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Low Costs and Big Benefits for Spirit Airlines

May 13, 2012 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Innovation, Labor, Regulation, Thinking Economically • 373 Views    No Comments

Spirit Airlines is doing everything it can to charge us less for a seat on one of its planes. One gentleman paid $77 for a round trip seat between Chicago and Fort Lauderdale.

Just the seat.

How much more could he have paid?

You might want to try matching each of the following Spirit Airlines fees to one of the items listed below.

Marginal Cost and Airline Fees

(Answers at the bottom)

On the surface, it just looks like passengers pay a fee and the airline generates more revenue. But there is more. Because of the carry-on and checked luggage charges, passengers pack less. Less luggage means lighter planes. Lighter planes need less fuel–a huge cost saving for airlines.

Spirit also eliminated reclining seats on their Airbus 320s so that they could fit approximately 40 more fliers onto the plane. Think about it. Whether flights are full or empty, they still need the plane, the fuel, the pilot. And they charge for almost everything else.  An extra passenger costs them very little.

An economist would say that Spirit was really good at thinking at the margin. Defined as the “extras,” the margin is where Spirit adds to revenue and saves on costs.

Thinking about marginal cost, Spirit probably even made money on the gentleman who paid $77 for his Chicago/Ft. Lauderdale round trip.

While my Spirit facts and the matching idea came from a WSJ.com article, I especially recommend this very clever interactive graphic that displays the shifting position of the major airlines since deregulation in 1978.

1e; 2g; 3c; 4b; 5f; 6d; 7a; 8i; 9h

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