realrobross'  Instablog

Ever since I booked my first flight to attend a photography seminar at Stanford, I remember my father's advice to avoid getting fleeced on airline tickets: "Always book your flight over a month in advance." Following this adage has helped me save hundreds - if not thousands - of dollars, since most airlines typically raise prices as the departure day looms.

These words of wisdom apply to most travel situations, but the occasional unexpected event - like a death in the family - makes it a maxim with a few limitations.

One of those limitations sprang up this past weekend: after a long battle with heart disease and following a bad fall, my grandfather, Ronald Fox, passed away at the age of 82. As soon as I heard the news, I knew that I would attend the funeral, since Cleveland is a short four-hour drive from Flint, MI. But my sister, who works as a nurse and an actress in Los Angeles, was contemplating whether or not to foot the bill for a plane ticket in excess of $1,000.

In the end, she bit the bullet and bought the cheapest direct flight available on a small carrier called Spirit Airlines (NASDAQ:SAVE). She seemed rather perturbed that the airline had few of the amenities she was used to: instead, she was dinged $30 per carry-on bag, $5 for a boarding pass, and even $3 for a bottle of water. To cap it off, she had nearly no leg room and her seat didn't recline!

Needless to say, she and most of the other passengers spent the red-eye flight from Los Angeles to Detroit with their heads resting against the seat in front of them, as the seat space was too small to rest on the tray table. But even after the fees and uncomfortable ride, she said it was worth it because the flight - which cost her $500 - was less than half the price of competing airlines.

This got me thinking: I wonder how much this airline earns by stripping out all expendable costs and charging for everything from boarding passes to bottled water? Surely Spirit would make a good chunk of sales nickel-and-diming its customers, but would it cover the lost revenue from halved ticket prices?

I'll admit that I severely underestimated the effectiveness of the low-cost model, as Spirit Airlines is actually the most profitable airline in the world. This small, 40-jet airline - which counts Greyhound Lines Inc. as a competitor - has reinvented itself after nearly filing for bankruptcy in 2007. Spirit has found its niche: customers who want to get to their destinations as cheaply as possible.

The big move for Spirit came in 2007. Faced with mounting debt, stagnating sales, and possible bankruptcy, the airline announced that it would now switch its focus to become the airline industry's low-cost leader.

To start, Spirit took away the freebies: no more free drinks or free food. Oh, you want complimentary water? You can buy a bottle for $3. Then it became the first US airline in decades to charge for checked luggage - a move soon copied by other major US carriers - and eventually started charging for carry-on luggage to the tune of $30 to $45 a pop. According to the company, fees for carry-on luggage could surpass $100 later this year, but it'll still allow flyers to store carry-on bags that can fit under their seat for free.

After the success of the checked-bags fee, the airline then started experimenting with other revenue streams: Spirit became the first airline to charge different prices for aisle and window seats, as well as embarking on the first "air billboards" campaign - whereby advertisers pay to put ads on everything from the plane's fuselage to tray tables and overhead bins.

These extra fees and other revenue streams now account for nearly a third of Spirit's sales, compared with an industry average of 6%. On a profit-per-plane basis, Spirit is well ahead of the competition: the low-cost leader generated $2.06 million per plane in 2011, well ahead of number-two Delta Airlines (NYSE:DAL). Only two airlines have earned more than Spirit since 2011: Southwest (NYSE:LUV) at $1 billion with nearly 700 planes; and Alaska Air Group Inc. (NYSE:ALK) at $522 million with 165 planes.

A business strategy professor of mine once said, "If your business model depends solely on offering lower prices, you're going to lose." However, Spirit saw what was happening with low-cost carriers like the Irish Ryanair (NYSE:RYAAY) and Air Asia, and felt that it could offer something similar to the American market.

Spirit's entry into the market couldn't have come at a better time. Skyrocketing unemployment and a slowing global economy pushed consumers to choose the cheapest option possible from everything from food to airline tickets. Even though fewer people would travel by air during this period, if they did and they weren't a business-class customer, Spirit would be a novel alternative.

But this low-cost model has some consequences, both internally and externally. In May 2009, Spirit pilots overwhelmingly (98% of votes) decided to strike due to contractual disputes related to compensation and benefits. Spirit pilots went on strike again in 2010 for similar reasons, and ended the strike with its pilots' compensation in line with industry averages.

On the consumer side, a 2008 Bureau of Transportation Statistics report stated that Spirit had the highest number of complaints per passenger among US airlines that carry more than five million passengers. It was also fined $375,000 in 2009 by the US Department of Transportation for failing to compensate passengers it bumped from an oversold flight. It's also known for having one of the industry's worst on-time performance records.

Even with all the internal and external wrangling, Spirit is trudging on. Since its rebranding in 2007, sales are up nearly 50%, while, as of its most recent filing, Spirit's year-over-year profit rose 20.4%.

So, for those - like my sister - who are willing to accept the tradeoff between losing the typical airline amenities for a fare that runs about half of its competitors, you'd fit right in on one of Spirit's 40 planes.

Just don't get too comfortable… actually, that shouldn't be a problem.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.