Spirit Airlines (SAVE, Financial) is one of my favorite picks in the airline industry mainly due to its ultra low-cost carrier model. Basically, the model is compelled by a low cost structure that allows the company to propose a lower base fare while maintaining a high profit margin.
Oil plays a significant role in the case of airline stocks. Oil price is inversely proportional to profitability in the aviation industry as the lower the oil price the higher the profit margin and vice versa.
Spirit Airlines disappointed investors in 2015 as the stock was down over 45%. However, this has been a transition year for the company as it has performed amazingly well on the back of feeble oil prices. This can be verified by looking at the robust results of the starting three quarters.
In the third quarter, the company reported earnings per share of $1.24, surpassing analyst estimates by a wide margin of 15 cents. On the other hand, the company’s revenue came in at $621 million, beating the consensus estimates by $5.24 million. That figure also represents a surge of 8.1% year over year.
The company’s total revenue per available seat mile (TRASM) declined 14.1% in the first half of fiscal 2016 and recorded a drop of 7% in the third quarter. However, the company projects a drop of just 3% to 4% in the fourth quarter.
To grow further, the company has modified its strategy; it has started avoiding hubs served by legacy carriers and focusing on small as well as medium-sized markets. Considering this, it looks like the company is headed in the right direction as competing directly against legacy carriers will hurt its profitability in the years ahead.
Oil prices are projected to recover in the future, and this will certainly create problems in the aviation industry. Moreover, Spirit will also face rising labor costs, but the company has several significant benefits for compensating this pressure.
Most significantly, Spirit Airlines is growing progressively, and this growth will help it decrease its unit costs. Moving ahead, the company is on its way to accomplishing full-year pretax margins of approximately 19% compared to the 12% anticipated by American Airlines (AAL, Financial). As an outcome, the company can soak up considerably greater margin pressure than most of its rivals.
Conclusion
Spirit Airlines is up approximately 50% year to date, but it enjoys several advantages compared to its rivals which clearly suggest that the stock can grow further in the future. Investors should continue to hold Spirit Airlines for long-term gains.
Disclosure: I don't hold a position in any of the stocks mentioned in the article.
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