Author Topic: SAVE - Spirit Airlines, Inc.  (Read 26474 times)

intothebreach

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Re: SAVE - Spirit Airlines, Inc.
« Reply #20 on: November 19, 2015, 12:41:15 PM »
Thank you KC, your input, reference and perspective have been most helpful so far (by all means: keep going : )

I'm also in Canada (Montreal), but my experience with capital-intensive businesses has been mostly automotive, for which I really do not have a high regard having worked in different positions supplying the big OEMs.



Fly

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Re: SAVE - Spirit Airlines, Inc.
« Reply #21 on: November 19, 2015, 12:48:13 PM »
Fuel and Labor costs are the two biggest expenses for airlines. The longer we go with low oil prices, the harder labor will fight for a larger piece of the revenue pie. We are seeing this play out with pilot contract rejections at Delta and Southwest now, and Spirit is working on negotiations as we speak. More expensive labor contracts now can spell serious damage when oil prices eventually rise again. Just a word of caution.

KCLarkin

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Re: SAVE - Spirit Airlines, Inc.
« Reply #22 on: November 19, 2015, 01:13:57 PM »
Fuel and Labor costs are the two biggest expenses for airlines. The longer we go with low oil prices, the harder labor will fight for a larger piece of the revenue pie. We are seeing this play out with pilot contract rejections at Delta and Southwest now, and Spirit is working on negotiations as we speak. More expensive labor contracts now can spell serious damage when oil prices eventually rise again. Just a word of caution.

This is true but the whole cost structure of the industry would move up in parallel (roughly), so SAVE's cost advantage would remain. Obviously, we are closer to the peak of the cycle than the bottom. But SAVE seems to be pricing this in. If you believe the growth story but are worried about the cycle, you could average in over a period of time.

KCLarkin

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Re: SAVE - Spirit Airlines, Inc.
« Reply #23 on: November 20, 2015, 09:17:50 AM »
Looks like American is matching Spirit's fares in Dallas:
http://centreforaviation.com/analysis/us-major-airlines-recognise-the-ulcc-threat-marketplace-dynamics-will-change-but-beware-cost-creep-250994

You wonder how long American can defend these low value passengers, but it will be a headwind for Spirit.

Quote
This is likely to be a continuing dance. After all, in a broadly similar market profile in Europe, it is the LCCs that have prospered, to the detriment of the majors. A difference there is that the majors have not been able to wash out their costs through the bankruptcy laundry, so the unit costs of the big three Europeans are higher than the US big three's.

So the warning message is there for the US majors: it is fine now to allocate a percentage of seats to low yielding passengers, but once cost levels start creeping up again, vulnerability to ULCCs increases exponentially.

I am still looking into SAVE. The risk-reward looks compelling. But I will likely sit this one out. I find the Canadian duopoly easier to handicap.

intothebreach

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Re: SAVE - Spirit Airlines, Inc.
« Reply #24 on: November 20, 2015, 09:45:14 AM »
Yeah, that was the key risk. Still think Spirit's margins give them some breathing room.

One thing I do not understand from the article though:

Quote
"He stressed in the markets where American has matched pricing, its unit revenue performance is the same as the rest of its system. One tactic American has used is running higher load factors on off peak flights, which is a more favourable proposition in a low fuel cost environment."

How can the portion in bold be true? From what I get, the American Airlines guy is saying that dropping their prices has no impact on their revenue performance...  seems like a really far-fetched party line to me (and I'm also not sure I buy the higher load explanation, as if they were not already doing so whenever they can).

KCLarkin

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Re: SAVE - Spirit Airlines, Inc.
« Reply #25 on: November 20, 2015, 09:56:37 AM »
Yes, they have breathing room with current margins. That is why the risk is limited. But if the mainline carriers respond aggressively it will limit Spirit's ability to grow. Still, I think the economics of the low cost supplier win out here.

My other concern -- in those markets where Frontier and Spirit compete directly, they seem to have equal share. So Spirit doesn't appear to have an immediate advantage over Frontier. There are plenty of open markets but I'd prefer not see two ULCCs competing head-to-head.

Simple Investor

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Re: SAVE - Spirit Airlines, Inc.
« Reply #26 on: November 20, 2015, 11:26:21 AM »
On the surface Spirit and WestJet look like no-brainers.  They both look priced for no growth. 

Simple Investor

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Re: SAVE - Spirit Airlines, Inc.
« Reply #27 on: November 20, 2015, 12:10:30 PM »
Although it is very, very hard to read the customer reviews and invest in this company.

oddballstocks

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Re: SAVE - Spirit Airlines, Inc.
« Reply #28 on: November 20, 2015, 01:14:35 PM »
The problem I see with these guys is that they're at Tier 2/3 airports. 

I live in Pittsburgh, at the Pittsburgh airport I can get a flight to about anywhere if I am ok with connections.  There are direct flights to Europe and a number of US cities, things are streamlined, the highway is built for it etc.

Spirit operates out of Latrobe, and Allegiant out of Youngstown, OH.  Both are small areas.  I've been to the Latrobe airport, we went to an airshow there this past summer.  A few Spirit flights landed.  It was longer and out of the way to get there.  Would I prefer to drive 30m or an hour to the airport?  Latrobe has free parking, but in the context of a few thousand dollar trip $50 isn't that big of a deal.  There's also the factor that anyone I know who's taken Spirit has said to avoid it for how terrible it is.  And when I price the tickets they're not that much cheaper than what I could get on a mainline carrier.

Youngstown is worse, it's over an hour away.  While flights go to decent locations I don't know if it's worth the extra drive to get there.

The people I've talked to who take these flights are VERY cost sensitive.  They're the type of flyers who don't normally fly.  I will pay for an upgrade if it means I'm not squeezed into a tiny seat for hours.  I still have bad memories of flying in a disgusting plane (Delta how can you let your toilets overflow??) with a seat that's too tiny to Europe years ago.

These airlines have a double whammy.  They look great when times are good because seats are filled with fliers who don't normally fly or can't afford it.  Think of the blue collar set of fliers.  They'll take Spirit or Allegiant now because things are humming along, but they're the first to get hit when the economy hits the skids.  These are the fliers who are going to Vegas or Myrtle Beach for the first time because they received a bonus or flights are insanely cheap.
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kab60

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Re: SAVE - Spirit Airlines, Inc.
« Reply #29 on: November 20, 2015, 01:31:06 PM »
The problem I see with these guys is that they're at Tier 2/3 airports. 

I live in Pittsburgh, at the Pittsburgh airport I can get a flight to about anywhere if I am ok with connections.  There are direct flights to Europe and a number of US cities, things are streamlined, the highway is built for it etc.

Spirit operates out of Latrobe, and Allegiant out of Youngstown, OH.  Both are small areas.  I've been to the Latrobe airport, we went to an airshow there this past summer.  A few Spirit flights landed.  It was longer and out of the way to get there.  Would I prefer to drive 30m or an hour to the airport?  Latrobe has free parking, but in the context of a few thousand dollar trip $50 isn't that big of a deal.  There's also the factor that anyone I know who's taken Spirit has said to avoid it for how terrible it is.  And when I price the tickets they're not that much cheaper than what I could get on a mainline carrier.

Youngstown is worse, it's over an hour away.  While flights go to decent locations I don't know if it's worth the extra drive to get there.

The people I've talked to who take these flights are VERY cost sensitive.  They're the type of flyers who don't normally fly.  I will pay for an upgrade if it means I'm not squeezed into a tiny seat for hours.  I still have bad memories of flying in a disgusting plane (Delta how can you let your toilets overflow??) with a seat that's too tiny to Europe years ago.

These airlines have a double whammy.  They look great when times are good because seats are filled with fliers who don't normally fly or can't afford it.  Think of the blue collar set of fliers.  They'll take Spirit or Allegiant now because things are humming along, but they're the first to get hit when the economy hits the skids.  These are the fliers who are going to Vegas or Myrtle Beach for the first time because they received a bonus or flights are insanely cheap.
I tend to agree with everything you said - yet the numbers seem to suggest another story. Crazy growth, crazy ROIC and net cash position yet trades like a nogrowth sub 10 roe business. What you write reminds me a lot about peoples perception of Ryan Air in Europe which is also my own perception. "People" despise them and they too use tier 2 and 3 airports, but they still seem to do better than the rest. Which is also why I think there might be a good opportunity here. I just dont know anything about airline cycles. Or if they have major capex ahead.