Investor Analysis for Spirit Airlines

Nick Giacona, Randi Roehling, Sara Stacharczyk,

Kelly Burns, Katie Johnson, Mark Woodiring

Satchell, A. (2010, December 22). Spirit airlines:$50 off fare deal . Retrieved from http://blogs.sun-sentinel.com/south-florida-travel/2010/12/22/spirit-airlines50-off-

fare-deal/

Customer Reviews

Unknown. (n.d.). Skytrax web reviews. Retrieved from

http://www.airlinequality.com/Forum/spirit.htm

“Don‟t be fooled by „low prices‟! A

great airline if you get a discount

flight and don‟t take anything with

you. The food and beverage

options were poor, and they even

charge for a cup of water.”

“I could‟ve flown on a cheaper

flight with American or Copa. The

bags are included, and I could‟ve

gotten a drink. You don‟t know if

Spirit is a rip-off until you check

in.”

“Extremely disappointed

in the service, you get

what you pay for.”

Thesis

Don‟t FLY Spirit Airlines, BUY their

stock!

Invest in Spirit Airlines over other airlines

because they have…. :

Leading industry returns

Ultra Low-Cost Carrier (ULCC) business model

Innovative revenue generation

Significant growth opportunities

Agenda

1. What Proves Spirit‟s Strength?

2. How Do They Do It?

3. A Final Review (Quiz & Conclusion)

Breakout Financial

Performance

December Q operating margin of 13.8%/3.9+

YOY (Highest among U.S. coverage)

Deutsche Bank. (2012). Spirit. 2012 Detailed stock valuation report [Financial data Available from Thomson Investext Online

database.

Breakout Financial Performance (cont.)

After tax ROIC was 17.7% in 2011 (top 10

globally)


database.

Strong liquidity position – no debt

Capacity grew 15% - ability to grow profitably

Ultra low cost/distinctive revenue model


database.

Breakout Financial Performance (cont.)

Comparisons

Southwest Delta

Spirit

Quote media: Dynamic market data solutions. (2012, April 5). Retrieved from http://www.quotemedia.com/results.php?qm_page=47226&qm_symbol=LUV

Quote media: Dynamic market data solutions. (2012, April 5). Retrieved from http://www.quotemedia.com/results.php?qm_page=42974&qm_symbol=DAL

Quote media: Dynamic market data solutions. (2012, April 5). Retrieved from http://www.quotemedia.com/results.php?qm_page=15601&qm_symbol=SAVE

How Do They Do It?

Ultra Low-Cost Business Model

Fleet Operations

• Dedication to Airbus A320

• Addition of 106 new planes between 2012 and 2021

• Maintenance, inventory, and repair efficiency

Employee Efficiency

• Versatile flight crew

• Around 20% of operating costs

Strategic Distribution and Marketing

• Mainly utilizes Spirit.com for their ticket sales

• Only used 0.2% of total revenue on advertising in 2011

Lean Flight Plans

• Seat configuration with 178 passengers

• Short ground times

Low-Cost Model

United States Securities and Exchange Commission, (2011). Spirit Airlines, Inc. Annual Report (001-35186). Retrieved from website: http://ir.spirit.com/annuals.cfm

Innovative Revenue Generation

Operating revenue from ancillary fees

Southwest – 6.2%

Frontier – 7%

Spirit – 30%

$5

$45

$0

$10

$20

$30

$40

$50

2006 2011

Non-ticket revenue per passenger

“The people who fly us get it! OK, I don’t get as much leg room, but I

saved $40 vs. my other options. You don’t get the same thing at Wal-Mart that you do at Nordstrom’s, right?”

- CEO of Spirit, Ben Baldanza

Schrader, A. (2012, February 25). Fees Fatten Spirit Revenue. Denver Post. Retrieved from

http://www.lexisnexis.com.proxy1.cl.msu.edu/hottopics/lnacademic/

Gilbertson, D. (2012, February 13). Spirit Fees 'a badge of honor' . USA Today. Retrieved from

http://www.lexisnexis.com.proxy1.cl.msu.edu/hottopics/lnacademic/

United States Securities and Exchange Commission, (2011). Spirit Airlines, Inc. Annual Report

(001-35186). Retrieved from website: http://ir.spirit.com/annuals.cfm

Growth

DFW service

increases

Detroit

Toluca (Mexico City)

San Diego

“…liberating

Customers from

high fares…”

Leverage Brand to

Grow Revenue in

underserved and

overpriced markets

Flexibility

Maxon, Terry. Dallas Morning News. “Spirit to expand D/FW Service with flights to Detroit, San Diego, Toluca.” 4 April, 2012. Spirit Airlines Annual Report

Pop Quiz – Question 1

Compared to the rest of the airline

industry, Spirit‟s ROIC is:

A. Less than industry ROIC

B. Consistent with industry ROIC

C. Greater than industry ROIC

Considerably greater than the industry average

*17.7% in 2011 vs. 4.9% global industry average

Return on invested capital (ROIC) and weighted average cost of capital (WACC) from IATA (1993-2004) and Deutsche Bank (for 2010-2012 estimates)

How much revenue per passenger did Spirit

generate last year (2011) through their non-

ticket fees/ancillary fees?

A. $5.00

B. $10.00

C. $45.00

*Answer: C, $45.00/passenger


United States Securities and Exchange Commission, (2011). Spirit Airlines, Inc. Annual Report (001-35186). Retrieved from website:

http://ir.spirit.com/annuals.cfm


While Spirit debuted at Dallas/Fort Worth with

2 routes, how many will be in place by

May, 2012?

A. 4

B. 8

C. 10

*Answer: C, 10 routes

Maxon, Terry. Dallas Morning News. “Spirit to expand D/FW Service with flights to Detroit, San Diego, Toluca.” 4 April, 2012. Spirit Airlines Annual Report

A Final Review

Based on industry returns, a low-cost

business model, innovative revenue

generation and significant growth

opportunities, we recommend that you invest

in Spirit Airlines.

Don‟t FLY it, BUY it!

Thank you!

Airlines Defy Conventional

Wisdom

http://www.barelkarsan.com/2011/04/industry-roic.html

Spirit is the Exception

“The lesson here is that you don't have to be

afraid of terrible industries. Just think of moves

of these types as six-to-12-month trades - as

opposed to longer-term investments. It takes a

lot of confidence, experience and

nimbleness, but a bad industry can still deliver

good (and sometimes great) returns.”-Lucas Kent Lucas, Taipan Daily

http://moneymorning.com/2010/05/07/airline-industry/

Investor Analysis for Spirit Airlines

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