Despite reporting stellar quarterly numbers, shares of Spirit Airlines (SAVE, Financial) have retracted thanks to the tepid guidance of JetBlue (JBLU, Financial). JetBlue’s weak revenue guidance pulled the entire airline sector lower, which is unfathomable as Spirit Airlines not only reported a strong quarter but also gave strong guidance.
While the behavior of the stock may seem frustrating now, investors should add to their Spirit holdings as there is currently no reason for the stock to be lower. It will eventually move higher. Shares of Spirit Airlines are down over 10% in the past few days despite the carrier doing no wrong; the pullback is a buying opportunity.
New CEO
Earlier this year, Spirit’s long-serving CEO Ben Baldanza retired and gave way to industry veteran Bob Fornaro. Fornaro has a different approach and has promised to increase the carrier’s customer satisfaction and reliability.
Spirit has established itself as one of the most hated airlines, but the arrival of Fornaro can change that in the long run. Fornaro was previously the CEO of AirTran and knows the industry pretty well. Fornaro should deliver on his promises, and improved operational reliability, at the cost of growth, will help Spirit improve in the long run.
Improving air fares
The primary reason for Spirit Airlines' decline in 2015 was the pricing competition from legacy carriers. As crude oil was hovering near $40 per barrel, carriers like American Airlines (AAL, Financial) were trying to undercut Spirit although to no avail.
However, the declining unit revenue did take a toll on Spirit as the stock lost over half of its value. But, with crude oil increasing over 70% since hitting multiyear lows, it is becoming difficult for carriers to continue competing on price.
As a result, ticket prices have moved higher, and so has Spirit’s unit revenue. For the latest reported quarter, Spirit’s unit revenue was down 13.8%, a lot better than the 16% decline the carrier was hoping for.
In addition, Spirit’s operational margin is also increasing as the carrier is focused on reducing costs that would further make it impossible for legacy carriers to compete against it on price. Spirit expects to deliver 20.5% to 22% operational margin in the upcoming quarter.
Conclusion
Spirit may slow down on its expansion plans, but the company’s profit-growing initiatives should continue boosting its EPS. Moreover, Spirit entering new midsized markets should also boost its earnings going later this year, thereby making the stock a nice pick on the pullback.
