Spirit Airlines, Inc. Investors Get Another Nice Surprise

Spirit Airlines, (NASDAQ: SAVE  ) was the best-performing stock in a sector that zoomed higher during 2013. Through the first three quarters of 2013, Spirit grew earnings per share, or EPS, by a whopping 50% due to strong revenue growth and margin expansion. This, along with increasing investor optimism about its growth plans, helped Spirit Airlines stock soar more than 150% last year!

SAVE Chart

Spirit Airlines 2013 Stock Performance, data by YCharts

Despite some hiccups near the end of 2013, Spirit came into the new year with plenty of momentum. Based on an investor update that the company provided last week, Spirit Airlines investors can probably look forward to another strong performance in 2014.

Earnings estimates rising again
Back in October, Spirit Airlines management surprised investors by forecasting a significant jump in unit costs for Q4. One of Spirit's planes had an uncontained engine failure in mid-October, and the company budgeted $10 million in expenses related to that incident, mostly for aircraft repairs.

Spirit Airlines faced some one-time costs last quarter, due to an October engine failure

At the time, Spirit projected that these unforeseen expenses would drive a 4%-5% increase in adjusted CASM (a measure of unit costs) for Q4, well above the company's plan for declining unit costs. Based on this guidance, analysts cut their earnings estimates to reflect a year-over-year decline in Q4 profit, excluding the one-time effect of Hurricane Sandy from 2012.

Spirit's new investor update from last week paints a much nicer picture. The company reduced its estimate of the engine failure costs to $8 million. Moreover, Spirit Airlines found cost savings elsewhere, and it now projects Q4 adjusted CASM excluding fuel at $0.0598-$0.0603. In other words, adjusted non-fuel unit costs will rise just about 1% compared to last year's figure of $0.0593. That's about three percentage points lower than Spirit's original CASM ex-fuel estimate for Q4.

This result is extremely impressive considering the headwind caused by one-time costs related to the October engine failure. Combine that with a solid 3% increase in RASM (unit revenue), and Spirit should be able to manage some earnings growth this quarter after all!

Growth a little sooner
Spirit Airlines, shareholders also got good news on another front. While Spirit has been growing quickly and plans to continue growing over time, the company's 2014 fleet plan previously entailed a slowdown in growth. In fact, after taking nine new aircraft in 2013, Spirit had expected to receive only seven aircraft in 2014, before accelerating growth in 2015 with 18 deliveries.

However, last week Spirit revealed that it had been able to rework its delivery schedule with Airbus. Now the company plans to add 11 Airbus A320s this year, seven of which will arrive in the fourth quarter. There will still be a slowdown in growth, but it will be much less pronounced. Capacity is now expected to rise 17% in 2014, compared to a previous estimate of 15%.

For Spirit investors, it's great to see that the company is anxious to get additional planes sooner rather than later. While most of the 2014 deliveries are happening in Q4, this growth will still allow a significant bump in capacity during the busy Thanksgiving and Christmas travel seasons. Additionally, smoothing the growth rate will mitigate the operational risks and costs of adding lots of new routes at once.

Foolish conclusion
Spirit Airlines investors had a great year in 2013, and they've gotten off to a very nice start in 2014. The company has already demonstrated this year that its drive to reduce unit costs is still going strong, and that its explosive growth will continue in 2014. As the Spirit Airlines growth story plays out in the coming months and years, investors will continue to be rewarded nicely.

Protect your profits
Airline investors earned big profits in 2013 as the valuations of companies like Spirit Airlines soared. If you're one of those lucky investors sitting on big profits, now might be a good time to move some of your money into safer investments. Dividend stocks have historically outperformed the market, but they're much safer than airlines. The Motley Fool's brand-new special report, "The 3 Dow Stocks Dividend Investors Need" can get you started as a dividend investor.  It's absolutely free, so simply click here now and get your copy today!

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  • Report this Comment On January 22, 2014, at 11:01 AM, sharkflyt wrote:

    Spirit is one great airline with so much growth happening which makes me an excited investor. The idea of picking and choosing what you pay for like at a fast food restaurant is what is really needed in the airline business. There are more people out there budgeting rather than with tons of money who can just dish out a $1000 for a plane ticket.

    With Spirit at least people can decide what they pay for especially if they book through the companies web site instead of third party sites. This airline is my favorite by far and will be long after I decide to retire. With this business model, I think I will be retiring and still earning huge divi's along the way.

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Adam Levine-Weinberg

Adam Levine-Weinberg is a senior Industrials/Consumer Goods specialist with The Motley Fool. He is an avid stock-market watcher and a value investor at heart. He primarily covers airline, auto, retail, and tech stocks. Follow him on Twitter for the latest news and commentary on the airline industry!

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8/27/2015 4:00 PM
SAVE $51.15 Up +0.07 +0.14%
Spirit Airlines CAPS Rating: ****