Low-cost carrier Spirit Airlines (SAVE, Financial) didn’t please the Street with its earnings report last month. Spirit Airlines' first-quarter 2015 earnings of 96 pennies per share were in accordance with the consensus Estimate while the operating revenues grew 12.6% from the year-prior quarter to $493.4 million, just above the analysts’ estimates. However the bad news was that the low-cost carrier said it anticipates that RASM will decrease in the range of 14% to 15% for the quarter finishing June 30, 2015. However, everything was not bad as there were a lot of positives to take from the earnings report.
For the quarter, Spirit paid $1.95 per gallon for fuel. Only American Airlines (AAL, Financial) paid less for fuel than Spirit. American Airlines is benefiting the most from depressed fuel prices due to its no-hedging policy, however Spirit is not far behind. Rivals like Alaska Airlines (ALK, Financial) and JetBlue (JBLU, Financial) paid more than Spirit. And it looks like Spirit is making the most of the cost savings in fuel as the carrier is on track to extend its capacity by 30% in 2015. In spite of the fact that this may put descending weight on the organization's close-term margins, it will advantage the organization in the whole deal.
Likewise, the organization won't be gravely influenced by the ascent in oil prices. Given that Spirit offers the least expensive ticket and determines a considerable measure of its revenue from non-ticket sales, it won't need to trek ticket costs as much as different airlines if oil moves higher.
Best business model
While different airlines offer and support in-flight benefits that aren't generally needed, Spirit's "Frill Control" model has empowered it to manage high overall revenues. The organization offers well beneath normal ticket prices and after that just charges discretionary expenses for amenities they find vital. Despite the fact that the organization prides itself on being a low-cost transporter, it has possessed the capacity to manage the most noteworthy margins and beat earnings estimates all the time.
This is on account of the organization's no-frill model permits it to charge clients for administrations that incorporate portable suitcases, processed gear, the flexibility to choose your own particular seat, and so on. This model has not just permitted the organization to pull in travelers by offering greatly modest tickets, yet has likewise permitted the organization to create about 40% of its revenue from additional items. Since the organization produces a substantial bit of its revenue from additional items, it is less subject to price wars and is less occasional.
Conclusion
Although Spirit Airlines has a great business model and is trading at a cheap valuation, the stock was punished due to the company’s weak RASM guidance. However, after the drop Spirit Airlines looks like a great bet as the company is expanding into various markets. In addition, the company is immune to seasonality and also has a great business model. Hence, I think investors should buy Spirit Airlines.
