Where Will Spirit Airlines Incorporated Grow Next?

By Markets Fool.com

Earlier this year, in his first public comments as CEO of Spirit Airlines , Bob Fornaro said that he wanted Spirit to be less "predictable" in choosing new routes. He hinted that, under his leadership, the brash ultra-low-cost carrier (ULCC) would deploy more capacity in midsize cities rather than challenging the market leaders in their biggest hubs.

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Spirit Airlines' new CEO wants to move the airline beyond big cities. Image source: Spirit Airlines.

Expanding into midsize markets seems like a wise strategic move for Spirit Airlines. First, this will increase the size of Spirit's long-term addressable market. Second, these midsize markets may help Spirit avoid some of the destructive price wars that have undercut its unit revenue in the past year-and-a-half.

Following its rivals

Allegiant Travel and Frontier Airlines -- the other two domestic ULCCs -- have been quicker than Spirit to move into midsize markets.

Allegiant's bread and butter has always been flying from small markets to popular leisure destinations. However, it has started expanding into midsize markets lately, including launching a new operational base in Cincinnati. Other midsize markets that Allegiant has added include Austin, Indianapolis, Memphis, and Pittsburgh.

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Meanwhile, Frontier Airlines has historically had more exposure to midsize markets, offering numerous connections through its hub in Denver. Since shifting to a ULCC business model a few years ago, Frontier has shrunk the Denver hub and added a wide swath of small, midsize, and large cities to its route map. Its growth in 2016 has been primarily focused on midsize markets, though.

Frontier Airlines is also growing in midsize markets. Image source: The Motley Fool.

New routes will come this fall

Spirit Airlines has been talking about moving into more midsize markets for four months now. It has started to prepare for the effort by revising its fleet plan to include more A319s and A320s -- and A320neos -- rather than adding a lot of larger A321s.

However, Spirit still hasn't announced any new flights into midsize markets. Because nearly all of its routes earn high margins -- and are most profitable during the summer peak season -- Spirit didn't want to make any big changes before the fall.

Within the next month or so, the carrier is likely to start announcing new routes that will launch after Labor Day. Spirit expects to grow its fleet by five aircraft in the second half of 2016, which could allow it to add up to a dozen new routes. At least some of those will likely be in midsize markets, although the lifting of slot constraints this fall at Newark Airport, just outside New York City, could drive Spirit to deploy some capacity in that congested, high-fare market.

Will Spirit attack its rivals head-on?

Spirit Airlines faces an interesting choice in deciding which midsize markets to enter. Fornaro specifically mentioned the Midwest and Florida as underserved regions that could support more flights in midsize markets.

However, those are precisely the markets that Spirit's fellow ULCCs have targeted in the past few years. By now, Allegiant and Frontier serve nearly every midsize market in the Midwest -- and many of those flights go to Florida.

On the one hand, Spirit could try to elbow its way into many of the markets that Allegiant and Frontier serve, undercutting them on price, if necessary, to stimulate demand. But that would risk trading a price war with the legacy carriers for a new price war between the three ULCCs.

On the other hand, Spirit could look further off the beaten path to find midsize markets where Allegiant and Frontier have little or no presence. (Think Buffalo, Louisville, or Providence.) However, by doing so, Spirit could be closing off future growth opportunities by allowing its rivals to consolidate their positions in key midsize cities in the Midwest.

It will be interesting to see how Spirit navigates this dilemma in the coming months and years. By the end of next month, investors should have a much-better feel for Spirit's midsize market strategy.

The article Where Will Spirit Airlines Incorporated Grow Next? originally appeared on Fool.com.

Adam Levine-Weinberg owns shares of Spirit Airlines and is long June 2016 $30 calls on Spirit Airlines. The Motley Fool recommends Spirit Airlines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.