Spirit Airlines (SAVE, Financial) and Volaris Aviation (VLRS, Financial) has been two of my best performing long recommendations of the past few months. Both the stocks have appreciated considerably. Although I recently recommended investors to sell Volaris and book profits, I think Spirit Airlines can still offer more upside, which is why investors should continue holding the stock.
Cheaper airfare
As per the Department of Transportation, the average cost for domestic airfare declined 6.3% to $372 in the third quarter, the lowest cost since 2010. The main reason behind this huge decline in airfare is the growth of low-cost airlines and the drop in oil prices. These low-cost airlines are stealing market share from their larger rivals.
Spirit Airlines is one of the best low-cost airlines. Most of the major carriers are being forced to decrease their airfares to strive against Spirit. On some routes, the major carriers are matching costs dollar for dollar which led them to 50% lower prices compared to few years ago.
Furthermore, the endured decline in oil prices has been a blessing for airlines. According to TD, in December 2015, air carriers paid $1.46 per gallon for jet fuel compared to $2.32 per gallon in same period of 2014. This indicates that the savings might be passed down to passengers.
First, the company mainly used fuel savings on itself, but recently reported that they will lower fares, start new routes and gain market share.
Traffic growth
The company recently shared its traffic report for previous month. Since 2012, the company has been growing vigorously. Spirit’s available seat miles and revenue passenger miles have surged since 2012 until today. Even with the massive jump in available seat miles, the company has sustained its load factor more than 80%. It is highly likely that this continuously traffic increasing trend will not reverse any time soon.
Apart from this, great disposable income and plunged crude oil prices are the main factors for the company’s further growth. Furthermore, Spirit’s financial condition is improving, there is a prospect of dividend instatement, and traffic rests solid.
Conclusion
With oil price inching higher over the last few weeks, Spirit Airlines will likely regain its competitive edge over traditional carriers if oil crosses $40 per barrel mark. But if oil stays in the $30 range, then all airlines, along with Spirit, will continue enjoying monumental profits. It's a win-win situation for Spirit investors, which is why the stock is a decent buy at current levels.
