Was I Wrong to Doubt Spirit Airlines Incorporated (SAVE)?

At the beginning of 2012, I called out ultra-low-cost Spirit Airlines (NASDAQ:SAVE) as the company I would be avoiding at all costs. Well, since then, the company’s stock is up 27%, besting the S&P 500 by about 5 percentage points.

Today alone, Spirit’s stock is up as much as 7% on earnings being released. Read below to see if I’ve changed my tune about the airline, and at the end, I’ll offer access to a special free report on our top stock for 2013 here at the Motley Fool.

Spirit Airlines Incorporated (NASDAQ:SAVE)First, just the facts
Coming into the company’s fourth-quarter earnings announcement, expectations were relatively low. Hurricane Sandy had wreaked havoc on a number of different airlines, and both revenue and earnings were expected to drop from previous estimates as a result.

Spirit came out this morning and reported a $0.03 beat on earnings, and healthy revenue growth of almost 20%. That, combined with the fact that the company is rapidly expanding its footprint across North and Central America — adding 27 new routes between October 2012 and June 2013 – meant investors were more than happy to buy up shares today.

I haven’t liked this model from the start
There’s no doubt that ever since the turn of the millennium, airlines have been doing all they can to increase revenue. This has primarily taken the form of fewer on-flight amenities, and charges for checked baggage.

But Spirit has taken “optional fees” to a ridiculous level. On a round-trip flight, you could pay up to $20 just for an agent to print your boarding passes; $200 for two carry-on bags; $200 for two checked bags; $3 for a glass of water… the list goes on and on. See if you can figure it all out at their fees website.

Some airlines have followed suit: Allegiant (NASDAQ:ALGT) Air now charges for carry-ons, and last year, Delta (NYSE:DAL) significantly increased its fees for checked baggage. But no one — and I speak from experience using the airline — comes even close to what Spirit does.

Digging deeper into earnings
My original thesis for betting against the company — on my All-Star CAPS profile – was pretty simple: Though the company appears to be growing revenues by leaps and bounds, I simply didn’t believe there were enough travelers out there who are willing to put up with Spirit’s nickel-and-diming to provide a solid stream of repeat customers.

Although the company said many times in the earnings release that Hurricane Sandy had a significant impact on results, I also believe that such incidents are commonplace in the airline industry, and could easily continue into the foreseeable future.

First things first: Spirit increased revenue by 19.8% during the fourth quarter of 2012. Not bad at all. But consider that during the quarter, available seat miles increased by 28.3% – meaning that the revenue growth was likely due to more — and longer — flights being available than to organic growth in existing markets.

In fact, the amount of money the company took in for every available seat mile shrunk by 6.6% from the same time last year.

But probably most concerning is this: Where once Spirit made just over 10% of its money from all its add-on costs, the airline now counts on such charges for 42.5% of its revenue.

To me, it seems a possibly dangerous paradigm is converging. Some results point to the fact that in markets where Spirit has a presence, customers are starting to get wise to Spirit’s low publicized ticket fees, and high actual fees.

I would guess that as long as Spirit is able to open in new markets — which, to be honest, could last for years — it will be able to grow revenues. But customers in established markets, I believe, will eventually decline and plateau, as one’s experience with the airline affects future decisions about which airline to fly.

I think Spirit’s model is a creative experiment in pricing, but I simply can’t see it playing out well in 10 years.

The article Was I Wrong to Doubt This Company? originally appeared on Fool.com.

Fool contributor Brian Stoffel has no position in any stocks mentioned. The Motley Fool owns shares of Spirit Airlines.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The Best B-Boy Movies

Most Awesome Hip Hop Documentaries

Foods That Stain Your Teeth

Richest Doctors in the World

The Best Movie Sountracks Ever

The Highest Grossing Musicals on Broadway

The Most Successful Reality TV Stars

Cheapest Cities to Visit in the US

Most Expensive Summer Camps

Most Expensive Animals in the World

Most Expensive Specialty Crops in the World

Movies That Took Ages to Make

The Longest Hollywood Films Ever Made

Most Expensive Concert Stages

The Richest Bands of all Time

10 Most Corrupt Countries 2013 List

10 Countries with the Highest Quality of Life Index

Most Expensive Mattresses in the World

5 Smallest Countries by Land Area

The Ultimate Heartbreak Songs

Richest Teenagers in the World

10 Most Haunted Places in America

10 Best Places to Retire in Florida East Coast

Top 10 Places to See Before You Die

Top 8 Countries in the World Where Justice Prevails

10 Richest States in America

15 Wealthiest Countries in the World

Richest Singers in the World

Most Expensive Tasting Menu in New York City

Most Expensive Baby Items in the World

Most Expensive Hotel Suites in Vegas

Most Expensive Brunch in New York City

Most Expensive Beef Cuts in the World

25 Best Colleges to Get a Job

Top 10 US Supermarkets

The 25 Most Dangerous Cities in the World to Visit

Most Expensive Xbox Games

Top 11 Cities Where Billionaires Live

Top 10 Most Charitable Companies in America

Most Expensive Seafood in the World

The 10 Wildest Conspiracy Theories

The 10 Best Job Markets in the US

Top 10 Accounting Scandals of All Time

The 25 Biggest Cities in the World

Top 10 Best Paying Virtual Jobs

Most Expensive Leather Shoes in the World

Top 6 Things to Buy in March

The 10 Most Stressful Jobs in America – 2014 List

Top 10 Jobs for Introverted People

Top 10 Honeymoon Destinations in the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!