Investors Don’t Trust This Airline

At least Spirit Airlines (Nasdaq: SAVE  ) has the right name. Only the eternally hopeful would believe that IPO investors would welcome a discount airline that depends on sardine-style seating and charge-for-everything fee add-ons to make a profit.

The dream hasn’t exactly panned out. Spirit debuted at $12 a share yesterday, well below the $14 to $16 a share it was seeking, and promptly fell to $11.55 and is still falling today.

Between record fuel prices, contentious labor contracts, and bizarre weather that’s already forced AMR Corp.’s (NYSE: AMR  ) American, United Continental (NYSE: UAL  ) , and Southwest Airlines (NYSE: LUV  ) to cancel a number of Dallas flights, Spirit is entering the public markets at a time when the entire industry faces significant headwinds.

But there’s also more than industry woes at work here.  Spirit, which typically flies between Florida, the Caribbean, and Latin America, is an ultra-discount carrier that leaves itself little room for error. Fares average $82 per round trip, Dow Jones reports.

That thin line tends to take a toll on Spirit’s financials. From 2009 to 2010, Operating margin deteriorated and the carrier burned through $23.3 million in cash flow. Only once, in 2009, has Spirit thrown off any amount of free cash flow. Cash from operations has declined in each of the past three fiscal years.

So while I don’t relish the thought of kicking a new stock to the curb so quickly, I can’t find a single reason to own shares of Spirit Airlines. I’d rather short it in my CAPS portfolio.

Do you agree? Disagree? Let us know what you think about Spirit’s sustainability using the comments box below. You can also add Spirit Airlines to your watchlist to get regular updates to our Foolish analysis of the stock.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He didn’t own shares in any of the stocks mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader.

Motley Fool newsletter services have recommended buying shares of Southwest 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.


Read/Post Comments (5) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 28, 2011, at 8:20 AM, crusader56 wrote:

    investors don't trust airlines you say? well neither do the employees.

  • Report this Comment On May 28, 2011, at 9:28 AM, waterflower wrote:

    I would stay away. A 17 year old operation that has survived virtually every economic downturn. Several quarters of sustained profitability. A pilot strike, 911, etc. Nobody would fly on them and no one flies on Ryanair either. Yes these quys think WAY outside the box.....

  • Report this Comment On May 28, 2011, at 11:14 AM, AeroMan4 wrote:

    The Fool touted JetBlue as a good investment and we've all seen where shareholder value has gone with that airline stock - down the toilet.

    Spirit Airlines - like all airlines that are not in ancillary businesses (MRO, IT, Catering, Cargo, ...) - will NEVER consitantly produce free cash flow or returns above their cost of capital.

    Kick SAVE to the curb with the rest of this industry.

  • Report this Comment On May 29, 2011, at 7:38 AM, BAexec wrote:

    I agree with the article. Not to mention that Southwest has a large presence in (FLL) Ft Lauderdale, Spirits main hub, and will soon have Internationl routes.

    If I were Southwest, I'd attack Spirits routes out of Ft Lauderdale and eliminate the airline. Southwest will have over 3 Billion in cash AFTER the Airtran deasl including the 500 million in costs incured during the integration of the two airlines

  • Report this Comment On July 30, 2011, at 7:40 PM, alexreising wrote:

    What you people, inlcuding TMF analysts don't seem to understand is that this company IS profitable, and has an incredibly low number of shares outstanding... on a valuation basis it is simply to cheap to pass up. Just because they charge you take a piss on the flight, doesn't mean you can't trade the stock until the market determines a reasonable value.... There is NO reason that SAVE should trade at Multiples 5 times lower than competitors.

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