Thursday, August 15, 2013

Spirit Airlines Drops Nearly 10% on the Week

Spirit Airlines has fallen close to 10% this week along with the other US airlines despite reporting air traffic that grew 25% over last year, after The Justice Department filed suit attempting to block the merger of American and US Airways. The fear is that if the merger is blocked that airlines will have to compete more competitively on price and will hurt profitability which airlines have only recently become re-accustomed to. The fear with Spirit is that they currently have the lowest total cost to fly. However depending on how competitive other airlines are with price, customers may decide that a Delta or US Airways flight at a new lower price with many more luxuries is preferable over a bare-bones Spirit flight. This seems like a stretch as the average fare price for a Spirit flight is only $77, whereas costs at a major carrier can be multiple hundreds.

Spirit should continue to reap the rewards of its low-cost business model, as proven by its traffic growth of 25%, and how it has continued to take market share in the domestic market. With over 400 markets targeted, and close to 50 Airbus A320 planes ordered, Spirit is poised to continue growing, and we feel that this merger risk is weighted more heavily towards the major carriers who offer similar prices and luxuries, and the true risk is on the higher margin international flights, which Spirit is not currently exposed to. We remain positive on Spirit and believe the low cost carrier (LCC) business model is the area of the industry that currently offers the highest growth, both through new routes, and taking market share from the over-priced large carriers. We reiterate a HOLD rating on the stock pending an updated price target. 

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