SAVE - Spirit Airlines, Inc.

[Gregmal]

I'd probably personally lean toward UAL but this one is good too IMO, along with JetBlue. For all the constant whining about valuations, there is in fact, tons of value out there today. You could slash many of these airline earnings by 50% and yes, even with operating leverage, they'd still trade at a lower multiple than the average S&P company. But hey, theres uncertainty here. Oh no!

[Edward]

Personally I tend to avoid the legacy carriers. There is more margin of safety and a more moaty business model with the ULCC's.

[kab60]

I prefer the growth runway here, but DAL is interesting since it has a very large MRO and credit card business.

[Spekulatius]

Personally I tend to avoid the legacy carriers. There is more margin of safety and a more moaty business model with the ULCC's.

 

Doesn’t the cost moat disappear over time. JBLU for example is struggling to keep its cost advantage , although they have shown recently success with cost cutting.

 

DAL has a huge advantage with hubs they basically control (Atlanta) and their credit card business. They also did a good job keeping older planes flying, their lower fuel efficiency doesn’t matter as much with low kerosene prices.

[kab60]

Personally I tend to avoid the legacy carriers. There is more margin of safety and a more moaty business model with the ULCC's.

 

Doesn’t the cost moat disappear over time. JBLU for example is struggling to keep its cost advantage , although they have shown recently success with cost cutting.

 

DAL has a huge advantage with hubs they basically control (Atlanta) and their credit card business. They also did a good job keeping older planes flying, their lower fuel efficiency doesn’t matter as much with low kerosene prices.

The relative cost advantage seems to have actually grown over time, but returns have obviously come down hard since legacy Airlines have responded to the ULCC and offer basic economy fares, and nothing indicates that's gonna change, so that's a bummer and probably why it trades where it does. But there should be a long runway for growth at acceptable returns even though it's unlikely that returns return to their former glory.

 

If one looks past coronavirus (which nobody does at the moment, probably with good reason) it seems like they were on path to improve returns through less growth from new markets and focusing more on established and more mature routes. Either way 4-5xPE for a 16-17 pct. ROE business without excessive leverage and double digit growth isn't too shabby, but it's obviously a terrible industry in that you have massive fixed as well as financial leverage. Think Delta is a safer bet with the credit card and MRO biz plus less execution risk due to more mature markets and high capital returns, but it's obviously all about risk/reward. So far I doubled down on the wrong horse!

[Castanza]

Personally I tend to avoid the legacy carriers. There is more margin of safety and a more moaty business model with the ULCC's.

 

Doesn’t the cost moat disappear over time. JBLU for example is struggling to keep its cost advantage , although they have shown recently success with cost cutting.

 

DAL has a huge advantage with hubs they basically control (Atlanta) and their credit card business. They also did a good job keeping older planes flying, their lower fuel efficiency doesn’t matter as much with low kerosene prices.

The relative cost advantage seems to have actually grown over time, but returns have obviously come down hard since legacy Airlines have responded to the ULCC and offer basic economy fares, and nothing indicates that's gonna change, so that's a bummer and probably why it trades where it does. But there should be a long runway for growth at acceptable returns even though it's unlikely that returns return to their former glory.

 

If one looks past coronavirus (which nobody does at the moment, probably with good reason) it seems like they were on path to improve returns through less growth from new markets and focusing more on established and more mature routes. Either way 4-5xPE for a 16-17 pct. ROE business without excessive leverage and double digit growth isn't too shabby, but it's obviously a terrible industry in that you have massive fixed as well as financial leverage. Think Delta is a safer bet with the credit card and MRO biz plus less execution risk due to more mature markets and high capital returns, but it's obviously all about risk/reward. So far I doubled down on the wrong horse!

 

Sentiment and the looming threat of flight groundings is the key driver at this point. Rkbabang has the right play although I dont have the balls to play that far OTM. ATM options (not cheap) still offer good upside imo. I will probably follow this down with Jan 2022 calls.

[Edward]

Doesn’t the cost moat disappear over time. JBLU for example is struggling to keep its cost advantage , although they have shown recently success with cost cutting.

In 20-30 years, maybe. Legacy airlines basically can't compete with the business model. You can see it well in Europe with Ryanair.

[AzCactus]

This one is getting beat up again here.  I've never owned an airline but has the value of the company really shrank by 45% since the year began?

 

[kab60]

I sure don't hope so! From the CEO at Raymond James 3 days ago:

 

We've got a presentation here talking about the opportunity at Spirit, the long-term view. Before I get to that, it probably makes sense to address at least the elephant in the room, around -- the noise around the virus and talk a little bit about what we're seeing. So the way we would look at things, first of all, is it's too early to draw any specific conclusions. We don't really have an update to the company's formal guidance today. Because the news is obviously developing in real time as we're seeing it happen over the last few days. We would expect that for a variety of issues, either because of issues at corporate travel level and the need to replace probably lost corporate demand, we're starting to see more lower fares in the marketplace than we have seen before. So to the extent that there is an impact in the near term, I think we would expect to see it on yield. However, with that said, traffic is still good. Anecdotally, I traveled over the last 3 days on 7 different flights. And everything was full. The airplanes were full, the airports were full. So I think at low-fare levels, people are still traveling, which is great to hear, at least as it exists today, and while we will continue to evaluate and monitor what happens over the coming weeks and how that may influence the quarter, we're clearly still very excited about what we're seeing in our market and longer term heading through the year. I know there's been -- throughout the course of the day, we've had a number of meetings and just had discussions about the resiliency of the airline business and where we sit today to the extent that this creates some sort of a change in the cycle, and that the environment remains more challenged for a longer period of time. I think what I can say specifically about Spirit is that over the last decade or so, we've invested considerable time, capital and energy in making this a business that is resilient through the cycle. And in our view, there are a variety of things that you can look to in the Spirit model that will give some comfort as to our ability to navigate up and down cycles. The first and most important aspect of the Spirit model that is so important is the cost structure of our business, living at the absolute lowest cost level in the industry. Over the course of history, if you look backwards in both growing times and more challenged economic times, the most resilient airlines are those that are at the lowest cost level. And that's because low-fare travel tends to be the most resilient and the stickiest. And so we believe that having the lowest cost in the business, which is true today, is one of the single most important weapon that we have in maintaining our resiliency through more challenged economic times. In addition to that, the company has, over the course of the last 10 years, created tremendous amounts of balance sheet and fleet flexibility that give us the ability to react tactically to the extent that we think that would be necessary. Today, we operate a fleet of approximately 150, all A320 family, narrow-body aircraft. And of those 150 or so, we own 27 of those aircraft outright. So they're unencumbered and working well in our fleet today. That in and of itself creates tremendous flexibility, both on the balance sheet level, to the extent we wanted to increase the company's liquidity position, those are unencumbered assets. But more importantly, those assets are basically cash burn 0 airplanes today from an ownership perspective and, therefore, can be in and out of our system, pending changes in demand. We also enjoy one of the most liquid balance sheets in the industry today on a metric basis. And that's been an intentional move by us over the last decade or so to create a stable position to give us good negotiating leverage with our peers to make sure that we're insulated or self-insured against shocks, be those shocks be commodity price shocks or demand shocks or whatever you might say. And so I think that in and of itself also sets us up to be in a relatively good position. So when I take into account all of the factors that are a part of who Spirit is today, absolute very low cost, flexible fleet, looking at how we operate today and a strong balance sheet, I think we're set up well to weather any kind of an economic cycle that we face and in some ways, to be able to take advantage when times can be more tough. So that's our view on what's happening today. Clearly, this is a developing situation.

[Castanza]

I sure don't hope so! From the CEO at Raymond James 3 days ago:

 

We've got a presentation here talking about the opportunity at Spirit, the long-term view. Before I get to that, it probably makes sense to address at least the elephant in the room, around -- the noise around the virus and talk a little bit about what we're seeing. So the way we would look at things, first of all, is it's too early to draw any specific conclusions. We don't really have an update to the company's formal guidance today. Because the news is obviously developing in real time as we're seeing it happen over the last few days. We would expect that for a variety of issues, either because of issues at corporate travel level and the need to replace probably lost corporate demand, we're starting to see more lower fares in the marketplace than we have seen before. So to the extent that there is an impact in the near term, I think we would expect to see it on yield. However, with that said, traffic is still good. Anecdotally, I traveled over the last 3 days on 7 different flights. And everything was full. The airplanes were full, the airports were full. So I think at low-fare levels, people are still traveling, which is great to hear, at least as it exists today, and while we will continue to evaluate and monitor what happens over the coming weeks and how that may influence the quarter, we're clearly still very excited about what we're seeing in our market and longer term heading through the year. I know there's been -- throughout the course of the day, we've had a number of meetings and just had discussions about the resiliency of the airline business and where we sit today to the extent that this creates some sort of a change in the cycle, and that the environment remains more challenged for a longer period of time. I think what I can say specifically about Spirit is that over the last decade or so, we've invested considerable time, capital and energy in making this a business that is resilient through the cycle. And in our view, there are a variety of things that you can look to in the Spirit model that will give some comfort as to our ability to navigate up and down cycles. The first and most important aspect of the Spirit model that is so important is the cost structure of our business, living at the absolute lowest cost level in the industry. Over the course of history, if you look backwards in both growing times and more challenged economic times, the most resilient airlines are those that are at the lowest cost level. And that's because low-fare travel tends to be the most resilient and the stickiest. And so we believe that having the lowest cost in the business, which is true today, is one of the single most important weapon that we have in maintaining our resiliency through more challenged economic times. In addition to that, the company has, over the course of the last 10 years, created tremendous amounts of balance sheet and fleet flexibility that give us the ability to react tactically to the extent that we think that would be necessary. Today, we operate a fleet of approximately 150, all A320 family, narrow-body aircraft. And of those 150 or so, we own 27 of those aircraft outright. So they're unencumbered and working well in our fleet today. That in and of itself creates tremendous flexibility, both on the balance sheet level, to the extent we wanted to increase the company's liquidity position, those are unencumbered assets. But more importantly, those assets are basically cash burn 0 airplanes today from an ownership perspective and, therefore, can be in and out of our system, pending changes in demand. We also enjoy one of the most liquid balance sheets in the industry today on a metric basis. And that's been an intentional move by us over the last decade or so to create a stable position to give us good negotiating leverage with our peers to make sure that we're insulated or self-insured against shocks, be those shocks be commodity price shocks or demand shocks or whatever you might say. And so I think that in and of itself also sets us up to be in a relatively good position. So when I take into account all of the factors that are a part of who Spirit is today, absolute very low cost, flexible fleet, looking at how we operate today and a strong balance sheet, I think we're set up well to weather any kind of an economic cycle that we face and in some ways, to be able to take advantage when times can be more tough. So that's our view on what's happening today. Clearly, this is a developing situation.

 

Thanks for sharing this.

[ValueHippie]

I also bought some Jan 22 Calls.

[mwtorock]

I also bought some Jan 22 Calls.

 

+1

[Castanza]

https://www.bizjournals.com/southflorida/news/2020/03/11/spirit-ceo-confident-despite-covid19-concerns.html?ana=yahoo&yptr=yahoo

[stahleyp]

https://www.bizjournals.com/southflorida/news/2020/03/11/spirit-ceo-confident-despite-covid19-concerns.html?ana=yahoo&yptr=yahoo

 

While I don't think Spirit is Lehman...what else is the guy suppose to say?

 

https://www.nytimes.com/2008/06/17/business/17lehman.html

[kab60]

Seems like the screws are on everybody. Spirit is obviously not as affected by business trip cancellations, but leisure will take a big hit as well. Think the Airlines standing after this is all set and done might possibly be in a better place than ever before, but one obviously has to pick one of the players left standing. I like Spirits liquidity position (1b cash), low cost model and unencumbered airplanes as well as unhedged fuel, but it's gonna be ugly. I've gotten 3 AirBnB cancellations in a week - never had any before. This was from international trips (one couple from California visiting Copenhagen), but domestic will be really bad as well. Just anecdotally it seems like the states is a couple of weeks behind Europe on all of this corona-stuff and people are taking it a bit more easy to say the least. I'm becoming more unsure whether or not that's priced in yet, but I still think it's too cheap here, so I'll ride it out.

[rkbabang]

Seems like the screws are on everybody. Spirit is obviously not as affected by business trip cancellations, but leisure will take a big hit as well. Think the Airlines standing after this is all set and done might possibly be in a better place than ever before, but one obviously has to pick one of the players left standing. I like Spirits liquidity position (1b cash), low cost model and unencumbered airplanes as well as unhedged fuel, but it's gonna be ugly. I've gotten 3 AirBnB cancellations in a week - never had any before. This was from international trips (one couple from California visiting Copenhagen), but domestic will be really bad as well. Just anecdotally it seems like the states is a couple of weeks behind Europe on all of this corona-stuff and people are taking it a bit more easy to say the least. I'm becoming more unsure whether or not that's priced in yet, but I still think it's too cheap here, so I'll ride it out.

 

I agree about Spirit, they are strong enough to survive as long as this isn't armageddon or the equivalent of the return of the black death.  I haven't had any airbnb cancellations yet.  But that could be due to the fact that after the person who is there now leaves on Monday I almost a month blocked off to work on the house.  My next guest isn't due until the 3rd week in April.  I read somewhere that people are choosing whole house airbnbs over hotels in hopes that being around fewer people will be safer.  I hope this is true.

 

[Castanza]

Seems like the screws are on everybody. Spirit is obviously not as affected by business trip cancellations, but leisure will take a big hit as well. Think the Airlines standing after this is all set and done might possibly be in a better place than ever before, but one obviously has to pick one of the players left standing. I like Spirits liquidity position (1b cash), low cost model and unencumbered airplanes as well as unhedged fuel, but it's gonna be ugly. I've gotten 3 AirBnB cancellations in a week - never had any before. This was from international trips (one couple from California visiting Copenhagen), but domestic will be really bad as well. Just anecdotally it seems like the states is a couple of weeks behind Europe on all of this corona-stuff and people are taking it a bit more easy to say the least. I'm becoming more unsure whether or not that's priced in yet, but I still think it's too cheap here, so I'll ride it out.

 

I like the lack of exposure Spirit has to Europe. Sure there is the LATAM exposure which is a big chunk of their leisure revenue, but (fingers crossed) hopefully the warm weather dampens the covid19 effects there. I think US domestic travel will recover relatively quickly. 

[Castanza]

2011 prices....

[Guest roark33]

some airlines just aren't going to survive this. 

[KCLarkin]

some airlines just aren't going to survive this.

 

Need to consider the likelihood that most airlines won't survive this. I'm not certain which ones in the US are most vulnerable, but in Canada I don't expect Flair to survive. Air Transat would be gone too if Air Canada hadn't purchased. Sunwing and Porter are likely gone.

 

The issue with airline bankruptcies is that the planes don't go away. So if you are a good airline and survive this downturn, your bad competitors will go bankrupt and reemerge with clean balance sheets. They can undercut you on price. And after this, the planes are going to be super cheap.

[Jurgis]

The issue with airline bankruptcies is that the planes don't go away.

 

I think that's an issue with bankruptcies in a lot of areas...

[KCLarkin]

I think that's an issue with bankruptcies in a lot of areas...

 

I'm more familiar with airlines than other areas, but planes are somewhat unique. You can't move a factory or store to a new route when business is bad.

 

When Circuit City fails, Best Buy benefits. When Toys R Us fails, Walmart benefits. When Air Canada went bankrupt, they renegotiated their labour deals, cut pension funding, and were able to cut costs so they could compete with WestJet. This cycle might not be as pronounced since the last round of bankruptcies was so recent.

[Jurgis]

I think that's an issue with bankruptcies in a lot of areas...

 

I'm more familiar with airlines than other areas, but planes are somewhat unique. You can't move a factory or store to a new route when business is bad.

 

When Circuit City fails, Best Buy benefits. When Toys R Us fails, Walmart benefits. When Air Canada went bankrupt, they renegotiated their labour deals, cut pension funding, and were able to cut costs so they could compete with WestJet. This cycle might not be as pronounced since the last round of bankruptcies was so recent.

 

I was thinking energy cos. ;)

 

I agree that retail capacity is removed quite a bit when they go BK. This is not true for a bunch of other cos.

 

Anyway, we are in agreement.  :)

[Guest roark33]

Great point.  Buffett with OXY and his basket of airlines just leaves me shaking my head.

[Castanza]

1.1B Current Liabilities

 

1.02B cash

 

2B line of credit available

 

Fuel is 30% of opex (so a grounding would reduce that) 3.3B total opex 2019

 

27 planes owned outright

 

Government bailout on the horizon

 

What am I missing?