Spirit Final Presentation
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Transcript of Spirit Final Presentation
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Analyst ReportJune 2016
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Announcement
“Ladies & Gentlemen, thank you for traveling with Spirit Airlines.
We are now 30,000ft high. Please remain buckled up and enjoy the ride…
Our friendly flight attendant will start serving you in just a moment. “
Open
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Spirit Airlines – Company Description
§ ULCC Pricing Model
§ “Bare-bones” fares
§ Additional fees for all other services
Open
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Pricing Model
§ Unbundled fares
§ $9 Fare Club
§ Non-reclining seats
§ Additional charge for carry-on bags ($25-50) and check-in bags ($20-45)
§ Big Front Seat - extra width and legroom
Open
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Pricing Model Open
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Open
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Consumer dissatisfaction ranges from:
§ outrage over the airline’s hefty add-on fees
§ no-exceptions policy
§ crammed seating.
OpenUnapologetic Management
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OpenUnapologetic Management
1st minute
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Customer Satisfaction Open
Top 10 most hated companies in the U.S. 1
1 Based on 24/7 Wall St “America’s most hated companies” as of 14th January 2016. 2 Based on American Customer Satisfaction (ACSI) Index 2016
Customer Satisfaction Benchmark by Airline Industry 2
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Customer Satisfaction Open
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Airline IndustryTHE AIRLINE INDUSTRY
HELPS DRIVE NEARLY
$1.5 TRILLION INU.S. ECONOMIC ACTIVITY COMMERCIAL AVIATION
HELPS DRIVE MORE THAN
11 MILLION JOBS IN THE U.S.
U.S. GDPCONTRIBUTION OF
5%
+122% REVENUE GROWTH IN 2015TOTAL $ 18.92 BILLION NET INCOME
696 MIILION DOMESTIC PASSANGERS
MORE THAN 50 Airlines
Forceasted growth rate of 1.9% CAGR until 2035 1
1 Based on estimation of the Federal Aviation Administration (FAA Aerospace Forecast Fiscal Years 2015-35)
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Economic Environment
0.6% 0.4%
3.2%
5.8%
16.6%
5.32%
13.74%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
12.6%
12.8%
13.0%
13.2%
13.4%
13.6%
13.8%
14.0%
14.2%
2011 2012 2013 2014 2015 2011-2015Avrg.
U.S. Airlines S&P 500Sources: Standard and Poor’s (S&P), Airlines for America (A4A), Bureau of Transportation Statistics and Oliver Wyman: Airline Economic Analysis
Six Years Post-Recession, Pre-Tax Profit Margnis of U.S. Carriers
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Competitive Environment
79.24%
13.52%
7.24%
Big 4 Mid-tier / Hybrids ULCC
Total Domestic Market Share (RPM) – Spirit Peer Group
We define Spirit Peer Group as follows: Big 4 = American, Delta, Southwest & United< Mid-Tier/Hybrids = Alaska, JetBlue, & Virgin America, ULCCs = Allegiant, Frontier, & Spirit
Very large carriers with that are in a very mature phase of their growth cycle
Smaller carriers than the Big 4 trying to attract premium yields with their product offerings
Carriers with Ultra-Low Cost structures designed to compete on the basis of price(price leader approach)
• ULCCs’ Share of the U.S. Domestic Market is expected to Increase Significantly
• INPUT
• https://skift.com/2016/01/14/u-s-legacy-carriers-vs-low-cost-rivals-in-8-charts/
Open
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Expanding Markets
§ Spirit has the abilility to grow in profitable markets.
§ Just expanded our Latin American routes.
§ The “Spirit Entry Effect” is real - the number of additional travelers after we enter a market generally increases enough for us achieve an 85% or greater load factor without taking share from other carriers.
§ Spirits untapped market is growing as their cost structure improves. (Lower-income&Frugal Flyers)
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Underserved Market
§ A Large base of frugal flyers looking for the cheapest base fair.
§ These flyers are hit with a multitude of unexpected costs creating averseness among customers.
§ Customer retainment has not been well addressed with Spirits current operations.
§ Currently, this has not proved to be a problem considering the observed growth in Spirits sales.
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Turning Point?
§ Slump in revenue growth in 2015
§ Stock price plunged from $74 in early 2015 to $40 at year-end
§ CEO Ben Baldanza sacked
Open
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“Number one, cash is king […]”
Jack Welch
Financial Performance Open
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Operating Performance
0%
5%
10%
15%
20%
25%
30%
35%
40%
0
1,000,000
2,000,000
3,000,000
2011 2012 2013 2014 2015Passenger Non-ticket Operating Profit Margin Sales Growth Operating Expenses
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Revenue Distribution
Passenger55%
Non-ticket45%
Passenger92%
Non-ticket1%
Special revenue adjustment
1%
Other6%
Spirit Airlines Southwest Airlines
Open
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Sales Growth
Income Margins(2015)
37.11%
23.08%25.49%
16.76%
10.87%
22.66%
29.36%
9.13%
3.58%5.12%
6.53%
10.74%
2010-2011 2011-2012 2012-2013 2013-2014 2014-2015 Average
Spirit Airlines Southwest Airlines
14.81% 11.03%
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13.5% 13.2%
17.1%18.4%
23.8%
17.2%
4.4% 3.6%
7.2%
12.0%
20.8%
9.6%
2011 2012 2013 2014 2015 Average
Spirit Airlines Southwest Airlines
Operating Profit Margins Open
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16.5%
11.8%
15.0%14.2%
12.5%14.0%
1.0%2.3%
3.9%
5.8%
10.2%
4.6%
2011 2012 2013 2014 2015 Average
Return on Total Asset
Spirit Airlines Southwest Airlines
Strong Financial Performance Open
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Investment in Flight Equipment
§ Massive investments in Flight Equipment in 2014 & 2015
§ Southwest already has established a much larger fleet
Open
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§ Why the ROA declines?
Expansion
PP&E investment
Balance Sheet analyses
Strong Financial Performance Open
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Short Term Solvency
1.95 1.98 1.93 1.97
2.2
0.87 0.810.7 0.61
0.5
2011 2012 2013 2014 2015
Quick Ratio
Spirit Southwest
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CFFO Investing Acitvities Finance Actitvities
Cash Flow Analysis
§ Strong operative results and high clash flow margin
22.1%
16.3%
10.3%
§ High capital expenditures into flight equipment
§ IPO in 2011 ($170mn.)
§ Nearly no changes in the capital structure between 2012-2013
§ Leveraged finance with long-term debt of 14 new airplanes 2014 ($536mn.)
§ Repurchase of common stock since 2015 ($112mn.)
§ No dividend payments
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Cash Flow Analysis
343.328 416.816530.631
632.784
803.632
-800
-600
-400
-200
0
200
400
600
800
1000
2011 2012 2013 2014 2015
CFO Investing Cash Flow Finance Cash Flow Closing Cash Balancein $k
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Conclusion
Market Profitability Liquidity
§ High generic market growth and positive future forecast
§ Establishing of a market niches due to a unique pricing model and generating new customers without taking away these from existing airlines
§ Strong increase in all operating KPIs and the ability of the firm to generate cash from sales
§ High growth potential due to expansion of fleet and optimization in CASM (Cost of available seats per mile)
§ Operating expenses are increasing at a slower rate than sales
§ No threat of short-term bankruptcy
§ Effects from long-term debt and leasing obligations in the future on liquidity creates uncertainty
✔ ✔ ✔