Airlines have been hit hard by the COVID-19 pandemic, which has caused travel demand to all but evaporate. The number of travelers heading through U.S. airport security checkpoints on May 31 was down 86% year over year, and that is an improvement over the 95%-plus drop recorded in mid-April.

Airline shares fell with the passenger counts, as investors began to fear bankruptcies were inevitable. Warren Buffett's outlook for the industry was so grim that he decided to sell large stakes in the four biggest airlines at a loss. If Buffett gave up on industry stalwarts like Southwest Airlines, it's no wonder investors all but gave up on smaller, second-tier carriers like Spirit Airlines (NYSE:SAVE).

Two months into the pandemic in the U.S. and Spirit, a so-called "ultra-low-cost" carrier that at times seems best known as the butt of late-night comedian jokes, is still far from out of the woods. But if the company can survive, the stock is one of the most attractive in the industry over the next 12 to 18 months. Here are the risks, and opportunities, before Spirit investors today.

Fasten your seatbelts

Spirit expects revenue to be down 95% year over year in the current quarter and sliced in half for the full year. Obviously, that is not sustainable indefinitely, but the airline does have a cash cushion to weather the storm.

The airline had about $915 million in cash as of April 30, including initial payroll support funding provided as part of the CARES Act government stimulus plan. As of early May Spirit was burning through about $4 million per day, but that figure has hopefully come down some in recent weeks as demand appears to be slowly rebounding off an April bottom.

A Spirit A319 coming in for a landing.

Image source: Spirit Airlines.

"As we think about overall liquidity, our plan is to raise enough liquidity to be able to remove the liquidity risk under almost any reasonable downside scenario and put us in a healthy position to prepare for the recovery," CFO Scott M. Haralson said on an early May investor call. "Also, we want to be able to do it in a manner that maintains the health of our balance sheet and restores our ability to grow again, once demand returns."

Assuming it does need more cash, Spirit has some options. The airline has applied for U.S. Treasury loans under the CARES Act for up to $741 million, with airlines allowed to wait until Sept. 30 to decide if they want to take all or part of what is available to them.

Spirit has $650 million in unencumbered tangible assets, including 29 aircraft. Its borrowing ability likely goes well beyond that, as the U.S. Treasury has indicated flexibility on what it takes as collateral in return for CARES Act loans. Spirit could pledge non-aircraft assets like its frequent flier program or its paid loyalty program in return for that funding, leaving planes available to be mortgaged if more capital is needed.

Spirit's business should fit the rebound

Should travel recover in the months to come, Spirit appears well-positioned to be one of the top beneficiaries. During past recessions corporate travel was the last to return, and that seems likely to be the case this time around as well with major employers halting all but essential travel and major conferences going virtual.

The first travelers who return are usually vacationers and those visiting relatives, and they tend to be the ticket buyers most easily lured back by lower fares. That's Spirit's core audience. And Spirit, thanks to its industry-low costs, can better use pricing to fill its seats than most of the industry.

In 2019, Spirit spent 7.97 cents per available seat mile, an industry metric used as a base unit for airline flying. Discount king Southwest, by comparison, spent 11.74 cents per available seat mile last year.

Of course, one of the ways Spirit achieves those ultra-low costs is by packing people onto airplanes, which might not be allowed -- or desired -- post-pandemic. Should airlines be required to fly planes half full, Spirit's cost advantage would erode somewhat, but with the entire industry forced to adapt, a cost gap should still remain.

Human behavior is hard to predict, but as someone who followed the industry in 2001 and heard pundits worry airlines would never recover, I'm skeptical that there will be permanent changes in behavior as a result of COVID-19. There will be concerns, but in the past price has been the tool to get flyers past their concerns. If history repeats, Spirit is well-positioned for this recovery.

I'm betting on Spirit

Over the next few months, Spirit management will be focused on managing two datapoints that, if monitored correctly, should allow the airline to hit cash breakeven. Either bookings will rise, or costs, and with them headcount, will fall.

In the best-case scenario, by the end of summer Spirit will be doing enough business to justify something resembling its full headcount and the added revenue will stop the cash bleed. Prior to the downturn, Spirit was among the fastest-growing airlines in the business. The growth will slow, but CEO Ted Christie said during the early May call that he still believes there will be growth:

For the next couple of years, it may be that we are smaller than we had planned before the current economic situation developed. However, we believe there are plenty of new market opportunities to support our growth, once demand begins to recover, including, perhaps, some opportunities in constrained markets that didn't exist before. In fact, we strongly believe that we will emerge from this crisis even better positioned than we were previously.

If things go wrong, Spirit is a small fringe player in the airline business and likely expendable. That's to say that if a second wave of the pandemic hits, or the economy falls into a severe depression, lawmakers and creditors are likely to ignore Spirit and focus on saving larger airlines. Given the unpredictability of the pandemic and how much is outside any company's control, there is real risk to buying into any airline right now, but smaller carriers like Spirit in particular.

But if that worst-case scenario can be avoided, and booking trends begin to improve even at modest rates, it's hard to think of an airline better-positioned cost-wise to turn things around faster than Spirit. With the stock trading at barely 0.2 times 2019 revenue, investors buying in now can hope to see the multiple expand at a much faster rate than revenue.

Shares of Spirit were down 80% since mid-February just a few weeks ago, but have rallied somewhat along with broader markets in hopes a recovery is at hand. However, the stock's still down 65% year to date. For investors who understand the risks, don't over-commit, and are interested in buying into a potential airline recovery, Spirit shares continue to look attractive at these levels.