Spirit Airlines: The Lady Doth Protest Too Much, Methinks
I have often said here that traders are like sports talk hosts in that they are almost guaranteed to overreact to every bit of news, so fading a dramatic reaction in a stock after any kind of news is almost always the right thing to do. That, though, is a short-term play. Even if the market does overreact in a kind of panic immediately following a change of circumstances, those circumstances really have still changed, and sometimes, when you sit back and analyze the situation rationally, it is obvious that the initial move was actually correct, if not even understated.
By yesterday evening I had concluded that that was the case with Spirit Airlines (SAVE) after its disastrous week. Then this morning, when Spirit gave a positive outlook and a reassessment of their current situation, it simply confirmed that view. It has been a crazy week for both airline stocks involved.
On Tuesday, when a judge in U.S. District Court ruled in favor of regulators, blocking the proposed merger between JetBlue Airways (JBLU) and Spirit, the initial reaction in the two stocks sent a clear message regarding the market’s view of the deal: JBLU jumped in Tuesday’s early trading, while SAVE tanked. Clearly, this was seen as a much better deal for Spirit than for JetBlue, and its collapse was therefore good for JBLU and bad for SAVE. So much so, in fact, that after the ruling, some analysts even suggested that for Spirit, the alternative to being taken over by their rival was bankruptcy.
Since then, both stocks have been bouncing around with some scary intraday moves. JBLU’s initial gains were quickly reversed, with the stock trading below its pre-news starting point by Wednesday morning, then recovering yesterday. SAVE, meanwhile, after showing the usual partial retracement of an overreaction during Tuesday’s trading, headed south again Wednesday and Thursday morning.
Given the level of reaction to the ruling, both in their stock and in terms of the surrounding commentary, it is no surprise at all that Spirit’s management came to the defense of the company this morning. The problem is that when I hear their words, the famous quote from Shakespeare’s Hamlet, “The lady doth protest too much, methinks,” rings in my ears.
With what looks like remarkably fortuitous timing, they picked today to inform everyone that they were raising their forecast for the fourth quarter of 2023, while also saying that they had plenty of liquidity -- around $1.2 billion in fact -- and that their situation was about to improve anyway as payments from engine maker Pratt and Whitney to compensate for some mandated engine checks were about to start flowing. That no doubt will help, but it sounds like a scene in a movie where a deadbeat owes the mob or somebody money and, when threatened, they say that they are expecting some money to come in and they will pay next month when things get straight, honest, they will!
They then called into question all of their own reassurances by pleading with JetBlue to appeal the decision. If they are fine anyway, why sell? And yet SAVE is up close to 30% this morning.
Don’t get me wrong, I don’t want Spirit to fold, for exactly the reasons that the judge said he was banning the merger. They are the poster child for low airfares, and even if that does come with being the butt of jokes at times, the evidence shows that other carriers’ fares fall when Spirit enters a market. That is good for anyone who travels, whether on Spirit or other carriers. The problem is that it looks as if their fares are too low for the carrier to operate profitably in this current situation, where interest rates and fuel costs are both on the high side.
This morning’s upward revision of the Q4 outlook and the assurance that there is a check in the mail that will make everything better is what Spirit’s executives had to say in the circumstances. Clearly the words came as a relief to a market that was looking for some hope, but if you got caught holding the stock when the collapse came, you should probably see it as an opportunity to at least cut for a smaller loss than you might have otherwise.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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