Miramar, FL-based Spirit Airlines, Inc.SAVE , which has witnessed negative estimate revisions ever since it provided a dismal outlook for 2015 last month, unveiled an impressive 32% rise in air traffic (measured in revenue passenger miles (RPMs)) for the month of July. Capacity (available seat miles or ASMs) of this discount airline increased 35.8% in the month to 1.89 billion.
With capacity growth outpacing the rise in air traffic, load factor (% of seats filled with passengers) naturally declined. The key metric was down 260 basis points on a year-over-year basis in Jul 2015 to 88.8%. The company registered a completion factor of 98.9% in the month.
Through the first seven months of 2015, Spirit Airlines generated RPMs of 10.18 billion (up 26.1% year over year) and ASMs of 11.84 billion (up 28.8%), leading to a load factor of 86% (down 180 bps).
Capacity at Spirit Airlines is projected to grow 30.3% in 2015. We note that capacity and pricing worries have hurt airline stocks since May this year due to Southwest Airlines' LUV plans to expand its capacity in 2015. Investors feared that the increased capacity expansion would lead to an oversupplied market even as fuel costs remain weak. It was feared that the oversupply would result in lower fares and diminished profits. The capacity additions could also result in a possible price war between legacy carriers and low-cost airlines like Spirit Airlines and JetBlue Airways Corporation JBLU .
Last month, Spirit Airlines slashed its operating margin outlook for 2015 and now expects the metric in the band of 21.5% to 23% (prior guidance: 24% to 27%). The carrier believes its top line will remain under pressure in the near term due to pricing challenges. Flight cancellations and below-par revenues caused the company to reduce its operating margin outlook.
Meanwhile, earnings estimates for this Zacks Rank #5 (Strong Sell) stock have been on a downswing reflecting the gloomy times the carrier is currently going through. Over the last 30 days, the 2015 Zacks Consensus Estimate of earnings has gone down 63 cents to $4.23 per share owing to downward revisions by 9 analysts. Likewise, the estimate for 2016 has moved south by 34 cents over the same time frame to $4.99 per share, with 6 analysts slashing their respective earnings estimates for the period.
Key Picks in the Sector
However, not all airline stocks carry a bearish rank like Spirit Airlines. Some better-ranked stocks in the space are Ryanair Holdings RYAAY and SkyWest Inc. SKYW . Both stocks carry a Zacks Rank #1 (Strong Buy).
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