SAVE - Spirit Airlines, Inc.

[muscleman]

KC gave a good answer. To which I would add that it is much more difficult than appears at first glance to be running any business with a true low cost philosophy and not succumb to temptations to take the easiest road. I believe it requires some kind of genuine "thrift" DNA that Spirit seems to embody. Time will tell as I have not been following the story that long.

 

 

How would you guys compare this one with Alaska and Southwest? I can't tell any difference.

Besides, I would be careful about anything related to Tilson.  :D

[HumbleInvestor]

Any ideas about the price movement today?

[Guest neiljgsingh]

Any ideas about the price movement today?

 

I was wondering the same thing. Only news item I could find is that Ben Baldanza bought 5k shares at around $42, which obviously doesn't explain the rapid movement.

[Fly]

Sudden departure of CEO Baldanza and replaced with Bob Fornaro. Setting up for a Spirit/Frontier merger?

 

http://finance.yahoo.com/news/spirit-airlines-inc-appoints-board-132500181.html

[Simple Investor]

Very odd the CEO is gone.  Just noticed it today. Didn't see much commentary from analysts at the wirehouses. 

[Guest neiljgsingh]

Some recent news that might have led to the rally over the past two days:

 

1) They updated 4Q2015 operating margin guidance from 17.5% to 22.5% due to "better-than-expected revenue" from their "ability to adapt as the pricing environment evolved, by taking an aggressive approach to revenue management and continuing our surgical adjustments to

capacity, including where we grow, where we shrink, and how we manage gauge." This is in the context of increased pricing pressure from the major carriers due to lower oil prices. Also, "ex-fuel unit costs for the fourth quarter 2015 are expected to be lower than our previous guidance due in part to lower aircraft rent, timing of maintenance events, better-than-expected cost efficiencies, improved productivity, and other items."

 

2) Citi upgraded from a Hold to a Buy (presumably due to updated guidance)

 

More here: http://files.shareholder.com/downloads/ABEA-5PAQQ9/1383368253x0x870727/2C272C33-4FE1-4342-A15A-9DE348DF4FBB/Investor_Update_1.19.16_for_website.pdf

[AccentricInv]

What are your guys' thoughts after today's earnings?  It seems that the stock is still getting hit on the capacity growth concerns?  Also what's your view on Ben Baldanza's departure a few months back?  It seems he was a bit of a maverick, and my first impression is that this is a net negative for the company?

 

I'm just starting to dig a little more into this, and today's dip gives me slightly more incentive to do more work on it.

[Guest neiljgsingh]

What are your guys' thoughts after today's earnings?  It seems that the stock is still getting hit on the capacity growth concerns?  Also what's your view on Ben Baldanza's departure a few months back?  It seems he was a bit of a maverick, and my first impression is that this is a net negative for the company?

 

I'm just starting to dig a little more into this, and today's dip gives me slightly more incentive to do more work on it.

 

I was pretty satisfied. Revenue was up nicely, fuel costs have dropped considerably, pre-tax margins and ROIC all where you'd expect them to be. Expansion seems to be going on as planned, and they've started buying a few aircraft instead of only leasing, which should increase D&A and help with the tax bill a bit.

 

I thought Baldanza was great, he clearly believed in the model and defended it better than any of his predecessors. That said, Spirit's brand value did not do well under his watch, which is probably what caused the board to push him out. Unsurprisingly, most people don't respond all that well to their aggressive policies/pricing strategy.

 

Fornaro has said his plan is to slow down the expansion and work on making the flight experience more enjoyable for passengers. The website is a lot more streamlined these days, presumably to try and educate people on their business model before they find out the hard way. The stock has done well since he took over, so I guess the market is fine with this approach.

 

One thing worries me though. SAVE traded up heavily over the last couple weeks on merger rumors with Frontier, the other major ULCC in the US. Back of the envelope numbers put net debt/EBITDA at 4-5x if the deal were to go through, which is obviously scary. This is the kind of stuff that's given airlines a bad rep with investors historically: take on massive leverage for M&A to grow your footprint, and then be forced to declare bankruptcy when there's a terrorist attack, a spike in oil prices, etc. SAVE appealed to me back in 2014 precisely because it had no debt. If the merger were to go through, I'd sell.

[AccentricInv]

What are your guys' thoughts after today's earnings?  It seems that the stock is still getting hit on the capacity growth concerns?  Also what's your view on Ben Baldanza's departure a few months back?  It seems he was a bit of a maverick, and my first impression is that this is a net negative for the company?

 

I'm just starting to dig a little more into this, and today's dip gives me slightly more incentive to do more work on it.

 

One thing worries me though. SAVE traded up heavily over the last couple weeks on merger rumors with Frontier, the other major ULCC in the US. Back of the envelope numbers put net debt/EBITDA at 4-5x if the deal were to go through, which is obviously scary. This is the kind of stuff that's given airlines a bad rep with investors historically: take on massive leverage for M&A to grow your footprint, and then be forced to declare bankruptcy when there's a terrorist attack, a spike in oil prices, etc. SAVE appealed to me back in 2014 precisely because it had no debt. If the merger were to go through, I'd sell.

 

Considering the pending Alaska / Virgin merger though, what do you think are the odds of a Frontier / Spirit combo actually going thru?  I'd presume the regulators are going to be busy with the former for a while, and Spirit will want to see how the industry pricing shakes out post-Virgin before doing a deal of their own?  Also if the market's going to slowly realize the merger may not be for a few years, hopefully we'll get some better prices in the near future?

 

Thanks for the insight, I certainly have some more work to do.

[Gamecock-YT]

What are your guys' thoughts after today's earnings?  It seems that the stock is still getting hit on the capacity growth concerns?  Also what's your view on Ben Baldanza's departure a few months back?  It seems he was a bit of a maverick, and my first impression is that this is a net negative for the company?

 

I'm just starting to dig a little more into this, and today's dip gives me slightly more incentive to do more work on it.

 

One thing worries me though. SAVE traded up heavily over the last couple weeks on merger rumors with Frontier, the other major ULCC in the US. Back of the envelope numbers put net debt/EBITDA at 4-5x if the deal were to go through, which is obviously scary. This is the kind of stuff that's given airlines a bad rep with investors historically: take on massive leverage for M&A to grow your footprint, and then be forced to declare bankruptcy when there's a terrorist attack, a spike in oil prices, etc. SAVE appealed to me back in 2014 precisely because it had no debt. If the merger were to go through, I'd sell.

 

Considering the pending Alaska / Virgin merger though, what do you think are the odds of a Frontier / Spirit combo actually going thru? 

 

very high. Still going to be a ton smaller than the big 3/4. Regulators let them go through but not that 'tiny' thing?

[AccentricInv]

What are your guys' thoughts after today's earnings?  It seems that the stock is still getting hit on the capacity growth concerns?  Also what's your view on Ben Baldanza's departure a few months back?  It seems he was a bit of a maverick, and my first impression is that this is a net negative for the company?

 

I'm just starting to dig a little more into this, and today's dip gives me slightly more incentive to do more work on it.

 

One thing worries me though. SAVE traded up heavily over the last couple weeks on merger rumors with Frontier, the other major ULCC in the US. Back of the envelope numbers put net debt/EBITDA at 4-5x if the deal were to go through, which is obviously scary. This is the kind of stuff that's given airlines a bad rep with investors historically: take on massive leverage for M&A to grow your footprint, and then be forced to declare bankruptcy when there's a terrorist attack, a spike in oil prices, etc. SAVE appealed to me back in 2014 precisely because it had no debt. If the merger were to go through, I'd sell.

 

Considering the pending Alaska / Virgin merger though, what do you think are the odds of a Frontier / Spirit combo actually going thru? 

 

very high. Still going to be a ton smaller than the big 3/4. Regulators let them go through but not that 'tiny' thing?

 

I'm not saying that it won't go thru eventually.  They're wayy too small from an anti-trust perspective.  I'm just saying from a government resources perspective, it may affect the timing (pushing it out from say 2017 to 2020).  Having done merger-arb before and gone thru the related due-diligence process (speaking with govt regulators, the DOJ, etc), I have a deeper appreciation for how resource constrained these govt agencies actually are, and the man-power required to get a deal thru.  I suspect they'll be busy with Alaska-Virgin for a while.

 

Also if I were Spirit, it'd seem I would want to see how the pricing changes post-integration of Virgin.  Two large industry players combining is certainly going to change the game theory of the industry, and would affect how you quantify the synergies in a Spirit-Frontier merger (along with the purchase price).

[Guest neiljgsingh]

 

I'm not saying that it won't go thru eventually.  They're wayy too small from an anti-trust perspective.  I'm just saying from a government resources perspective, it may affect the timing (pushing it out from say 2017 to 2020).  Having done merger-arb before and gone thru the related due-diligence process (speaking with govt regulators, the DOJ, etc), I have a deeper appreciation for how resource constrained these govt agencies actually are, and the man-power required to get a deal thru.  I suspect they'll be busy with Alaska-Virgin for a while.

 

Also if I were Spirit, it'd seem I would want to see how the pricing changes post-integration of Virgin.  Two large industry players combining is certainly going to change the game theory of the industry, and would affect how you quantify the synergies in a Spirit-Frontier merger (along with the purchase price).

 

Agreed that anti-trust will probably not be an issue (although you could technically argue that the combined company will have a monopoly on the ULCC market). No idea on how govt resources would affect the timeframe, but I'm inclined to believe they have the capacity to deal with more than one merger in the same industry at a time. Last year was obviously huge for M&A, so I doubt they're understaffed.

 

As for the pricing stuff, I don't think they'd wait around to see if Virgin/Alaska changes fares. For two reasons: 1–there's not much overlap in the route map (Virgin is largely cross-country, Alaska is... Alaska, Cali, Pacific Northwest; while Spirit is tier-two and three cities and mostly Northeast, Midwest and South, and Frontier is almost entirely Colorado heading east and Midwest and South); 2–Virgin and Alaska are not ULCCs, so their pricing really can't move that much since they're competing mainly with the Big 3 + Southwest (plus their business model has obvious limitations on how low they can drop prices before they become unprofitable).

 

At any rate, this is all speculation. Even though there are obvious synergies for a SAVE/Frontier merger (the route map itself kinda proves this, as well as basically identical business models), the leverage necessary to get the thing done is scary. I'd much rather play the patient investor game with a lightly levered, growing, and extremely profitable company that is proving all the other airlines that ULCCs can not only survive but kill it in the US. What's the rush? Why risk the entire experiment to grow a bit faster? Idk, maybe I'm just tired of seeing companies across so many industries do this and then let everyone down when they eventually implode (VRX, SUNE, the list goes on).

[Guest neiljgsingh]

Apologies for not keeping up with this. Since my last post on Apr. 30, SAVE is up about 8% compared to the Dow up 4%. Closest comp ALGT is down 8%, while "low-cost" LUV and JBLU are down 3% and 6% respectively. The Big 4 are all down with the exception of UAL.

 

Hard to say why SAVE has outperformed, but it might be due to the rebound in oil. All things equal, SAVE should be able to offer more competitive rates when oil is higher as the other airlines have no choice but to raise fares fairly quickly. Since the delta between SAVEs prices and, say, the Big 4's is pretty large, SAVE should theoretically have the flexibility to read the tea leaves on oil for a bit longer before having to change fares.

 

An indication of this is that May and June, rebound months for oil, supported roughly 25% YoY increases in SAVE's RPMs without price increases. On the other hand, JBLU and DAL felt the heat and raised fares on one-way tickets, and basically all the other airlines followed suit. This flexibility should serve SAVE well moving forward regardless of whether or not the vol in oil prices continues. (Sources: http://www.investors.com/news/united-american-hawaiian-make-quick-ascent-amid-airline-rally/ and http://www.usatoday.com/story/money/personalfinance/2016/05/03/southwest-cuts-airfares-delta-lockstep/83882530/).

 

Wondering if anyone has other thoughts on oil, SAVE, or airlines more generally.

[Gamecock-YT]

Apologies for not keeping up with this. Since my last post on Apr. 30, SAVE is up about 8% compared to the Dow up 4%. Closest comp ALGT is down 8%, while "low-cost" LUV and JBLU are down 3% and 6% respectively. The Big 4 are all down with the exception of UAL.

 

Hard to say why SAVE has outperformed, but it might be due to the rebound in oil. All things equal, SAVE should be able to offer more competitive rates when oil is higher as the other airlines have no choice but to raise fares fairly quickly. Since the delta between SAVEs prices and, say, the Big 4's is pretty large, SAVE should theoretically have the flexibility to read the tea leaves on oil for a bit longer before having to change fares.

 

An indication of this is that May and June, rebound months for oil, supported roughly 25% YoY increases in SAVE's RPMs without price increases. On the other hand, JBLU and DAL felt the heat and raised fares on one-way tickets, and basically all the other airlines followed suit. This flexibility should serve SAVE well moving forward regardless of whether or not the vol in oil prices continues. (Sources: http://www.investors.com/news/united-american-hawaiian-make-quick-ascent-amid-airline-rally/ and http://www.usatoday.com/story/money/personalfinance/2016/05/03/southwest-cuts-airfares-delta-lockstep/83882530/).

airlines more generally.

 

Will end badly, as usual. The unions are wanting a larger piece of the pie and you are starting to see the conflicts coming to a head. Capacity is still growing, though airlines are 'moderating' said growth. You've seen Spirit encroach on some of the legacy hubs, starting fare wars. Things will probably be ok as long as oil stays low, but once it ramps up the goose is cooked.

[kab60]

Sooo, time has passed and here we are again. Why is this not a screaming buy? They've been hit by pilot shortage, discussions with unions dragging out etc., but in the long run - higher wages or not - they're still the cheapest game in town,  no? I understand not wanting to buy airlines, and more so if one expects a recession, but usually it's a decent bet to buy the low cost producer. What's holding people back?

[rogermunibond]

The guy to watch is Bill Franke in the ULCC space.  I don't think he's involved in SAVE.  His firm Indigo Partners, acquired Frontier and looks poised to grow it into a ULCC competitor.  Obviously, there'd be nice synergies to merge the two but that's not happening.  Indigo's deal with Airbus means they don't plan on merging soon IMO.  They put an IPO on hold but expect to see IPO news heat up again in 2018.

 

https://www.cnbc.com/2017/11/16/bill-franke-calls-flyers-teenage-spoiled-brats-after-airbus-deal.html

[mrholty]

The guy to watch is Bill Franke in the ULCC space.  I don't think he's involved in SAVE.  His firm Indigo Partners, acquired Frontier and looks poised to grow it into a ULCC competitor.  Obviously, there'd be nice synergies to merge the two but that's not happening.  Indigo's deal with Airbus means they don't plan on merging soon IMO.  They put an IPO on hold but expect to see IPO news heat up again in 2018.

 

https://www.cnbc.com/2017/11/16/bill-franke-calls-flyers-teenage-spoiled-brats-after-airbus-deal.html

 

Um, the article you stated that he is involved with SAVE.

IIRC he has 2 or more seats on SAVE's board and due to a disagreement fired Ben Baldanza and put in the guy who was the former AirTran CEO.

I'd expect them to merge evenutally.

[rogermunibond]

I believe they are mistaken.  Franke resigned from the board in 2013.  Indigo Florida sold all the shares it held.

 

https://www.sec.gov/Archives/edgar/data/1498710/000119312513317237/d577765dsc13da.htm

 

In fact Franke wanted SAVE to buy Frontier in 2013, but the board resisted and he bought it instead through Indigo Partners

 

https://www.forbes.com/sites/kathryncreedy/2016/01/05/analysis-baldanzas-departure-from-spirit-airlines-may-signal-ulcc-consolidation/#6842b91c5d72

[JayGatsby]

Is there anything helping the United/Delta/American trifecta keep the startup airlines at bay from a real estate / terminal perspective, particularly on the coasts? If I remember right, one of the things helping BA against Virgin back in the day was BA controlled the gates at Heathrow. One thing helping Frontier is DIA was built on a massive plot of land 40 minutes from downtown (for Denver that's quite far). The airport basically has unlimited room to expand and Frontier is taking advantage of that. That requires landing space on the other end as well though.

[rb]

Is there anything helping the United/Delta/American trifecta keep the startup airlines at bay from a real estate / terminal perspective, particularly on the coasts? If I remember right, one of the things helping BA against Virgin back in the day was BA controlled the gates at Heathrow. One thing helping Frontier is DIA was built on a massive plot of land 40 minutes from downtown (for Denver that's quite far). The airport basically has unlimited room to expand and Frontier is taking advantage of that. That requires landing space on the other end as well though.

Airports can actually handle a lot more than people think.

 

Denver is a sprawled out monster with 6 runways - but let's call them 4. In 2016 it handled 58 million passengers and 572,000 aircraft movements. It can do a lot more. But let's take a busy coastal airport. LAX has 4 runways and in 2016 it handled 81 million passengers and 697,000 aircraft movements.

 

Contrast that with Gatwick. It has one runway and in 2016 it handled 43 million passengers and 281,000 aircraft movements. And Gatwick itself can handle more. Gatwick while busy can handle more. Its real bottleneck is airspace congestion over London.

[Gamecock-YT]

Is there anything helping the United/Delta/American trifecta keep the startup airlines at bay from a real estate / terminal perspective, particularly on the coasts? If I remember right, one of the things helping BA against Virgin back in the day was BA controlled the gates at Heathrow. One thing helping Frontier is DIA was built on a massive plot of land 40 minutes from downtown (for Denver that's quite far). The airport basically has unlimited room to expand and Frontier is taking advantage of that. That requires landing space on the other end as well though.

 

They're called slots (as in landing slots). The economist had an article in the issue this week.

[kab60]

Anyone getting interested again? I didn't participate in any of the other round trips but bought a smallish position today.

[Stuart D]

I just had a quick read through the this thread & some of SAVE's financials.

 

Looks as though they have grown a lot since the last round of discussion. CapEx has exceeded depreciation by $100's of millions for each of the last 4 years. Do you know if the company is planning to keep their foot on the gas (i.e. growth) pedal? or are they now looking to gush cash?

 

 

[kab60]

They still have a large orderbook for 19, 20 and 21, so FCF will stay negative for the forseeable future. Which is ofc fine if returns are attractive. They guide for mid DD operating margin long term so it should be accretitive. My investment is pretty high level. They're a low cost provider and fill an important niche and have generally generated good returns. Growth runway should be good, so it's really about execution, and that shouldn't require a PHD. It's an Airline so obviously cyclical but who knows where we're going... Not that it gets valued like this, but it actually trades below BV which is mostly planes.

[Foreign Tuffett]

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.