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

Ultra-low cost strategy, focusing on non-ticket revenue

Indeed, in order to generate high operating margin, Spirit Airlines Incorporated (NASDAQ:SAVE) has adopted an ultra-low cost strategy for its passengers in 48 airports in different areas including the U.S., the Caribbean and Latin American regions. As Warren Buffett mentioned several decades ago, the airline business is actually a commodity business, where customers rush to airlines, which offer the lowest airfares, regardless of airline brand. Because of the low cost strategy, Spirit Airlines has managed to consistently generate positive net income since 2008, even in the period of high volatility in fuel prices and global economic recession. In the past five years, its net income has grown from $33 million in 2008 to more than $108 million in 2012, marking an incredible annualized growth of 26.8%.

What makes me interested is the huge growth in its non-ticket revenue over time. While its passenger revenue increased from $657.5 million in 2008 to only $782.8 million in 2012, its non-ticket revenue jumped from nearly $130 million to $535.6 million during the same period. Indeed, that is smart strategy to focus on non-ticket revenue growth as Spirit Airlines could reduce its airfares lower.

At $26 per share, Spirit Airlines is worth nearly $1.9 billion on the market. The valuation has moved up significantly higher than when I first wrote bout it, at 7.42 times EV/EBITDA, whereas the EV multiple of Southwest Airlines Co. (NYSE:LUV) is nearly 5.6. Alaska Air has the lowest valuation at only 4.77 times EV/EBITDA.

My Foolish take

Personally, I am still bullish on Spirit Airlines in a long run. If Spirit Airlines kept going forward nicely with its ultra low cost strategy, I would expect to see Spirit Airlines Incorporated (NASDAQ:SAVE) move higher in the next several years. Alaska Air, with a decent operating margin and low valuation, is a decent pick as well.

The article A Good Ultra-Low Cost Airline Stock originally appeared on Fool.com and is written by Anh HOANG.

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