Value Line has initiated coverage of Spirit Airlines (SAVE). The company, which can trace its roots back to 1964, is a low-cost air carrier that provides flights predominantly to and from South Florida, the Caribbean, and Latin America. Fort Lauderdale’s Hollywood International Airport is the carrier’s primary hub.
Spirit was founded in 1964 as Michigan-based Clippard Trucking Company. In 1974, it changed its name to Ground Transfer Inc., and began offering charter tours and travel packages to Atlantic City, Las Vegas, and several other entertainment destinations in the continental United States. In 1992, the company became Spirit Airlines. It purchased a number of aircraft and started to operate passenger service to and from Florida, California and New York, among other regions. Over the next several years, its fleet, flight schedule, and list of destinations materially expanded.
In May 2011, Spirit Airlines completed its initial public offering. At that time, 15.6 million shares were sold to the public at an average price of $12 per share. The underwriting syndicate was led by Citigroup (C) and Morgan Stanley (MS). It is now headquartered in Miramar, Florida, and the stock trades on the NASDAQ exchange under the ticker SAVE.
Currently, Spirit’s all-Airbus fleet encompasses about 35 aircraft, which serve approximately 40 airports throughout the western hemisphere. The majority of Spirit’s flights depart and terminate in the United States, the Caribbean, and Latin America, and commonly originate or connect at Spirit’s Fort Lauderdale hub. It employs more than 2,400 individuals. Like most other airlines, it must contend with volatile fuel expenses and labor unions. In fact, fuel and employee costs make up the bulk of Spirit’s operating expenses. The carrier does hedge its fuel orders and at the end of 2011, approximately 50% of its workforce was unionized. Effective hedging and reasonable labor relations are vital to the corporation’s future success. It is worth mentioning that most carriers have trouble dealing with these issues. For instance, AMR Corp. (AMR), owner of American Airlines filed for Chapter 11 bankruptcy protection in 2011 because of volatile union negotiations and an inability to operate profitably. Additional airline failures are a possibility down the line. In fact, interested parties are strongly urged to understand this sector’s risks and common challenges before committing funds.
The Air Transport Industry is also fiercely competitive, with a number of carriers battling for customers, routes, and market share. As a result, consolidation is typical, assuming the proper financing can be obtained. For example, in order to streamline operations and reduce costs, several mergers have occurred. In October, 2010, Continental and United airlines merged to form United Continental Holdings (UAL) and Delta’s (DAL) purchase of Northwest on October 29, 2008 are just two examples of large transactions. Smaller carriers have also joined forces, with Southwest’s (LUV) acquisition of AirTran in May 2011 a prime example. Moving forward, it appears that this trend ought to persist, given the level of competition and myriad of challenges that continue to plague this industry.
Subscribers interested in keeping tabs on Spirit Airlines should monitor Value Line’s regular quarterly coverage in The Value Line Investment Survey, while keeping an eye out for Supplementary Reports when breaking news takes place.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.