Spirit Airlines Profits On Backpack, Flip-Flop Crowd

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Spirit Airlines ( SAVE ) makes no excuses for its cut-rate prices and no-frills business model.

Chief Executive Ben Baldanza is clearly proud of it.

"If Spirit were a retail store, we'd be the dollar store. If we were a restaurant, we'd be McDonald's," he said in a recent interview.

Ultra-low-fare air carrier Spirit Airlines targets leisure travelers who might not even fly but for the bargain prices it offers on base fares.

Its routes span from its base in Fort Lauderdale, Fla., to the Caribbean and northern South America, the Northeast, Chicago, Dallas/Fort Worth and as far west as Las Vegas and California.

Even when passengers pay for "unbundled" extras such as overhead bin storage, assigned seats and ticket print-outs, Spirit fares are the lowest in its markets.

Spirit's average fare including ancillary fees is $126, says airline analyst Helane Becker of Cowen & Co. That compares to $140 for the granddaddy of low-fare airlines,Southwest Airlines ( LUV ), and $181 forUnited Continental ( UAL ).

"Spirit's market is the bulk of the population that looks for price first," said Becker. "They attract the backpack and flip-flop crowd."

In the second quarter, Spirit said its average base fare per passenger was $77.51. It boasted that the fare was down 4.4% from the prior year's same period as the airline "liberated over 3 million passengers from high fares."

Average nonticket revenue from optional ancillary fees climbed nearly 4% to $53.43.

Penny-Pincher Appeal

Baldanza says Spirit targets all customers who are paying their own way, whether they are families towing lots of kids, students or others on tight budgets.

"We created an option in the market for the customer who wants to pay less. They recognize that they won't get as many creature comforts and that's a good trade-off for some groups of people," he said.

It's also a good trade-off for Spirit. Passenger volume in Q2 jumped 19.1% from the earlier year. Total revenue rose 17.6% to $407.3 million, while earnings grew 29% to 63 cents a share.

"It's shown consistent earnings growth, which you can't say for a lot of airlines," said analyst Bob McAdoo of Imperial Capital.

Analysts estimate that earnings will grow 54% this year over last to $2.20 a share and another 19% in each of the next two years, according to Thomson Reuters.

Spirit's stock, above 40 on Monday, has soared more than 237% since the company went public in May 2011, five years after Baldanza led the charge in turning the airline into an ultra-low-fare carrier.

Shares jumped 15% on Friday, and nearly 4% by early afternoon Monday, after Spirit reported that September traffic rose 28.8% vs. a year earlier on a capacity increase of 24.9%. Load factor rose 2.5 points to 84.7%. The company also raised its earlier estimate for the third quarter and now expects revenue per available seat mile to rise 8% to 9% over a year earlier. It had previously forecast mid-single-digit growth.

Baldanza, who previously worked for U.S. Airways, Grupo Taca and other airlines, says Southwest Airlines isn't such the low-fare carrier it used to be. "In the places where we both operate, we tend to be the lowest-cost operator," he said.

Southwest has been reducing flights in Spirit's busy home airport in Fort Lauderdale.

Whether a new low-cost rival emerges in the form of Denver-based Frontier Airlines under new ownership remains to be seen. Former Spirit Chairman William Franke, who resigned from Spirit's board in August, recently led a private-equity group's bid to buy struggling Frontier fromRepublic Airways ( RJET ). The deal, recently accepted, is valued at $145 million, including assumed debt.

Room For Rivals?

However, Baldanza doesn't seem worried. "We've heard Frontier has aspirations to look more like Spirit. We wish them luck on that," he said. "Their costs today are significantly higher than ours, so they will need to make a lot of changes. Even if they are successful, there will be plenty of room for both of us to grow."

Spirit planes -- 51 at last count -- are among the fullest in the airline industry. In the busy August vacation month, seats were more than 90% occupied. Between April and June, the load factor was 85.4%.

"People continue to complain about Spirit but they continue to show up," said analyst Hunter Keay of Wolfe Research.

Indeed, Spirit packs in more seats on its relatively new single-aisle, narrow-body Airbus A320 planes than any other carrier flying similar aircraft. Becker says it crams 186 seats on the aircraft where other carriers have 150 to 160 seats.

Rather than cancel a flight, Spirit sometimes keeps passengers waiting for hours if bad weather flares up or a mechanical issue arises, observers say. That's because it can't usually put passengers on another scheduled Spirit flight when there is none.

It typically flies only one or two times a day on routes, sometimes late at night or early in the morning.

Weather or mechanical issues aside, planes rarely stay still. "We use every hour of the clock," Baldanza said.

More than 99% of its flights are completed, Keay says. "Some of them were late, but they got almost every single one of their passengers to where they wanted to go -- at an extremely low price."

Spirit can charge a low price because it "keeps the model very simple," Baldanza says. It uses one airline type, the Airbus, making it easier to train pilots and mechanics.

"We schedule airplanes to make money on every route we fly. If it's not we'll change the pricing, the amount of capacity or pull the route," he said.

Last year Spirit moved out of Washington Reagan National Airport for Baltimore Washington Airport, where airport rules were not as constraining on flight schedules. The result: Baltimore is more profitable than D.C.

Spirit intends to make its low-fare options available to more consumers. In the second quarter, it added or announced new service on 15 routes, including seven from Dallas/Forth Worth to places such as Minneapolis, Philadelphia, L.A. and Cancun, Mexico.

"We will be growing an average of 18% per year over the next five years," Baldanza said, referring to the number of seats offered for sale every year, or available seat miles in airline lingo.

With new aircraft lease orders in the pipeline, Baldanza says the fleet will nearly triple by the end of 2021.

But don't count on flying Spirit to Europe or other far-flung destinations just yet. Its narrow-body aircraft have a flying range of around five hours, Baldanza says.

"We think of our marketplace from Canada to northern South America and all points in between," he said.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: LUV , RJET , SAVE , UAL

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