For years, satirical late-night TV host Stephen Colbert has been running a series on his show called "Better Know a District," which highlights one of the 435 U.S. congressional districts and its representative. While I am no Stephen Colbert, I am brutally inquisitive when it comes to the 5,000-plus listed companies on the U.S. stock exchanges.
What Spirit Airlines does
Spirit Airlines is a low-cost airline company that services approximately 50 destinations in the U.S., Caribbean, and Latin America. It uses low-cost ticket prices to attract consumers and then allows them to add on optional items such as baggage, carry-on bags, food et al, as needed.
In Spirit Airlines' most recent quarter, it reported a 20% increase in revenue to $328.3 million, despite a 6.6% decrease in revenue per available seat mile. However, it should be noted that the brunt of this decline was due to Hurricane Sandy, which walloped the entire airline sector, not just Spirit Airlines. More importantly, passenger flight segment volume grew 22% as average non-ticket revenue (i.e., optional fees) flew 9.4% higher.
Whom it competes against
Blanketing much of the Midwest and East Coast, Spirit Airlines has a slew of competitors it has to contend with. It competes against national carriers such as US Airways (NYSE:LCC) and United Continental (NYSE:UAL), and it also contends with domestic giants like Southwest Airlines (NYSE:LUV). In each case there are advantages and disadvantages.
National carriers offer the convenience of servicing a wider array of markets and, should a flight problem arise, they usually have more partner airlines to choose from in order to keep passengers happy and heading to their destination on time. On the flipside, national airlines have less flexibility when it comes to route changes because of the hubs they operate out of and they usually carry mountainous piles of debt.
A domestic giant like Southwest sits in the sweet spot between being a national carrier and a low-carrier in that it focuses on price -- namely its "bags fly free" strategy -- to help sell tickets. But, similar to national carriers, even Southwest has run into the problem where adjusting a route, should it become unprofitable or should fuel price rises, could be difficult.
Spirit Airlines services a much smaller market (about 200 flight paths), which gives it better flexibility to mix up its routes if they become unprofitable. Also, with less money being spent on personnel, it can deliver bigger margins to the bottom line since most of its ancillary fees such as baggage are collected online or at point-of-sale machines.
While I feign to say I'm a fan of any company in the airline sector, after careful review I've decided to place a CAPScall of outperform on Spirit Airlines.
To begin with, I consider the national carriers to be at a strategic and financial disadvantage to low-cost regional airlines like Spirit. United Continental, for instance, was supposed to realize cost synergies from its merger in 2010 but actually took a step back last year and saw costs head higher. Merging networks and a fleet of personnel is a lot more difficult that it looks, and could be one factor that investors are overlooking in the pending US Airways purchase of AMR.
Financially, many national carriers are a disaster in relation to Spirit Airlines. United Continental boasts $6.6 billion in net debt on its balance sheet, while US Air and AMR have greater than $7 billion in combined net debt between their two balance sheets. On the other hand, Spirit Airlines has $417 million in cash and zero debt! This gives Spirit incredible plane buying and leasing flexibility that the other airlines simply don't have.
Another factor I really like about Spirit Airlines is how it draws customers in with its low-cost pricing and then generates incredible margins from its ancillary fees. For example, Spirit and Allegiant Travel (NASDAQ:ALGT) are currently the only two airlines charging a carry-on bag fee. While these fees may cause a lot of griping, you'll find more than enough patrons willing to pay them in return for a cheap ticket price. These fees often come with little need for a hired representative to collect, meaning both Spirit and Allegiant can rack up optional fees by encouraging travelers to pay for bags and other optional items at the time of booking or at airport point-of-sale machines and bypassing the need to tie up a flight representative.
With plenty of cash and lots of route-based flexibility, I think Spirit is set to outperform for years.
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
The Motley Fool owns shares of Spirit Airlines and recommends Southwest Airlines. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.