A Big Short for 2012 and Beyond?

I've never shorted a stock before, but I'm strongly considering doing it. My target: Spirit Airlines (Nasdaq: SAVE).

I got burned giving the airline a red-thumb after it IPO'd, but I'll be reinitiating my bearish CAPScall on my CAPS profile, and I think you should consider doing the same. Here's why:

Solid financials... for now
One reason my initial call was losing to the market by more than 50 points was because Spirit has an impressive balance sheet. Consider its cash-to-debt ratio, as well as its revenue and earnings growth over the past three years, when compared to other airlines.

Sources: S&P Capital IQ, SEC filings. Dollar figures in millions. N/A = not available due to negative earnings. *FY 2008 to the last 12 reportable months in 2010 and 2011.

Based on this alone, Southwest is the only airline that comes even close to holding a candle to a company like Spirit—which has kept itself out of debt, and is producing amazing income growth.

In fact, growth trends are accelerating at Spirit, with third-quarter 2011 year-over-year revenue growth of 41.7%, and third-quarter year-over-year operating income growth of 112.4%. Numbers like that simply aren't supposed to show up among airlines these days. And with the stock trading at a paltry 8 times future earnings, you can see why investors have bid shares up more than 50% since mid-August.

So, why would I short it?
It's how Spirit obtained these numbers that has me bearish on the company's long-term prospects. Billing itself as an ultra-low-cost carrier, I simply don't believe there are enough travelers out there who are willing to put up with Spirit's nickel-and-diming to provide a solid stream of repeat customers.

I recently used Kayak.com to find tickets to Costa Rica for next year. Not surprisingly, Spirit showed up as the cheapest flight by a wide margin. But how much does it really cost?

Low-cost leader or hidden-cost leader?
Consider the comparison from my real-life example -- when all of the extra fees are included -- between Spirit's price and the tickets we eventually bought from Delta. This assumes two carry-ons, one checked baggage (both paid for at the airport), a desire to sit next to my wife, and water for the flight.

Source: Spirit Airlines site. Author's results. All prices round-trip.

No, your eyes aren't deceiving you. You have to pay for carry-ons, having an agent print your boarding pass will end up costing you $5 per pass, and you even have to pay $3 for water on-board (but, of course, the salty pretzels that you get are free).

Oh, and the $518 base fee includes a nearly $34 fee just for booking online.

These fees really add up for the airline. Back in 2007, they only accounted for roughly 11% of revenues. As of the last quarter, that total had more than tripled, as the add-ons now account for a whopping 35.3% of revenue.

Source: SEC filings. 2011 number shows Q3 percentage of revenue from non-ticket items.

I find this trend especially troubling. The segment of the company's revenue that's really driving growth is, I believe, the same segment that will eventually push flyers away from the airline's service.

Beyond price
JetBlue, which famously has little legroom, sets its standard from 34 to 38 inches. Where does Spirit come in? A paltry 28 inches. It gives less room than literally anyone else.

The company's prospectus also states: "We achieve these low operating costs in large part due to our productive workforce." That's really just a fancy way of saying that the company's employees are overworked and the company is understaffed.

The numbers back up the weak service. Skytrax, which bills itself as the world's largest airline review site, offers telling evidence. Here's the average rating of customer satisfaction for the following airlines.

Source: Skytrax.

Don't make this mistake
If there's anything I've learned this year, it's this: Not every stock has an obvious consumer angle. But for those that do, it's vitally important for them to provide valuable, high-quality products and services.

When Netflix (Nasdaq: NFLX) began outraging customers with its poor communication this summer, I was slow to catch on -- and paid the price. The company has seen its stock price fall more than 75% since mid-July. Unless you'd like a similar thing to happen to you with Spirit, I suggest staying away.

The company certainly is showing impressive gains by winning over customers with those low prices they see when they type in their flight searches. And while there probably are some customers with whom Spirit's model jives, I'm guessing the majority first-time customers won't be repeat ones.

Eventually, Spirit will simply run out of people to dupe.

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