Southwest Airlines Co. (LUV), Spirit Airlines Incorporated (SAVE): A Good Ultra-Low Cost Airline Stock

Warren Buffett, in his 1989 letter, said that the cost of thumb sucking had been huge for his shareholders. In the middle of December 2012, I wrote about Spirit Airlines Incorporated (NASDAQ:SAVE) and suggested that the market significantly undervalued the business at that time. Even after writing an article, I sat still and did not buy into this airline. Since then, Spirit Airlines Incorporated (NASDAQ:SAVE) has jumped by nearly 52%, from $17.14 per share to nearly $26 per share, in a period of just more than three months.

Southwest Airlines Co. (NYSE:LUV)

The best performer and the most profitable airline

Since the beginning of 2013, Spirit Airlines could be considered the best performer on the market among its peers including Alaska Air Group, Inc. (NYSE:ALK) and Southwest Airlines Co. (NYSE:LUV).

ALK data byYCharts

While Spirit Airlines Incorporated (NASDAQ:SAVE) have gained nearly 44.4% since the beginning of the year, Alaska Air and Southwest Airlines Co. (NYSE:LUV) advanced by around 38.6% and 20.7%, respectively. I personally think Spirit Airlines deserves that, due to its superior performance over the other two airlines.

Operating margin (%) D/E ROIC (%) EV/EBITDA
Alaska Air Group, Inc. (NYSE:ALK) 12.63 0.6 11.2 4.77
Southwest Airlines Co (NYSE:LUV) 4.72 0.5 3.25 5.57
Spirit Airlines Incorporated (NASDAQ:SAVE) 13.15 N/A 20.7 7.42

Among the three, we can clearly see that Spirit Airlines is the most profitable airline with the highest operating margin of 13.15% and also the highest return on invested capital of more than 20%. Alaska Air ranks second with a 12.63% operating margin and more than 11% return on invested capital. From the table above, investors would not be impressed with the Southwest Airlines’ operating performance. Southwest Airlines Co. (NYSE:LUV) generates the lowest operating margin at 4.72% and also the lowest return on invested capital of only 3.25%. Interestingly, while Alaska Air and Southwest Airlines Co. (NYSE:LUV) employed some debt in their operations, Spirit Airlines has a debt-free operation. As of December 2012, it had $583 million in total stockholders’ equity, $417 million in cash and no debt.