One of the best-performing stocks this year is Spirit Airlines (SAVE -0.04%). Its shares are flying high, up about 100% year to date. With roughly four months left in 2013 and the holiday season approaching, there's no telling how high the stock could soar (or how low it could plummet) this year. However, the coming months will not be an easy ride for the budget carrier, which is bracing for major turbulence that could knock it off its path to massive gains. Let's have a look at some of the challenges Spirit Airlines faces.
New board leadership
On Aug. 7, Spirit Airlines officially announced the resignation of William A. Franke as chairman of the board, and the board elected H. McIntyre Gardner to take Franke's place. Board member John Wilson also resigned together with Franke. Wilson and Frank are both connected with Indigo Partners, which William Franke co-founded as a private equity and venture capital firm that focuses its investments in airlines.
While William Franke was a nonexecutive chairman of the board, he was crucial to the success of the company. He helped design the successful low-cost fare strategy that attracted more passengers. As a result, the company earned the highest load factor in the industry at 85.1% during the first quarter of 2013. The industry average is 81%.
Prior to the resignation of Franke, Indigo Partners sold all its stake of Spirit Airlines on July 29 through a public offering that involved a total of 12,070,920 shares worth more than $427 million. The massive inside selling caused the shares to plunge 8.3% in a single day. However, shares slowly bounced back in the ensuing days.
Poor consumer survey rating
Another major obstacle of Spirit Airlines is its poor rating among consumers. In fact, the company ranks among the worst airlines in the U.S. in terms of in-flight convenience. No free snacks are served, and passengers have to pay for a cup of coffee or for a can of soda. Even water is sold.
In addition to that, the airline charges an additional fee per carry-on bag, and a separate fee is charged to book a flight. Some passengers complained about limited leg room. But despite the numerous complaints, many passengers still flock to the airline's counter at the airport, the main reason being cost.
Upside and growth catalyst
The resignation of William Franke and the company's poor reviews are among the challenges the airline faces right now. However, there are also some favorable winds that can help push the company aloft and keep it on course toward success, even without Franke in the cockpit.
Spirit Airlines is now led by board chairman H. McIntyre Gardner and CEO Ben Baldanze. Gardner has been a board member since 2010. He has shown solid business acumen as chairman of the firm's auditing and nominating and corporate-governance committees. He was also instrumental to the company's execution of its growth strategy.
Baldanze, on the other hand, has been with the company since 2005, and he directly steered the company toward success and exponential growth. Under his direct management, Spirit Airlines has been growing 15% to 20% per year. When he first started his CEO role, the firm's revenue was only $500 million. Today, the company's revenue has more than doubled and is now approaching $1.3 billion.
The annual revenue growth of Spirit Airlines surpassed the 2012 annual growth of Southwest Airlines (LUV 2.45%), one of the biggest players in the industry. In 2012, Southwest reported only 9.13% revenue growth, while its four-year average revenue growth is 12.33%.
Spirit Airlines have also outperformed Southwest Airlines on the trading floor. Southwest shares have gained 22% year to date, which is a far cry from Spirit's year-to-date double. Nevertheless, it's still an impressive performance.
U.S. airline and travel industry market outlook
The U.S. Federal Aviation Administration projects an optimistic outlook for airlines in the U.S., predicting that the industry will grow almost twofold in the next 20 years based on the worldwide aviation trends. Boeing (BA 2.53%), the largest airplane-manufacturer, shares that sentiment, seeing the market expanding into a $5 trillion industry by 2032.
Demand for new airplanes within the 20-year period was pegged at 35,280 units. Airplanes in service are expected to jump 103% from 20,310 planes in 2012 to 41,240 by 2032, or about 5% annually. Because of the rising demand for airplanes amid increasing air travel worldwide, Boeing shareshave also enjoyed the ride up, gaining an impressive 34% for this year.
The bottom line
Instead of competing with the big dogs in the industry, Spirit Airlines struck a gold mine by positioning itself in an untapped market that is even bigger than the segment where the majority of its competitors are positioned. While the rest are trying to attract high-paying passengers, Spirit Airlines captures more passengers who want low-cost air transport, thereby achieving higher occupancy rate.
By stripping all in-flight perks, it can not only offer low-cost fares that grab market share from its competitors, but also expand the market by attracting more passengers to opt for air travel. This principle will help sustain the company's growth in the coming years as it continues to add more routes to cater to more passengers.