Where does Spirit go from here?

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By TESTCustomwebLP TESTCustomwebLP May 19, 2015 13:55

Where does Spirit go from here?

After Spirit shares slide 10% following the downgraded 2015 forecast it is worth noting that this airline is undervalued: Spirit Airlines revenue passenger miles (RPMs) increased 28.5% year-on-year to 1.4 billion for 2014/15. To put that into perspective – Southwest Airlines increased RPMs by 8.6% to 9.9 billion, JetBlue Airways saw RPMs rise by 9% year on year while the US majors, Delta and United saw RPMs increase by 1.8% and 0.4% respectively while American saw RPMs go down by 0.3% year on year for 2014-15. As another measure of Spirit’s rapid expansion available seat miles (ASMs) increased by 31% year on year for 2014/15 to 1.7bn – That number compares against Southwest Airlines ASMs increasing by 6.7% to a huge 11.9bn, Jetblue Airways saw a 6.6% increase year on year while of the majors American Airlines RPMs increased 1.3% to 22.1 billion year on year to April, Delta and United saw increases of 3.7%, and 2.7% respectively.

These figures confirm once again that Spirit Airlines will continue its rapid growth curve at a rate more than three times that of JetBlue, the airline posting the next largest RPM growth, but with relatively low overall RPMs and ASMs of only 1.7 billion and 1.4 billion respectively it is clear that Spirit has room for massive growth yet. Airlines for America continues to argue that that the total number of passengers flying on US airlines during spring of 2015 will increase to nearly 135m, the highest number since the financial crisis of 2008.

Even after adding additional costs, such as seat assignments, bags, and refreshments, the total fare on Spirit remains 35% lower than most competitors (averaged amount), so operational efficiency gives the airline a great deal of room for maneuver in an increasingly competitive market. Spirit Airlines currently obtains 63.2% of its revenues from tickets with the remaining 36.8% coming from ancillary fees – well above the US airline average of 29.3%.

Now in 2015 Spirit hopes to add another 35 new routes, as they do investors know that any route underperforming will be dropped without delay. In fact Spirit has to place some 96 odd A320ceo aircraft being delivered in 2015 through to 2017 with ten of those converted to A321ceos already which will deliver in 2017 and 2018 at the end of the order run, so the airline has to keep-up its strong growth curve until the end of the decade at least and, save for Cuba opening-up and additional Latin American routes being added, means that without question Spirit must at some point come under competitive pressure. IN the meantime many will continue to speculate on the possibility of a Frontier/Spirit merger given that the two airlines have fleet maps seemingly completely pre-planned to complement each other. Frontier Airlines remains fully owned by Bill Franke’s Indigo Partners which owned and guided Spirit Airlines into the ULCC it is today. Indigo Partners is at this time in the final phase of turning Frontier Airlines into a ULCC mirror of Spirit Airlines. As mentioned before in great detail in Airline Economics issues; Frontier has the benefit of critical mass at one of the globe’s largest and best connected airports – Denver. Other than this distinct advantage Frontier is the same as Spirit right down to the aircraft type and numbers on order, it just flies on different routes: Frontier Airlines placed a firm order for nine A321ceo aircraft in late 2014 and the airline currently flies a fleet of A319ceo and A320ceo aircraft with an order backlog with Airbus of over 80 aircraft.

So will Frontier and Spirit look to take the big step and merge in the near future? The figures for such an event are very impressive indeed – The combined Spirit/Frontier network would have over 300 routes of which only 22 would overlap, so around 10% of the network. In the event of a merger request going to the US justice department it is likely that they would allow the deal to go through in the hope that a very large nationally and internationally focused ULCC with price points so very low would be seen as a kick-start to creating an environment where fares across the US would start to fall and because of the current small overlap of services by the two airlines it is safe to say that most, if not all airfields would not loose services from any merger between the two. The time is seemingly right for a deal to be done for the creation of a very large airline in the USA that has the ability to run global services out of Denver if it so chooses in the future. If patriotic Americas want to see the USA airline sector take the fight for global supremacy to the Middle East and Chinese majors then this is a very strong starting point.

Such a merger might put enormous pressure on the US majors if international services were to begin but domestically it has to be said that Frontier and Spirit both create new passenger demand wherever they go, we have not yet seen a large switch of passengers from American, Delta or United to the ULCCs and that is likely to be a continuing trend unless there is an economic downturn which would shift passengers to the lowest cost operators. However both Spirit and Frontier have the ability, if they so choose, to attack the US majors by appealing to business travelers with new upgraded products and this remains a very serious threat to the US majors and significantly Virgin America. Southwest is rapidly and effectively dealing with its cost base and JetBlue has positioned itself very well indeed with Middle East major JVs and with its MINT product.

Whatever the future may bring the Spirit share price looks like a bargain. Staying on the US airline scene for a moment: We questioned 12 months ago if United would go for it and lease or purchase an A380 in the near future – United remains the favorite to become the first US A380 operator but only time will tell if a deal can be struck.

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By TESTCustomwebLP TESTCustomwebLP May 19, 2015 13:55