No real threat
Indigo’s interest in Frontier over Spirit suggests that it sees more opportunity to create value there, but that is a testament to Frontier’s upside rather than a “warning sign” for other Spirit shareholders. That said, is it possible that Frontier — under Franke’s leadership — could become a serious threat to Spirit as it completes its transition to the ULCC model? Some analysts have recently expressed concern that Franke could use his knowledge of Spirit’s business to make Frontier a formidable competitor.
There are two important reasons to believe that Spirit shareholders should not be concerned about the competitive threat from Frontier. First, as noted above, Spirit still has a significant cost advantage over Frontier. Spirit is continuing to find ways to reduce it costs, such as shifting its fleet mix toward Airbus A320s and A321s rather than A319s. The A320s are more than 20% bigger in terms of seating capacity in Spirit’s typical configuration, allowing Spirit to spread its fixed costs over more seats. The A321s are even larger, offering additional cost benefits.
Spirit’s cost initiatives create a moving target for Frontier, meaning that it will take Frontier several years to close the cost gap (if it does at all). In the meantime, it would be foolish for Frontier to try to compete directly with Spirit. Indeed, Frontier has been focusing its new route plans on markets without other commercial service, including Wilmington, Del. and Trenton, N.J.
Second, the market opportunity for Spirit and Frontier is very large, meaning that the two should be able to grow for many years without stepping on each others’ toes. Earlier this year, Spirit’s management team estimated that there were more than 400 potential new route opportunities that could produce an operating margin of at least 14% for the carrier. That easily swamps Spirit’s ability to grow for the next five or even 10 years. In other words, Spirit could keep growing 15%-20% a year through the end of the decade even with Frontier as a direct competitor.
Foolish conclusion
Spirit Airlines Incorporated (NASDAQ:SAVE) has been one of the most successful airlines in the U.S. in the last few years, and that’s driven its stock price up by more than 100% since its IPO in 2011. This week’s pullback presents a good opportunity for investors who have missed out on Spirit’s run so far. Spirit’s largest shareholder may be selling, but only because it wants to copy Spirit’s profitable business model at Frontier Airlines.
The article Spirit Airlines’ Biggest Shareholder Is Selling originally appeared on Fool.com and is written by Adam Levine-Weinberg.
Fool contributor Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool owns shares of Spirit Airlines.
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