Spirit Airlines' Ultralow Fares Drive Heady Gains

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Spirit Airlines ( SAVE ) Chief Executive Ben Baldanza was in pretty good spirits himself on Aug. 1.

The ultralow-fare airline had just reported double-digit sales and earnings growth for the second quarter the week before.

Spirit has been a highflier since making its market debut in May 2011, thanks to a business model that allows the carrier to save leisure travelers big bucks on fares, while charging added fees for optional services like food and advance seat selection.

In the second quarter, Spirit's earnings grew 26% to 49 cents a share. Revenue climbed by the same amount to $346.3 million. Revenue per available seat mile, which shows how much an airline is earning per available seat, rose 8% to 12.25 cents. Its operating margin was 16.3%, up from 14.8% a year earlier.

"Any airline can offer low fares," Baldanza told IBD. "It is making money with low fares that most can't do, but we do."

Legal Trouble

But Baldanza's spirits may have been dampened a bit a few days later, when the airline was hit with a class action lawsuit filed in the U.S. District Court for the Southern District of Florida.

The suit, filed late Monday, alleges Spirit "misrepresented the airfare for flights booked by its customers by imposing a baseless passenger usage fee (PUF) and presenting it as though it were a government sanctioned or required fee," according to a press release from Podhurst Orseck, the Miami-based law firm representing the plaintiffs.

"No real service or advantage is provided in exchange for the PUF, which is added to the cost of any ticket purchased online or over the telephone, as opposed to in person at a ticket counter at the airport," the release said.

But Spirit denies it.

"Spirit believes the claims are without merit and intends to defend the case," said spokeswoman Misty Pinson via email.

Avondale Partners analyst Fred Lowrance says he doesn't know what, if any, financial impact the suit will have on Spirit.

"This comes with the territory in terms of the way Spirit sells the product," he said. "Any time you're unbundling what people normally consider the base product you get with the fare, it's going to ruffle feathers and people will look for holes."

By the close of trading Wednesday, the suit hadn't made a dent in Spirit's stock price, which is up more than 70% from its IPO price of 12.

Spirit's recipe for success on the financial front lies in cutting operating costs on just about every front it can -- and making it as no-frills as you get.

Spirit's operating costs per available seat mile, 9.91 cents in 2011, are among the lowest of the domestic low-cost carriers, including JetBlue andSouthwest Airlines ( LUV ), according to a company filing with the SEC.

Lowrance says Spirit's operating margin is the best in the industry.

To keep costs down, Spirit aims to maintain high utilization rates wherever it can. It flies its planes an average of 13 to 14 hours a day vs. an average of less than 10 for other U.S. airlines, says Baldanza.

"The less time you spend on the ground the better, and the more flights you can do in a day the better," said Lowrance.

Baldanza is the first to tell you there's not much leg room on Spirit flights. Spirit, he says, squeezes 178 seats onto its Airbus A320 aircraft, while JetBlue Airways ( JBLU ) puts 150 seats in the same plane.

"Because we fly our planes more hours per day and put more seats on our planes, we charge a little less," said Baldanza. "We take that idea and apply it to everything we do."

Miramar, Fla.-based Spirit operates more than 200 daily flights to over 50 destinations within the U.S., Latin America and the Caribbean. It targets the discretionary traveler, who doesn't need to travel, but would like to.

Flying A La Carte

Spirit has unbundled various services that have traditionally been included in base fares and offers them as optional, ancillary services for additional fees. This way it makes services "truly optional for customers," says Baldanza.

"The lower costs and the unbundling allow us to offer exceedingly low fares to customers," said Baldanza.

"That creates a market for travelers that had been priced out of the market," he adds.

According to Pinson, Spirit's average fare from June 2011 through June 2012 was $79, a 48% discount from Southwest's average fare of $153. Even with the optional add-ons, Spirit's fare comes to $129, which is still 16% lower.

Lowrance says the airline industry in general is doing very well. Demand is strong and capacity, or number of seats flying, is not growing for the industry. So the supply-demand dynamic is positive, he says.

Analysts surveyed by Thomson Reuters expect Spirit to keep up the strong momentum it's been seeing. They see full-year earnings rising 49% to $1.97 a share. They expect a 30% gain in 2013.



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: JBLU , LUV , SAVE

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