the whole business model." So we've changed massive
parts of the website. Anyone who's gone to the
website during this debate is seeing a very different website than we would have had a year ago, that has spent a lot of time on education. That explains how you fly Spirit, how you save money on Spirit, how you pack lighter, things you can do to positively affect your
ability to get a cheaper flight to where you're going. We have done lots of education
of our own employees, and we've changed our
entire team member training around that effort to do things. We have worked with
third-party sellers of Spirit, like Travelocity, and Orbitz,
and Expedia, to work with us, to help share the education
on our own website with their own customers,
so that they are not, so that they don't just
see the low fare on Expedia and then get disappointed
what they see on Spirit. So we've done all those things, and one thing I'll tell you for sure is I'm not George W. Bush
standing on the aircraft carrier saying "Mission accomplished," right? We've got a lot more to do
along every one of those, on every one of those
parameters I mentioned. But I can tell you, you look
at our Twitter responses, you look at our net promoter score, you look at the detail
of our complaint data, you look at our repeat rate, and all of those things tell us that customers understand us more, customers understand the model more, customers are more feel better about the total value
proposition on Spirit than just a couple of years ago. So we know the things
we're doing are working, but we clearly have to do a lot more. - Is this model of yours, is it applicable to other industries? Could like hotels start
charging for hot water? And pillows, and all. - It's a good point, but the secret is that every other
industry already does this. Right, you can go to McDonald's
or you can go to Morton's, you're gonna pay a different price, but you're not going to
expect the same thing. Marriott has JW Marriott, they have Fairfield Inns,
they have Courtyard. They have all different products
for different price points, and they give customers different things for different rates. The idea that if you pay
more, you should get more, and if you pay less, maybe
you should expect less, that exists in everything you buy. What if the only car you
could buy cost $50,000, and had a nav system, and
had the bigger wheels, and the bigger engine, but that was the only car you could buy. Isn't it nice that you can
choose options on your car, and you can buy the car that you want with the features that you want? - I want to give each of
you guys three minutes to wrap up, and I'll start
with you again, John Paul, to just give us a wrap
up in three minutes, and then you can respond, and then maybe you can stick around, if anyone wants to stick around. I know some of you gotta get to class, so let's begin to wrap this up, go ahead. - So I was talking to my mom this morning, she was asking me about this debate. She'd read the article, she's actually featured in the article. She was a stewardess herself
on a very different airlines about 30 years ago. (chuckling) She asked me, knowing the
intensity of discussions at the University of Chicago, if Ben fully knew what he was in for. (Ben laughing) And I said, probably not, cause it's hard to prepare for. But there's a wonderful quote from Ben, this is from Fox Business,
a couple months ago, describing being from an Italian family, part of my family's Italian
as well, so this resonated. He said, talking about
kind of these complaints, when they had conflict,
you never hid from it and you never got defensive about it, you addressed it head on. And I appreciate Ben going out of his way, bringing people from his team for a very rigorous and difficult debate. And I admire that courage a great deal. Thank you for taking time out, and if I can return the favor on your turf tell me, I'd be glad to. - Thank you very much, Professor Rollert. I want to thank you, and
Eric, and all of you, for participating in what I thought was a very, very positive
kind of experience. You know, at Spirit, we
want to do the right thing, We think we are doing the right thing. I spent 20 years of my
life working for airlines and went to bed every night thinking "How can I charge customers more "and make them feel good about it?" And for the last 10 years
I've worked at a company where I can go to bed at night thinking "How can I make it cheaper for customers?" "How can I let kids see their
grandparents in Nicaragua, "who they've never seen before?" How can I let a small businessman who owns a plant in another state, actually visit his plant
a couple of times a year. And that's an incredibly
liberating, positive thing. Now to make that happen, we've got to do some things differently. But I'll ask all of you, go
to YouTube this afternoon and Google, or Google, or go to YouTube and look up Southwest
1980s bag commercial. And what you're going to find is a commercial of Herb Kelleher's that was run in Texas, in the 1980s, with a bag over his head. Because at that time
people called Southwest "South Worst" because they
were providing peanuts and no seat assignments, when the norm in the
industry was a hot meal between Austin and Dallas. And what Southwest did is
they took a different model that at first was misunderstood, and first thought to be really
negative to the consumer, and over a number of years they converted it into the
wonderful company they are today. And the reason customers
love Southwest today is their expectations perfectly match the delivery of the product. And all I would say at
Spirit is we are a disruptor, just like Uber is, right. (chuckling) And just like a Spotify was, and disruptors create friction at first. And at first it looks like
what they're doing is crazy, and at first they annoy taxi drivers, and they annoy media producers, and they annoy all kinds of people. But over time, if they're doing
the right thing for people, not if they're just meeting the law, but if they're doing the right thing, which in our case is
letting people fly for less, over time, with good transparency their models come to be
understood and appreciated, and Spirit is on that path. And I would posit that
a few years from now we can all get back
together at Booth and say, people actually used
to complain about this. (audience laughing) (Ben laughing)
- That's Ben Baldanza, he's the President and
CEO of Spirit Airlines. (audience clapping) This is John Paul Rollert, professor of ethics here at Booth. Thanks to everyone for
(applause distorting).
