Spirit also charges for food and beverages, implements ticket change and cancellation fees, as well as a controversial passenger usage fee – which charges $9 to $17 for all tickets not purchased at airport ticket counters – to boost its ancillary revenue.
Although these fees have been unpopular with travelers, they substantially boosted the company’s bottom line — $139.5 million, or 42.5%, of its fourth quarter revenue was reported as “non-ticket operating revenues,” most of which came from these ancillary fees – a 33.3% increase from the prior year quarter. For the full year, non-ticket operating revenues rose 40.4% to $535.6 million.
A weak start to the year?
Spirit’s revenue passenger miles rose 18.1%, and its available seat miles rose 20.8% in February compared to the previous year. However, its passenger load factor – used to measure an airline’s ability to utilize the total capacity of its aircraft – dropped 2 percentage points to 83.2%. In other words, although individual passengers paid more, the average number of passengers per flight dropped. Total recorded departures also rose 15.3% from 5,582 to 6,436.
CEO Ben Baldanza remained optimistic regarding Spirits’ growth prospects in March, stating, “We believe the strength in demand we are experiencing in March will fully offset the load factor decline experienced in February, which was primarily driven by Northeast schools canceling their winter break.”
The Foolish Fundamentals
We should also evaluate Spirit’s fundamental performance against industry rivals JetBlue Airways Corporation (NASDAQ:JBLU), Ryanair Holdings plc (ADR) (NASDAQ:RYAAY), and Southwest.
| Mkt. Cap | Forward P/E | Price to Sales (ttm) | Return on Equity (ttm) | Debt to Equity | Profit Margin | |
| Spirit Airlines | $1.75 billion | 10.00 | 1.30 | 20.67% | No debt | 8.23% |
| JetBlue Airways | $1.91 billion | 9.61 | 0.37 | 7.02% | 151.01 | 2.57% |
| Ryanair Holdings | $11.48 billion | 13.23 | 1.19 | 18.99% | 111.23 | 12.54% |
| Southwest Airlines | $9.06 billion | 10.38 | 0.53 | 6.07% | 45.11 | 2.46% |
| Advantage | JetBlue | JetBlue | Spirit | Spirit | Ryanair |
Source: Yahoo Finance, March 14
Both Spirit and Ryanair, which are more heavily dependent on ancillary fees, have stronger margins and better return on equity than JetBlue Airways Corporation (NASDAQ:JBLU) or Southwest, which charge fewer extra fees.
Compared to Ryanair Holdings plc (ADR) (NASDAQ:RYAAY), Spirit has an important strength – no debt. That clean balance sheet will make it much easier to fulfill its plans to expand its fleet and routes.
Those positive catalysts also contribute to Spirit’s higher valuation. But do Spirit’s top and bottom line growth justify its higher P/E and P/S multiples?
Although Spirit’s top line growth has easily outpaced its rivals over the past 12, its bottom line growth has lagged. Southwest, on the other hand, exhibits the opposite problem – rising earnings along with poor revenue growth.
However, growth percentages don’t accurately reflect the company’s earnings per share. On an earnings per share basis, Spirit Airlines’ $1.49 per share is higher than Southwest’s $0.56 and JetBlue’s $0.39, but lower than Ryanair’s $2.76 per share. This indicates that Spirit Airlines is right to follow Ryanair’s business model of offering lower fares paired with high ancillary fees.
The Bottom Line
Spirit Airlines deserves to trade at a premium to its rivals. The company operates efficient flights with higher seat counts and longer operating hours. It strategically grows its fleet and spreads its routes at a steady, sustainable pace. Ancillary fees will keep it profitable if oil prices rise and traveler demand wanes, giving it an edge over its rivals. Thanks to all these positive growth factors, I think it’s safe to say that Spirit Airlines will soar in 2013 and beyond.
The article Will This Airline Soar in 2013? originally appeared on Fool.com and is written by Leo Sun.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
