Spirit Airlines Profit Soars, Shareholders Shrug

On Wednesday, Spirit Airlines (NASDAQ: SAVE  ) reported a record quarterly profit, as its already strong margins soared to stratospheric levels. Spirit's adjusted EPS more than doubled year over year to $0.79, beating the average analyst estimate of $0.75 . Revenue of $457 million also beat the average estimate, and was up an impressive 33.4% year-over-year .

Spirit Airlines reported very strong earnings growth last quarter (Photo: Spirit Airlines)

Despite this strong performance, investors did not seem very impressed. In fact, Spirit shares fell as much as 8% during the day, dropping below the $40 line, before recovering later in the day. Investors may have been spooked by management's discussion of some potential cost headwinds this fall and next year.

However, Spirit is a long-term growth company, and should be understood that way. It is true that Spirit's revenue growth and margin growth are both likely to moderate in the near-term. Longer-term, though, the company's opportunity is enormous. Any significant drop in the stock price in the next year will create a nice buying opportunity for long-term investors.

Near-term headwinds

During Spirit's earnings conference call, CFO Edward Christie stated that non-fuel unit costs would rise 4%-5% in the fourth quarter. This is a notable reversal for a company that has aggressively reduced costs for the last several years .

That said, this increase is almost entirely due to repair and investigation expenses related to an engine blowout that occurred earlier this month . I believe Spirit is being especially conservative in setting aside $10 million to cover these costs. In any case, these costs are one-time in nature, and Spirit may be able to recover some or all of that money from its insurance carrier or the engine manufacturer.

Looking into 2014, Christie projected that expenses may rise. Spirit's growth rate will slow next year, as it will take delivery of seven new planes, compared to nine deliveries in 2013. This slower growth will contribute to higher unit costs, as will new federal regulations regarding pilot rest .

However, another driver of potential cost increases next year is that Spirit will need to start preparing in late 2014 for faster growth in 2015. Indeed, Spirit is scheduled to take delivery of 18 new airplanes from Airbus that year: more than it is receiving in 2013 and 2014 combined !

Big growth

This growth is what makes Spirit such an alluring investment opportunity. Spirit executives are very confident that the market can support significant expansion on their part. Spirit's current fleet plan calls for roughly doubling capacity in the next four years, with the potential for double-digit growth even beyond that point .

As Spirit's growth rate picks up in 2015 and 2016, unit costs will start to decline again. Not only will Spirit be able to spread its fixed costs over more flights, but the aircraft it is adding are (on average) larger and more efficient than those in its fleet today. Spirit's new planes incorporate fuel-saving Sharklet winglets, and some of the 2015 and 2016 deliveries will use new engine technology that is expected to reduce fuel burn by as much as 15%.

These developments will allow Spirit to keep prices low while boosting its profit margin even further. In other words, even if Spirit's growth cools off in 2014, investors shouldn't worry. Spirit is well positioned for massive long-term profit growth.

Gems of the airline industry
Do you want to learn more about how Spirit and one other airline are leading a revolution in the airline industry? The Motley Fool's new special report takes you behind the scenes and lays out the incredible opportunity facing these two companies. Click here to claim your free copy!

Read/Post Comments (0) | 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.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2710502, ~/Articles/ArticleHandler.aspx, 9/26/2016 10:28:33 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 1 hour ago Sponsored by:
DOW 18,094.83 -166.62 -0.91%
S&P 500 2,146.10 -18.59 -0.86%
NASD 5,257.49 -48.26 -0.91%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/26/2016 4:00 PM
SAVE $41.13 Up +1.41 +3.55%
Spirit Airlines CAPS Rating: ****