Spirit Airlines Wants to Keep Growing

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Ultra-low-cost carrier Spirit Airlines (NASDAQ: SAVE  ) has been one of the fastest-growing airlines in the U.S. for the past several years. The company's revenue has shot up from just $781 million in 2010 to $1.32 billion last year, and analysts expect Spirit's revenue to reach $1.88 billion in 2014. That would represent a compound annual growth rate of approximately 25%.

Despite this rapid growth, Spirit has also been one of the most profitable airlines in the country; the company has actually been improving its already-stellar pre-tax margin recently. Last month, Consumer Reports ranked Spirit at the bottom of the airline industry in terms of customer service, but passengers continue to flock to the airline because of its rock-bottom fares.

With revenue and earnings consistently increasing, Spirit ordered 20 new Airbus A321 aircraft at last week's Paris Air Show to meet the significant untapped demand for its services. The company also upgraded 10 of its Airbus A320 aircraft on order to the larger A321 model. This order signals that management intends for Spirit to continue its rapid growth for the foreseeable future. As the company expands, it could become an increasingly potent threat to higher-priced competitors.

Rapid growth to continue
Spirit currently operates a fleet of 50 Airbus aircraft, consisting of 29 A319s seating 145 passengers, 19 A320s seating 178 passengers, and two A321s seating 218 passengers. All three models are part of the A320 aircraft "family," which means that they have a similar design and a common cockpit. This allows Spirit to deploy planes based on the level of demand in each market while avoiding much of the crew scheduling and maintenance complexity that comes from flying different types of aircraft.

A Spirit Airlines A320 (courtesy of Spirit Airlines).

As of the end of 2012, Spirit operated 45 airplanes and planned to grow its fleet to 78 planes by the end of 2016. However, the company was scheduled to see fleet growth taper off to just two aircraft per year in 2017 and 2018 before accelerating again at the end of the decade.

Last week's order allows Spirit to grow capacity by 15% or more per year (on average) for the next five years. Spirit executives have frequently stated that they see ample growth opportunities ahead, with more than 400 potentially viable markets today. Even with all of these aircraft on order, the company will be able to satisfy just a small portion of that demand.

The choice of A321 aircraft is also a testament to management's confidence in the robust demand for Spirit's low-fare, no-frills product. Whereas the majority of Spirit's planes today are A319s seating 145 passengers, the A321s are 50% larger, with 218 seats. Clearly, Spirit executives think that they could fill more seats in many markets if the company had additional capacity.

A competitive threat
For the most part, Spirit has been successful by flying under the radar of the major carriers. It is still a very small carrier compared to the major airlines: AMR (UNKNOWN: AAMRQ.DL  ) , Delta Air Lines (NYSE: DAL  ) , Southwest Airlines (NYSE: LUV  ) , and United Continental (NYSE: UAL  ) . Moreover, it generally appeals to a different type of customer than those carriers: one who is extremely price-sensitive.

Many of Spirit's customers would not fly at all if they didn't have access to Spirit's low fares. Thus, to some extent Spirit is not competing directly with other airlines for customers. Still, at the margins, there are obviously some fliers who choose Spirit because it is available but would pay more for a ticket on one of the major airlines if it were the only option.

As Spirit continues to expand rapidly, this indirect competition will increasingly put pressure on the major carriers. Even network airlines like American, United, and Delta -- which primarily focus on serving business travelers -- need to fill the "back of the plane" with price-sensitive leisure customers. For most of these airlines, losing just two or three customers on each flight could be the difference between earning more than the cost of capital or not.

Foolish bottom line
Spirit's order last week signals that the company intends to grow rapidly for the foreseeable future. Not only will the carrier add planes to its fleet, but the new planes will also have more seats than the A319s and A320s that make up the backbone of Spirit's current fleet. Given Spirit's solid profitability, investors should be happy to see that the company will keep growing rapidly.

So far, Spirit has not presented a severe threat to established carriers because it still has a very small market share and primarily targets customers who could not otherwise afford to fly a traditional carrier. However, if Spirit continues to grow rapidly, it could start to siphon a significant amount of business away from other airlines due to its very low fares. All airline sector investors should keep their eyes on Spirit, as this little company could become increasingly disruptive within its industry.

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Read/Post Comments (4) | Recommend This Article (5)

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 June 25, 2013, at 2:42 AM, prginww wrote:

    I flew Spirit for the first and last time in January. I can not believe these idiots are still in business! They are as bad as ValuJet. I know a crash of Spirit is soon as poorly as they run things. The right hand has no clue what the left hand is doing. Plus, they charge for EVERYTHING!! I am surprised we got free air! Southwest is a step up from these jerks. Spirit tapes everything down with duct tape and throws the "snacks" you pay $6 for at you. They need to go. And soon. If you have a choice, avoid these idiots at all costs.

  • Report this Comment On June 25, 2013, at 6:23 AM, prginww wrote:

    Southwest is definitely a big step up from Spirit, but it's also much more expensive to fly Southwest. Spirit has by far the lowest base fares around, and they do it by crushing seats together and "nickel and diming" for anything you want beyond a seat on the plane. Even with the fees, it's still usually the cheapest option.


  • Report this Comment On June 25, 2013, at 8:17 AM, prginww wrote:

    This company is the worse airline ever as my previous commentator wrote, they charge for every thing including water, cheap airlines has no place in the USA. they will never grow and should expire in a few years.

  • Report this Comment On June 27, 2013, at 4:05 PM, prginww wrote:

    My experience with Spirit is good. They might have tight seating if your over 6 feet tall and they might charge for everything but at the end of the day they are hundreds of dollars cheaper than the competitors. I think people whine too much about this airline when it is their choice to fly what ever airline they want. They saw the price and they went fot the cheapest deal.

    Spirit is the best deal and for those nay sayers out there about them, remember they don't need whiners when they have plenty of people wanting a great deal. Spirit stock is about to climb even higher and when they get more airplanes like stated they will be the biggest threat to airlines like Delta and Southwest.

    Southwest is a cattle call with no so free bags when you look at the fares. They used to be but now they cannot compete with people wanting to go to popular destinations for cheap. Spirit Airlines rocks in my opinion because I know how to read their website and how to save big time. They have the best frequent flyer program in the nation especially with the World Master card.

    I can't wait to see the new airplanes they are getting. They are much bigger than the current airbuses.

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