SAVE - Spirit Airlines, Inc.

[Gregmal]

My observations are that Spirit's advantages largely got competed away once the bigger carriers decided to play their lower rate higher fee game.

[Peregrine]

My observations are that Spirit's advantages largely got competed away once the bigger carriers decided to play their lower rate higher fee game.

 

A cost advantage is a cost advantage. Spirit's PRASM is lower than its larger peers' CASM. True, the large hub airlines are operating the same routes that Spirit flies on at a loss but they need these routes to draw traffic to their hubs and Spirit is still making healthy margins in spite of that.

 

A bigger worry is some of these new entrants that are following the same ULCC formula.

[Spekulatius]

Why hasn't this idea worked? Despite revenue growth, stock is much lower than it was 5 years ago. The market seems to think that this business is destroying value as it grows.

 

The business has destroyed value, because they increased their revenues by 50% , while their operating profit went from $500M to $350M, while interest expense went from $20M to $80M. Furthermore, negative FCF is pretty much guaranteed for a couple more years per plain delivery schedule.

 

Perhaps this will really pay off at some point in the future when this business matures into a cash gusher like the legacy airlines. I doubt that many growth investor give a hoot about any airlines, which can be an opportunity of sorts.

[Peregrine]

 

The business has destroyed value, because they increased their revenues by 50% , while their operating profit went from $500M to $350M, while interest expense went from $20M to $80M. Furthermore, negative FCF is pretty much guaranteed for a couple more years per plain delivery schedule.

 

 

Do you just look at item 6 on a 10-K and come up with these conclusions? Spirit had a large settlement with their pilots in 2018 which led to a large one-time charge. Plus fuel costs were unsustainably low a few years ago.

[Spekulatius]

 

The business has destroyed value, because they increased their revenues by 50% , while their operating profit went from $500M to $350M, while interest expense went from $20M to $80M. Furthermore, negative FCF is pretty much guaranteed for a couple more years per plain delivery schedule.

 

 

Do you just look at item 6 on a 10-K and come up with these conclusions? Spirit had a large settlement with their pilots in 2018 which led to a large one-time charge. Plus fuel costs were unsustainably low a few years ago.

 

Basically yes. A few other thing - the operating profit margin went down before 2018.

Also, analogies with Europe are a bit misplaced - low cost carriers in Europe tend to take away business from other modes of transportation, while in the US they try to cut another airlines throat for the most part. I own a bit of Ryanair and think it’s a  better Business than Spirit.

Recent pressures on shares may be due to tariffs on Airbus, which will hit SAVE disproportionally hard.

 

 

What do you think is the reason for Spirits lagging stock performance? I think there is more to it than Mr Market doesn’t like cyclicals.

[Jurgis]

I think there is more Tonic than Mr Market doesn’t like cyclicals.

 

I'm successfully battling the onset of dementia by applying my brain to figure out what Spekulatius' speech-to-text errors really meant.

Suggested mental exercise for everyone.

AA+++  8)

[Spekulatius]

I think there is more Tonic than Mr Market doesn’t like cyclicals.

 

I'm successfully battling the onset of dementia by applying my brain to figure out what Spekulatius' speech-to-text errors really meant.

Suggested mental exercise for everyone.

AA+++  8)

 

The AI in Apples text recognition and grammar correction always seem to know what I really care about.

[Peregrine]

 

The business has destroyed value, because they increased their revenues by 50% , while their operating profit went from $500M to $350M, while interest expense went from $20M to $80M. Furthermore, negative FCF is pretty much guaranteed for a couple more years per plain delivery schedule.

 

 

Do you just look at item 6 on a 10-K and come up with these conclusions? Spirit had a large settlement with their pilots in 2018 which led to a large one-time charge. Plus fuel costs were unsustainably low a few years ago.

 

Basically yes. A few other thing - the operating profit margin went down before 2018.

Also, analogies with Europe are a bit misplaced - low cost carriers in Europe tend to take away business from other modes of transportation, while in the US they try to cut another airlines throat for the most part. I own a bit of Ryanair and think it’s a  better Business than Spirit.

Recent pressures on shares may be due to tariffs on Airbus, which will hit SAVE disproportionally hard.

 

 

What do you think is the reason for Spirits lagging stock performance? I think there is more to it than Mr Market doesn’t like cyclicals.

 

Who knows? And it's not just a cyclical...it's an airline as well. I was pointing out your faulty rationalization.

[Spekulatius]

 

Who knows? And it's not just a cyclical...it's an airline as well. I was pointing out your faulty rationalization.

 

Who knows is not a good answer, if you own the stock. SAVE has underperformed most airline stocks, except JBLU (which has margin issues) during the last few years. The balance sheet has definitely taken a turn for the worse, due to negative FCF. the industry overall seems to be over-earning a bit due to capacity constraints from the 737Max grounding. This benefits SAVE, because their fly Airbus exclusively.

 

I haven’t heard much about the latest trade war escalation where Airbus is now charged 10% tariffs, which are going to be paid by the customer. This hits SAVE hard, because they are expanding the fleet (high Capex) and exclusively fly Airbus 320 family planes. What if Trump goes crazy and escalates to a higher tariff? Then SAVE‘s operating model is in question, as they may have to switch to Boeing planes, which invalidates their operating model and increased their plane operating costs. Or they cancel deliveries (can they?) and actually start to generate cash, which Mr Market may like?

[kab60]

Earnings out, apparently they were good. More importantly, about to order 100-150 planes from Airbus towards 2027. Which, it seems, will be constructed in the US, so don't think tariffs are an issue.

[bizaro86]

I think it's pretty likely SAVE could find someone else to take their delivery slots if they wanted, given the significant worldwide shortage of narrow body planes.

[kab60]

Just wanted to point out what seems like a major discrepancy in expectations (and perhaps an opportunity for those playing short term earnings games). Per last CC, company expects to increase EPS high double digit in 2020 (1:1 with their capacity increase). Analysts basically expects earnings to be flat. Management had a lot of opportunities to downplay but stuck to their guidance. No Idea who is right, but odds look good that the Company atleast surprises somewhat positively since expectations are so low. The continuing Max issues might be a positive joker.

[kab60]

Doesn't this company have a target at its back? It trades around 1,3xvalue of its planes - which are solely Airbus. Boeing issues should make them more sought after. Then they have their order backlog - having secured planes for the next decade. I know, Airlines, but returns are pretty good across the board. Talked to an Airline Chairman who said the Industry was much changed since the GFC due to consolidation and rightsizing of structures. Who knows, buying a bit above book, and perhaps being an m&a target, doesn't look like too bad of a bet. And then you still have that possible short term catalyst of a major earnings beat.

[kab60]

I understand people hate airlines, even more during a potential pandemic, but I think this is silly. It trades at 90 pct. of 2019 BV which is mostly planes and engines - all Airbus - while growing double digit.

 

There's a bunch of capex coming, but financing is secured for 2020. Towards 2027 it's backstopped by Airbus.

 

They also have 1b in cash. Airbus also has some delays, so they can likely postpone taking delivery if shit hits the fan. Last weak analysts sent it up after company commmited to keeping margins steady while growing capacity 15-17 pct. (so same expected growth in earnings). Since then it's down 33 pct. or something along those lines, since coronavirus (surprise) spread from China.

 

Most of their flights are leisure and domestic flights, so less affected by business disruption and foreign flights obviously. The international flights they do have a mostly is mostly to Colombia and the northern part of South America where the weather is warm, and Corona is something they drink.

 

From 10-K: As of December 31, 2019, we had secured debt financing for three aircraft, scheduled for delivery in 2020. In addition, we secured financing for 12 aircraft to be leased directly from third-party lessors, scheduled for delivery in 2020 through 2021. As of December 31, 2019, we did not have financing commitments in place for the remaining 132 Airbus firm aircraft orders, scheduled for delivery through 2027. However, we have signed a financing letter of agreement with Airbus which provides backstop financing for a majority of the aircraft included in the A320 NEO Family Purchase Agreement. The agreement provides a standby credit facility in the form of senior secured mortgage debt financing. Future aircraft deliveries may be paid in cash, leased or otherwise financed based on market conditions, our prevailing level of liquidity, and capital market availability.

 

Am I the only one dumb enough to go big on this? :D

 

[gjangal]

I bought a 4% position around 41-42 before this blew up. Thinking of adding a couple of percent more but that’s it. I don’t like doubling down on my losing positions. Growing low cost airline taking /adding share was my only thesis for this.

[kab60]

But is that thesis impaired by corona? I bought at 36, 4 pct as well. Until last week this was a winning trade, but I don't see how the thesis has changed despite a 33 pct drop. Made it 6 pct yesterday, but I feel like I'm a lone optimist, so I'm probably the dumb money here.

[Castanza]

But is that thesis impaired by corona? I bought at 36, 4 pct as well. Until last week this was a winning trade, but I don't see how the thesis has changed despite a 33 pct drop. Made it 6 pct yesterday, but I feel like I'm a lone optimist, so I'm probably the dumb money here.

 

Are you worried about their reliance on South and Central America flights? It looks like about 1/3rd of their flight volume. Coronavirus could impact those countries for quite some time. This could also disproportionately affect their rev which is one of the highest ancillary revenues in the industry 45+ percent if I remember correctly. I imagine the South and Central American flights are the longest. Take these out of the equation and you're looking shorter flights which translates to less bags and fewer drinks purchased.

 

[kab60]

Not really. Possible there is a short term hit, maybe more, don't know, but it seems countries with warmer weather are way less affected. So when it gets cold(er) in Colombia, spring might be coming to the states so perhaps a bit of natural flu hedge...

[kab60]

So 5xearnings for a company with secular growth, about midteens ROE without excessive leverage and a large runway for growth. I think the big risk here is Airbus doing a Boeing - not corona nor an economic slowdown.

[Edward]

So 5xearnings for a company with secular growth, about midteens ROE without excessive leverage and a large runway for growth. I think the big risk here is Airbus doing a Boeing - not corona nor an economic slowdown.

I agree this is an above average business for a very cheap price.

 

Tilson's presentation from 2017 is still relevant:

http://www.tilsonfunds.com/SAVE-10-17.pdf

[rkbabang]

So 5xearnings for a company with secular growth, about midteens ROE without excessive leverage and a large runway for growth. I think the big risk here is Airbus doing a Boeing - not corona nor an economic slowdown.

I agree this is an above average business for a very cheap price.

 

Tilson's presentation from 2017 is still relevant:

http://www.tilsonfunds.com/SAVE-10-17.pdf

 

I agree.  I just bought some Jan 2022 calls.  An asymmetrical bet.  Very little risked and potential for large gain.

[kab60]

Berkshire bought 1m shares of Delta. SAVE har lost around 1B of marketcap or 1/3 in 4 weeks. Equals 2,5 years of earnings. Dont really think it makes sense unless one expects them to go under which, considering everything, seems extremely unlike. Bought more yesterday and effectively and thus doubled my position in the last week.

[Spekulatius]

SAVE and JBLU have solid balance sheets and are hard hit. I agree it seems overdone.

 

@rkabang - what strike price Jan 2022 calls did you buy? They seem pricey, due to the high volatility. I do agree it’s a good idea. I would probably just stick with thr common though.

[rkbabang]

SAVE and JBLU have solid balance sheets and are hard hit. I agree it seems overdone.

 

@rkabang - what strike price Jan 2022 calls did you buy? They seem pricey, due to the high volatility. I do agree it’s a good idea. I would probably just stick with thr common though.

 

I bought 45 strike.  2 years is plenty of time for this whole COVID-19 to play itself out and everything to go back to normal.  Like I said, a small bet.  I'm thinking of adding some common as well.  Especially if it drops any more from here.

 

 

[Castanza]

Not really. Possible there is a short term hit, maybe more, don't know, but it seems countries with warmer weather are way less affected. So when it gets cold(er) in Colombia, spring might be coming to the states so perhaps a bit of natural flu hedge...

 

You are probably right. Definitely a short term hit. But man, how low can this go? Down another 7% today.