After reading the November traffic results from the major legacy airlines, one would've assumed that the month was a throwaway for all airlines. The timing of the Thanksgiving holiday pushed passenger return traffic into December. All of the major airlines reported declining load factors, with Delta Air Lines (NYSE: DAL ) and US Airways, now part of American Airlines Group (NASDAQ: AAL ) , blaming the late Thanksgiving and proclaiming that December will be strong.
But, along came Spirit Airlines (NASDAQ: SAVE ) with some surprisingly positive numbers. The company did note a small decline in load factor, but the other traffic totals suggest that November was a normal month to the airline.
Spirit is a leader in the ultra-low-cost carrier segment that is attempting to take market share from these legacy airlines. Based on November's numbers, the substantial gains by the company might only be the start of a bigger move.
Spirit generated 24.4% growth in revenue passenger miles, or RPM, while the available seat miles, or ASM, grew 24.8%. These totals led to a load factor decline of 0.2 points to 83.7% (from the 83.9% of November 2012). The load factor is a key airline metric highlighting the percentage of a plane that is full of passengers. A higher load factor typically is a good sign that an airline is matching demand, or RPM, with capacity additions, or ASM. Airlines have to be careful not to expand capacity (ASM) too far ahead of demand (RPM), which would result in a lower load factor.
On first review, the load factor numbers appear disappointing, but when matched with nearly 25% growth and the weakness shown by the giants in the industry, the numbers appear a lot more impressive.
When reviewing the major airlines, the numbers for Delta Air Lines and the US Airways portion of the new American Airlines actually shed light on the fact that Spirit had one very successful month. Delta saw the total system load factor decline 3.1 points to only 79.4%, compared to the 82.5% in November 2012. The domestic load factor was even worse with a 4.2-point decline in November 2013.
US Airways generated a five-point decline in the mainline load factor, as the domestic portion saw a 4.7-point drop to 82.4%. The biggest issue with the airline is that the slight drop in RPM was met with a 6.1% increase in ASM. The domestic portion saw RPM drop 1.6% on a 4% increase in capacity. US Airways did forecast a strong December to make up for the weakness in November.
Years of growth ahead
The first thing an astute investor might wonder is if Spirit Airlines has much of a growth runway left. On a general revenue basis, Spirit expects to hit nearly $1.7 billion this year, compared to more than $37 billion for Delta and around $40 billion for the new American Airlines Group. As far as general revenue is concerned, Spirit is only a fraction of the industry and looks to have an almost unlimited path of growth ahead. Considering that Spirit charges lower fares, how does it stack up on actual passenger traffic numbers?
For the month of November, Spirit Airlines had just over 1 million RPM, Delta's mainland division had 8.6 million RPM, and US Airways had 4 million RPM. In addition, both airlines had larger RPM when counting international operations.
As the table below showcases, on a revenue basis Spirit was equivalent to about 3.2% of the total revenue of the combined Delta and US Airways. Comparing only the domestic RPM, Spirit was a much larger 8.2% of the combined total. Considering Spirit does fly some of the basic Latin America routes, the total system RPM was closer to 5.4% of the combined 19.2 million RPM of both Delta and US Airways.
Of course, if investors throw in the passenger traffic from American Airlines and United Airlines, Spirit appears to have a lot more growth potential ahead. The key to the analysis, though, is comparing the difference between the revenue numbers and passenger miles that better define the market potential.
Considering that Spirit Airlines has gained over 150% in the last year, it would on the surface suggest that limited upside exists now. Airlines don't grow that fast -- Spirit must've outgrown current growth rates with that large gain. In reality, the stock now only trades for 16 times forward earnings estimates. If the airline can continue growing at 24% during a very weak month during the revival of the sector, then it might deserve a higher multiple.
Analysts forecast the rate of long-term-earnings growth at 32%, and expect roughly 24% growth next year. At that rate, earnings would hit $2.87 per share (the stock trades around $45 now). If Spirit's stock maintains the current P/E multiple of around 20, then it would hit over $55 next year based on that earnings growth.
On the surface, the traffic numbers for Spirit Airlines during November weren't overly impressive since load factor declined from the previous year. The entire sector had weak numbers, which highlights the importance of reviewing numbers across the industry. The ability of Spirit to report decent numbers in a weak month should signal to investors that the future remains bright. The company has years of growth ahead, but investors will always need to dig deeper into the RPM comparisons, beyond the more simplistic revenue numbers. Due to a lower fare structure, Spirit has a larger market share than revenue results alone would suggest.
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