If Spirit's fees are so bad, why is the stock up 91%?

The airliner is leading a sector in which most major players' shares gained at least 30% this year.

By TheStreet Staff Jul 18, 2013 11:58AM

money, plane, airplane, cash, hand, travelBy Ted Reed


The first half of 2013 has been a good time for airline stocks, but it's been a great time for shares of Spirit (SAVE).


Spirit's stock has gained 91% through Wednesday to lead the sector in which most big carriers show gains above 30%.


Spirit often makes news for the wrong reasons: Its high fees invite coverage from a segment of the media that seeks to attract eyeballs by displaying outrage. For instance, one recent TV story was titled, "Five Outrageous Spirit Airlines Fees," while another was called, "Spirit Airlines Criticized for Charging Customers 70 Different Fees."


Perhaps it's a benefit that Spirit shares come at an all-in, clearly defined price -- at Wednesday's close they were at $33.87.


Nearly every airline has a good story to tell this year, and not just because of the industry backdrop of rising demand, diminished capacity, rational growth and newly found fee revenue. Delta (DAL), leading the industry resurgence, is up 68%. US Airways (LCC) is up 37% on merger expectations, and United (UAL) is up 44% as it is recovering from a clumsy operational merger.


Southwest (LUV), which quadrupled its dividend, is up 33%. Alaska Airlines (ALK), which follows Wall Street's playbook chapter by chapter, is up 43% (TheStreet).


As for Spirit, it keeps cost low, pushes the envelope of revenue sources and keeps growing profitably. The carrier plans to grow about 22% this year and 15% to 20% over the next several years.


Avondale Partners analyst Fred Lowrance has an "outperform" rating on the stock and a $37 price target. On Tuesday, he raised his second-quarter earnings estimate to 62 cents a share, in line with consensus from analysts surveyed by Thomson Reuters. Spirit will report earnings next Wednesday.


"With its unbundled fare, ultra-low cost model, Spirit is able to profitably offer significantly lower fares than its competition could possibly match for any extended period of time," Lowrance wrote. "As such, Spirit stimulates demand, principally among leisure travelers who also tend to opt-in for multiple high margin ancillary product offerings.


"As an airline with a truly unique product, we believe the number of addressable markets and route pairs is much larger than Spirit's current network -- supporting profitable growth for many years to come."


Lowrance noted that Spirit trades at a 12% discount to Allegiant (ALGT), its closest competitor, based on full-year 2014 earnings per share.


However, Wolfe Research analyst Hunter Keay worries that shares may have peaked. "Spirit continues to execute well above peers, but sentiment is as bullish as it has ever been in our view," Keay wrote in a recent report. "We caution that Spirit has had slip-ups in the past, and the risk/reward of Spirit's current valuation makes it hard for us to justify an outperform rating at this point. We would become more interested on a pullback."


In 2012, between Sept. 12 and Sept. 18, Spirit shares lost 20% after the carrier reported lower-than-expected revenue per available seat mile in August, raising doubts about the business model. "Sentiment in the name now feels even better than it did in the first half of 2012 before the stock declined," Keay wrote. Any potential hiccup could be exacerbated given the still somewhat unproven nature of the business model."


Another troubling note: While the assumption is that Spirit passengers are happy with the airline's peculiarities, they seem to complain quite a bit. In May, according to the U.S. Transportation Department, Spirit had 80 customer complaints, the third highest total, even though Spirit is the 11th largest airline. Top five for complaints included United with149, American with 136, US Airways with 62, and Delta with 55.


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5Comments
Jul 18, 2013 5:13PM
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I for one would never fly spirit..... their model just flat pisses me off so I would rather pay a couple more bucks to NOT deal with them at all. I think they will eventually prove to be a flash in the pan or be the "Greyhound bus" of the airline industry which will exclude all business travelers
Jul 18, 2013 6:26PM
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As long as you know what your getting. ANY delays and your stuck with THEM! No agreements with any other airlines.
Jul 22, 2013 2:19PM
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The stock is up because how poorly a corporation treats its customers is inverse to the stock price because treating people like a resource to exploit usually means savings.
Jul 18, 2013 5:56PM
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I have flown Spirit a few times and if you read the fine print and know how to work their system, you can fly really cheap.  You have to know how their baggage fees work and what the weight and size limits are and you have to purchase your bags ahead of time.  For a smart consumer, Spirit can be a great deal.  I recently flew my entire family of five from Dallas to Denver and back for less than $700, including luggage fees.
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