Was I Wrong to Doubt This Company?

At the beginning of 2012, I called out ultra-low-cost Spirit Airlines (NASDAQ: SAVE  ) as the company I would be avoiding at all costs. Well, since then, the company's stock is up 27%, besting the S&P 500 by about 5 percentage points.

Today alone, Spirit's stock is up as much as 7% on earnings being released. Read below to see if I've changed my tune about the airline, and at the end, I'll offer access to a special free report on our top stock for 2013 here at the Motley Fool.

First, just the facts
Coming into the company's fourth-quarter earnings announcement, expectations were relatively low. Hurricane Sandy had wreaked havoc on a number of different airlines, and both revenue and earnings were expected to drop from previous estimates as a result.

Spirit came out this morning and reported a $0.03 beat on earnings, and healthy revenue growth of almost 20%. That, combined with the fact that the company is rapidly expanding its footprint across North and Central America -- adding 27 new routes between October 2012 and June 2013 -- meant investors were more than happy to buy up shares today.

I haven't liked this model from the start
There's no doubt that ever since the turn of the millennium, airlines have been doing all they can to increase revenue. This has primarily taken the form of fewer on-flight amenities, and charges for checked baggage.

But Spirit has taken "optional fees" to a ridiculous level. On a round-trip flight, you could pay up to $20 just for an agent to print your boarding passes; $200 for two carry-on bags; $200 for two checked bags; $3 for a glass of water... the list goes on and on. See if you can figure it all out at their fees website.

Some airlines have followed suit: Allegiant Air (NASDAQ: ALGT  ) now charges for carry-ons, and last year, Delta (NYSE: DAL  ) significantly increased its fees for checked baggage. But no one -- and I speak from experience using the airline -- comes even close to what Spirit does.

Digging deeper into earnings
My original thesis for betting against the company -- on my All-Star CAPS profile -- was pretty simple: Though the company appears to be growing revenues by leaps and bounds, I simply didn't believe there were enough travelers out there who are willing to put up with Spirit's nickel-and-diming to provide a solid stream of repeat customers.

Although the company said many times in the earnings release that Hurricane Sandy had a significant impact on results, I also believe that such incidents are commonplace in the airline industry, and could easily continue into the foreseeable future.

First things first: Spirit increased revenue by 19.8% during the fourth quarter of 2012. Not bad at all. But consider that during the quarter, available seat miles increased by 28.3% -- meaning that the revenue growth was likely due to more -- and longer -- flights being available than to organic growth in existing markets.

In fact, the amount of money the company took in for every available seat mile shrunk by 6.6% from the same time last year.

But probably most concerning is this: Where once Spirit made just over 10% of its money from all its add-on costs, the airline now counts on such charges for 42.5% of its revenue.

To me, it seems a possibly dangerous paradigm is converging. Some results point to the fact that in markets where Spirit has a presence, customers are starting to get wise to Spirit's low publicized ticket fees, and high actual fees.

I would guess that as long as Spirit is able to open in new markets -- which, to be honest, could last for years -- it will be able to grow revenues. But customers in established markets, I believe, will eventually decline and plateau, as one's experience with the airline affects future decisions about which airline to fly.

I think Spirit's model is a creative experiment in pricing, but I simply can't see it playing out well in 10 years.

I think you'd be better served with other choices for your money.  In fact, I think it'd be worthwhile to check out the No. 1 stock for the next year, as chosen by The Motley Fool's chief investment officer. Find out which stock it is in the brand-new free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.


Read/Post Comments (6) | 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 February 19, 2013, at 5:15 PM, Topcop3003 wrote:

    You still don't get it with this airline. Their business model is totally different from other airlines operating in the US. Do you really think that Coke and snack is free on other airlines or that your bags are flying free as SWA advertises? The answer is NO! All these costs are figured into your ticket and you pay for then whether you want them or not(as well as federal taxes on that total amount).

    Spirit pushes the base airfare to the lowest possible costs (which is what your federal taxes are based on saving you tax cost) and then you only pay for what you use. You need to look at the total cost of your trip and compare that to the other airlines. I have never flown on Spirit where the total amount I paid cost more than other majors carriers that supposedly give you stuff for free. If you travel light and don't mind cramped seats you can save a ton of money.

    You are incorrect that when people figure this out passengers will not fly with spirit. The regular passengers figure out how to fly as cheaply as possible. You quote the worst possible fees in incorrect assumption this is what people pay. It is NOT $100 for a carryon unless you do not prepay for it. You get numerous attempts to pay the least cost and only those who try to game the system get hit with the highest cost.

    I realize it is hard for stock guru's to think outside the box but you guys have completely missed the boat here.

  • Report this Comment On February 19, 2013, at 5:31 PM, tjlion wrote:

    I've been a frequent flyer with several major airlines both internationally and domestically. I started flying Spirit last year because their price was too good to pass. During online booking, Spirit is up-front about explaining each and every additional fee such as checked bags, carry-on, boarding pass, etc and how to avoid these fees. I had no problem understanding any fees and learned I could avoid most fees just by reserving my needs in advance. I typically have one additional fee of $28 for a checked bag, cheaper than I've been charged by other airlines. One of my frequent trips from Portland, OR - Dallas-Ft cost me $120-$140 round trip. The nickel-and-diming only comes from those people who show up at the gate and whom didn't reserve checked-bags, large carry-on bags and are surprised to find out they pay a higher price for adding these items at check-in time as opposed to during booking. My two cents is that Spirit is up-front and very fair and an incredible price. They have been as on-time as all airlines I've flown and I have not experienced any problem. As for the major airlines, they seem to play games and vary prices as much as 50% from one week to the next based on so called, demand levels. If money is of no concern, fly whomever. If money matters, give Spirit a try. As for this article, I think it might be best to fly a few routes and then judge the business model and operations.

  • Report this Comment On February 19, 2013, at 10:01 PM, lumberg wrote:

    Brian, please explain your $200 fees for baggage. This does not match any fees I've seen nor match Spirits online pricing at all. Where do you get this $200 pricing? I call absolute complete B.S. until you prove otherwise and call this an absolute lie.

    Spirit optional pricing: http://www.spirit.com/OptionalFees.aspx

  • Report this Comment On February 19, 2013, at 10:17 PM, tjlion wrote:

    Lumberg, it is possible that someone could be charged $200 as Brian mentioned. Allthough, I would say that person is lacking intelligence. You can show up at the airport and have not booked your luggage and be charged $100 for not doing this in advance. Then, before your return flight if you didn't realize and learn from your outbound flight that you should probably login and update your return flight to include a bag, then you will be penalized again. I would hope most intelligent people would learn the first time and the return flight would cost $30 for a bag. Amazing what doing things in advance does. I'm amazed that people get upset when they don't think but I suppose that's human nature to not think.

  • Report this Comment On February 19, 2013, at 10:24 PM, mrsangy wrote:

    Yes, you were obviously wrong to doubt this company. Had we invested a year ago, we would have made a lot of money. It also seems this company is onto something smart and sustaining.

  • Report this Comment On February 20, 2013, at 10:47 AM, TMFCheesehead wrote:

    @lumberg-

    It's exactly as tjlion explained.

    @topcop-

    You're thoughts on the company are completely fair and may prove to be true. I have a different opinion. In the end, all we can do is wait and see how things play out.

    I try to make investment calls with a 3-5 year timeline in mind. So far, it's been a little over a year since I suggested staying away from Spirit. Before this week, Spirit was losing to the market over that timeframe. Now, it's beating the market. I'll be keeping tabs on the company, and in about two years, we'll see where it stands.

    Brian Stoffel

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