Spirit Airlines Earnings: An Early Look

Earnings season is in full swing, with huge numbers of companies having already given their latest numbers to investors, and Spirit Airlines (NASDAQ: SAVE  ) is about to release its quarterly earnings report. The key to making smart investment decisions with stocks releasing their quarterly reports is to anticipate how they'll do before they announce results, leaving you fully prepared to respond quickly to whatever inevitable surprises arise. That way, you'll be less likely to make an uninformed knee-jerk reaction to news that turns out to be exactly the wrong move.

Airlines have had a blockbuster year, as major carriers realized that charging ancillary fees was a gold mine waiting to be tapped. Spirit Airlines has developed a reputation for cheap fares but sometimes outrageous fees. How are customers responding to Spirit's strategy? Let's take an early look at what's been happening with Spirit Airlines over the past quarter and what we're likely to see in its quarterly report on Tuesday.

Stats on Spirit Airlines

Analyst EPS Estimate

$0.25

Change From Year-Ago EPS

(24%)

Revenue Estimate

$330 million

Change From Year-Ago Revenue

20.5%

Earnings Beats in Past 4 Quarters

3

Source: Yahoo! Finance.

Will Spirit Airlines fly higher?
Analysts have given investors a turbulent ride in their earnings forecasts for Spirit, which have fallen more than a dime per share in the past three months but which have increased from even lower levels a month ago. Shareholders aren't upset, though, with the stock soaring nearly 25% since mid-November.

Spirit has taken what has been an extremely lucrative business model for the airline industry and taken it to a ridiculous extreme. Delta Air Lines (NYSE: DAL  ) and United Continental (NYSE: UAL  ) have added hundreds of millions of dollars to their bottom lines by instituting baggage fees and other ancillary charges, playing a major role in helping them reverse long periods of operating unprofitably. Yet Spirit has taken fees to the next level, charging highly attractive low-cost fares as low as $9 but then adding charges as high as $100 per bag if you pay them at the gate. Moreover, its charges of between $25 and $50 for carry-on bags plug a loophole that many travelers have adopted on other airlines.

Still, Spirit has been able to take advantage of the flexibility that regional carriers have. Its balance sheet is free of debt, although lease-financing deals for its aircraft fleet leave Spirit with more than $1.17 billion in long-term liabilities that it will have to maintain for years to come. Add to that its expansion program, and the risk involved with Spirit becomes much clearer.

The coming merger between American and US Airways (NYSE: LCC  ) has many investors wondering whether further consolidation in the industry is possible. Although further mergers among major airlines would probably raise antitrust concerns, smaller airline buyouts might pass FTC muster. But it's hard to see how Spirit would integrate itself with a major airline, unlike regional carrier Alaska Air (NYSE: ALK  ) , which sports a valuable hub in Seattle and a unique mix of business and leisure travelers.

Look closely at Spirit's earnings report to see how its ancillary fee revenue compares with its regular fare revenue. With non-ticket revenue making up more than 40% of total sales last quarter, a further ramp-up will tell an interesting story about how willing passengers are to pay fees to get cheap fares.

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