Why Spirit Airlines Soared 153% in 2013, and Expects to Stay Above the Clouds in 2014

Spirit Airlines (NASDAQ: SAVE  ) stock rocketed higher by more than 153% in 2013. This made it the biggest gainer in one of the top-performing industry sectors this year, outshining strong performances from Delta Air Lines (NYSE: DAL  ) and Southwest Airlines (NYSE: LUV  ) .

SAVE Chart

2013 Airline Stock Chart, data by YCharts

Spirit Airlines stock has benefited from the company's rapid earnings growth in 2013. (Analysts currently expect Spirit to post EPS of $2.31 for this year, up from $1.43 last year.) Longer-term consolidation in the airline industry has put Spirit in position for massive growth. While Spirit stock is unlikely to double again in 2014, it still remains one of the most appealing investment opportunities in the airline industry.

The lowest fares in the U.S.
Spirit Airlines has made its name by becoming the clear price leader in the U.S. airline market. Spirit's policy of "unbundling" fares -- charging extra for everything from bringing a large carry-on bag to choosing a seat in advance -- allows it to offer extremely low base fares.

Spirit Airlines is the price leader in the U.S. airline industry today (Photo: Spirit Airlines)

Even including optional fees, Spirit Airlines typically offers the lowest total price for the routes it serves. Since the vast majority of fliers are price-conscious, and many are willing to sacrifice comfort for lower fares, Spirit fills its planes consistently despite "nickel-and-diming" customers.

Moreover, Spirit's maniacal focus on keeping costs down has allowed it to achieve mid- to high-double-digit operating margins, something virtually unheard of in the airline business. Through the first nine months of 2013, not only did Spirit grow revenue by 24.7%, but it also expanded its operating margin from 14.3% to 17.4%.

Long runway for growth
Best of all for Spirit Airlines shareholders, the carrier has a long runway for growth. Earlier this year, Spirit boosted its aircraft order with Airbus, allowing it to maintain an annual growth rate of more than 15% (on average) through the end of the decade. Based on its current plans, Spirit Airlines will triple in size between today and the end of 2021.

The company should have no trouble maintaining its high margins even with all of this growth. Last month, Spirit increased its estimate of the number of additional domestic markets that meet its expansion criteria to 500.

Spirit's management has also pointed out that in 2021, the carrier's U.S. market share will still be less than half of Ryanair's European market share. This suggests that the U.S. "ultra-low-cost carrier" segment will remain in growth mode for quite some time. As the top carrier in that niche, Spirit Airlines is poised to lead the charge.

Foolish final thoughts
Spirit Airlines shareholders have made a boatload of money in 2013 as the company managed to deliver strong margin expansion despite rapid capacity growth. Investors obviously shouldn't expect to more than double their money every year, but Spirit still looks like a great long-term-growth stock.

The industry consolidation trend is encouraging very cautious capacity growth among the largest airlines in the U.S. This is in turn allowing them to raise prices. The more the major airlines boost their prices, the bigger Spirit's growth opportunity becomes. Its business model of low-cost and low-base fares allows it to stimulate travel demand among people who would not be able to fly much (or at all) at major airline prices.

Based on current industry trends, there are no major clouds on the horizon for Spirit Airlines. There will always be budget-minded travelers, and few if any other airlines can profitably match Spirit's prices. That's a solid recipe for continued outperformance.

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Read/Post Comments (6) | Recommend This Article (2)

Comments from our Foolish Readers

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  • Report this Comment On December 30, 2013, at 1:19 PM, sharkflyt wrote:

    Spirit Airlines is set to pace a new record in the airline industry. They have set the bar and have a business model that both works and creates jobs. I called this stock to hit $38 when it was $14 and now it has quadrupled to over $44 per share. With the 150 new planes they have coming, the stock couldn't look brighter. Spirit is one investment that will outlast all U.S. carriers for quite some time. In fact, other carriers fleet are old and aging which means those airlines would have to spend a boat load of money which would strap them down and cause a cut in workforce.

    Spirit is one of the only airlines hiring and continues to keep a cash flow which tells me that this is the airline to invest in. Even if you aren't used to the cost of a bag or soda you need to get past putting your emotions all into your investing basket because emotions play bad with stocks...I choose Spirit for a nice long run.

  • Report this Comment On December 30, 2013, at 8:19 PM, tightjaws wrote:

    Spirit is a good choice for the casual flier who travels with very little baggage and a has a very flexible schedule, Base fares are cheap but it won't take much in the way of additional fees for baggage and other charges to escalate the fare beyond what other carriers charge. Spirit is known for significant delays so if you must be somewhere on time, leave a day early and allow an extra day for return just to be on the safe side. My experience has been rather satisfactory.

  • Report this Comment On December 31, 2013, at 3:28 AM, vegasfunguy wrote:

    I'll pay the extra $50 roundtrip for a seat that reclines, minimal delays. drinks, and no carry on baggage fees. Spirit delayed me 7 hours from Las Vegas to San Diego ( a 5 hour drive) and compensated me $7 in food credit. SUCK IT SPIRIT.

  • Report this Comment On December 31, 2013, at 12:21 PM, Afterberth wrote:

    I don't think this trend will last. I know many people including myself who have flown this airline once and will never fly it again. they have horrible service and the fees are ridiculous. Word of mouth goes a long way. The only places i can see them surviving are small airports with no competition.

  • Report this Comment On December 31, 2013, at 2:06 PM, dcuellar wrote:

    It may be the lowest cost airline but you have to travel in a swimsuit and no bags. Just bring a credit card onboard (if the credit card is too big) they may charge you $100 for carry on item. When you add up all the fees, they are NOT the best option to fly.

  • Report this Comment On December 31, 2013, at 7:33 PM, coogoody wrote:

    Can't believe that this GREEDY NO SERVICE AIRLINE is doing so well. They frequently overbook their flights and strand people. They stranded me in Florida for days with 3 kids. I could have flown 1 st class roundtrip for what the tickets that I had to purchase to get us home. They offered no refund and their compensations a trip in 3 days was not acceptable. I will never fly them again nor would I recommend them. I diffinetly would not purchase their stock on ethics alone.

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