Is Spirit Air Worth the Water?

Airlines have long been considered a no-man's land for investors, yet in recent years some have thrived. With the ongoing consolidation of the airline industry, each individual company has the ability to carve out a potentially profitable niche that defies the notion that airlines are unprofitable, undesirable businesses. For this value-oriented sky-flier that released earnings last week, 2012 was a very strong year. Now, with rising fuel costs, legacy-led pricing power, and increasing ancillary fees, how does the forecast look for the this year and beyond?

Flyin' high
According to Spirit Airlines (NASDAQ: SAVE  ) , 2012 was a successful year of recovery for the travel industry. The company added 29 new routes to its portfolio, bringing its total number to 110. Those moves helped Spirit achieve a record full-year income of $1.3 billion -- all while maintaining its low average base fare of $75. More impressive is that this came in on the heels of a difficult quarter for the company. Hurricane Sandy hit the industry hard, and Spirit management believes the catastrophe brought down revenue by $25 million and operating income by $24 million.

That $1.3 billion in revenue represents a more than 21% jump over the prior year's numbers. The company had 12.2% operating margins, again affected by Hurricane Sandy -- it otherwise would have probably been closer to 14%, in line with last year's figure.

For the quarter, the company was able to beat the Street's expectations. EPS for the fourth quarter came in $0.03 ahead of estimates at $0.27 per share, based on $328.3 million in revenue. Sales came in at a 20% premium to 2011's fourth quarter and, again, above Wall Street estimates of $324.7 million.

Overall, things appear strong for the discount airliner that offers bottom-line prices for bottom-line service. But how does that model play out long-term, and what other factors could change Spirit's course?

Is it really that cheap?
There's no doubt that Spirit is one of the cheapest airlines, if not the cheapest, on a routine basis. Allegiant Travel (NASDAQ: ALGT  ) is most similar in price point and route offering, but it also has a robust travel booking service beyond its core airline business. Though, as my colleague Brian Stoffel pointed out, ancillary fees quickly diminish Spirit's seemingly advantageous cost platform. Now, all airlines are charging more and more ancillaries, but Spirit seems to be taking the idea of nickel-and-diming to a new low. Charging $3 for water doesn't seem like a reasonable thing to do, regardless of increasing fuel prices or competition from other airlines. I usually bring my own water on planes, but this offends me on a fundamental level.

Will travelers be as put off as I am by that kind of behavior? The company is expanding quickly, so growth looks strong -- but it will be interesting to see how its new routes perform on a long-term basis and if initial traveler interest wanes.

Rising fuel costs are another element that could change things for Spirit this year. Airlines can typically compensate by raising fares. Spirit can do this to a degree, but with its other practices (again, see $3 water), it's only selling point is dirt-cheap airfares. If it were to increase fares by just $10 or $15, it might have to let us bring a carry-on for free.

Tailwinds and the call
Beyond my personal issues with Spirit's business model, there do seem to be some outside factors that bode well for the company going forward. As mentioned in a recent interview on CNBC, Spirit CEO Ben Baldanza believes the merger between American Airlines (UNKNOWN: AAMRQ.DL  ) and US Air (NYSE: LCC  ) will increase prices for legacy carriers and widen the gap between discount airlines and the others, thus creating a bigger runway for growth.

From my understanding of the merger, this could happen, but it's not a guarantee. Both American and US Air reps have said multiple times that this does not necessarily equal an increase in fares, though analysts have often disagreed. Assuming Baldanza is correct, though, passengers may be more inclined than ever to try out Spirit and its Evian-priced tap water.

In a recent article, I touted Alaska Airlines as the airline to go with if you're intrigued by the "renaissance" period of airlines and want to invest. I like Alaska's doubleheader of growing routes while earning more per seat per mile, its profitable West Coast niche, and, most importantly, its free water.

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Read/Post Comments (4) | Recommend This Article (2)

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 27, 2013, at 12:33 PM, MCO0306 wrote:

    Michael

    You are complaining about a $3 bottle of water???? Really???? How much did that bottle of water cost you after purchasing it after the TSA security checkpoint? You need to focus on the business not the $3 bottle of water. Nice try though. I give you a D+.

  • Report this Comment On February 27, 2013, at 2:49 PM, XMFMadMardigan wrote:

    MCO,

    I used the $3 water as a device to illustrate what I find to be a problem in Spirit's business model. The CEO says people want to have an ala carte style flying experience, giving them the option to pay bottom dollar for a bare bones flight. I'm not saying it is a bad company or that the stock will sink--I just am not convinced that Americans will take to this in the long-term. Their growth right now is based on growing routes all over the place and charging out the wahoo for everything imaginable (like a boarding pass). Let's wait and see in a couple of years if these new routes are as popular.

    I appreciate your letter grade, but I think you may have missed the point. I am not against Spirit in any way--I have no interest in that. I just simply believe there are better stocks out there for those interested in airlines.

    For the record, I paid 2.00 for a 1L bottle the other day at MIA.

  • Report this Comment On February 27, 2013, at 5:32 PM, Topcop3003 wrote:

    You have missed the boat with this Airline. Every trip I have flown with Spirit has cost me much less than other carriers. In addition to the ticket I generally pay for 1) carry on 2) premium exit row seat 3) soda and snack. In every case I have still saved money over other carriers that supposedly give you stuff for free. The seat is not as comfortable but not an issue for me.

    The boarding pass example you stated is easily avoided by printing it at home. The water and sodas are just as expensive in post security stores, and sometimes more so, than on the airplane.

    Spirit is very upfront and open about the charges and I have never been surprised by a fee.

  • Report this Comment On March 03, 2013, at 9:13 PM, jtd04cc wrote:

    Agree with MCO0306: D+ at best Michael.

    Had a 3 hour delay on Christmas due to SAVE having "no pilot to fly the plane" ($69 flight one way fees included). The grumbling from the crowd immediately began "never flying Spirit again."

    I went over to the bar and got to talking to a tenured FLL Terminal bartender. I asked how many people complain about Spirits fees and delays, and say they will never fly them again. She replied a lot of em do. I asked, how many do you see back. She replied "a good number of them".

    You, like the masses, seem to enjoy complaining about Spirit, their business model, $3 waters etc (much the same way people complain about Wal Mart destroying Main Street America). But the bottom line is, the lowest fare wins every time; or at least enough times to sustain a profit despite other shortcomings.

    >Satisfied Spirit customer, and shareholder.

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