Spirit (NASDAQ: SAVE) manages to differentiate itself in the commoditized airline world. This company, defined in their form 10-K as an ultra low-cost, low-fare airline derives revenue from two sources: tickets and ala-carte for fee items such as baggage check in, on board meals, and seat selection.

In other words, people can buy a low priced ticket without including items normally included in the price. So far this business model works really well, translating into higher margins and adding spirit (pardon the pun) to their returns with a 52% gain since their IPO on June 1, 2011 (chart below).

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SAVE data by YCharts

As indicated in the table below, lower fares translated into higher load factors for Spirit meaning fewer seats went unoccupied and more fuel and overhead were covered by the basic fare. JetBlue (NASDAQ: JBLU) and Delta Airline (NYSE: DAL) trailed behind Spirit on their load factors.

The ala-carte system encourages low cost behavior according to Spirit's form 10-K. For example, baggage fees discourage customers from bringing aboard unnecessary baggage and result in lowering Spirit's fuel cost.

While Spirit trailed on revenue per available seat mile it was far ahead on cost per available mile. The year to date spread or difference between revenue per available seat mile (RASM) and cost per available seat mile (CASM) was the widest for Spirit (1.70) followed by JetBlue (1.12). Delta's cost per available mile was more than revenue (-1.71).

 

Spirit

JetBlue

Delta Airline

 

Year to Date

2011

Year to Date

2011

Year to Date

2011

Load Factor

84.8%

85.6%

84.1%

82.4%

82.5%

82.1%

RASM

11.96 Cents

11.45 Cents

12.72 Cents

12.10 Cents

13.78 Cents

12.89 Cents

CASM

10.26 Cents

 9.91 Cents

11.60 Cents

11.23 Cents

15.49 Cents

14.12 Cents

Source: Company Fillings/Definitions Taken Verbatim from Spirit Airlines 2011 Form 10-K, P.41 and P.42

**Definitions: Load factor means the percentage of aircraft seats actually occupied on a flight. Available seat miles or ASM means the number of seats available for passengers multiplied by the number of miles the seats are flown. RASM or unit revenue means operating revenue divided by ASMs. CASM or unit costs means operating expenses divided by ASMs.**

Looking at fundamentals, one must take into account Spirit's limited history as a low cost carrier (starting in 2007) and as a publicly traded company. Time will reveal whether Spirit's margins and free cash flow can remain intact. Other airlines may see their success and start doing the same thing.

Looking at revenue in the chart below, Delta leads followed by JetBlue and Spirit. Delta certainly possesses the resources to switch business models if it felt the need.

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SAVE Revenue TTM data by YCharts

Spirit leads in operating and profit margins (see chart below). Spirit, JetBlue, and Delta's operating margins rank at 14%, 9% and 6% respectively and 10%, 4% and -2% for net margins respectively.

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SAVE Operating Margin TTM data by YCharts

 

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SAVE Profit Margin data by YCharts

On the cash flow scene (charts below), JetBlue and Spirit clock consistent positive operating cash flow. Delta's operating cash flow dips into the negative from time to time.

Spirit shows consistent positive free cash flow. Over the past couple of years a better economy translated into positive free cash flow for all three airlines discussed.

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SAVE Cash from Operations TTM data by YCharts

 

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SAVE Free Cash Flow TTM data by YCharts

Spirit's balance sheet sports 0 interest bearing debt (chart below) and a total debt to equity ratio of 65%. This compares favorably to JetBlue's long-term debt to equity ratio of 157% and Delta Airline's 1184%.

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SAVE Debt to Equity Ratio data by YCharts

Spirit's return on equity trumps their competition with 23% tripling JetBlue. The chart shows an astronomical return on equity for Delta because it possesses a stockholder's deficit meaning liabilities exceed assets.

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SAVE Return on Equity data by YCharts

Spirit's fundamental risk currently resides in the low range; however, a good price war may threaten their superior fundamental positioning. More airlines will begin to look like them especially if the ultra-low cost model proves successful.

Spirit and JetBlue currently trade at a P/E of 12 and Delta Airline trades at a P/E of 9. Spirit sports a low valuation due to an analyst downgrade stemming from lower guidance for their revenue per available seat mile. Spirit's valuation stems from anticipated degradation of fundamentals which is temporary due to the effects of hurricane Isaac. JetBlue and Delta's valuation can be attributed to current negative attitudes toward the airline industry in general.

Spirit's superior fundamentals and cost structure combined with a low valuation make for an investment with superior upside potential. I'm giving this company a thumbs up call on