The top ten US carriers, excluding American Airlines and its shirt-burning Chapter 11 entrance and $2bn loss, performed well in 2011with revenue on the main increasing by over 10% while fuel costs saw an aggregate average cost increase of over 13%. The message is that although fuel increases are hitting the airlines in the USA, on the main the carriers have adapted well. Ticket price increases have, until the final calendar quarter of 2011, kept pace with cost increases ensuring margins held. But investors want to know if this is going to continue through 2012. The very short answer is: There is only one way to invest in an airline and that is long and if you are looking for this sort of action then you would do well to look no further than Spirit Airlines.
Spirit Airlines looks a good bet for a long play. Current share price is $18.22 with a target price of $30.00. Think of Spirit and one usually remembers things like; cramped flights and endless complaints about service. This is the mainstay for any US low cost operator but if you book a ticket at the same price as a Greyhound bus then what do you expect. The fact is that Spirit’s flights are full and the airline is profitable. Spirit stock offers investors 32% to 58% gains over the next two years driven by continued expansion and aircraft deliveries that will increase the size of their fleet by 19% in 2012 and 16% in 2013. According to the February 2nd company presentation, Spirit’s breakeven fare per passenger was $62.96. This compares to nearly $97 for Southwest Airlines and $133 for JetBlue. Cost per available seat mile (CASM) is much lower too at $9.73 whereas Southwest’s is $10.43 and JetBlue’s is $12.13.
The reason why Spirit is doing well is clear: High density seating configuration is the key. Spirit configures its A320 fleet with 178 seats compared with 150 seat average. The other, as we all know full well, is average daily aircraft utilization. Spirit average utilization is 12.8 hrs/day compared to 11.7 at JetBlue and 10.9 at Southwest. Thus, it is turning aircraft faster.
The bottom line is this: Spirit is a 2011 IPO so it's new to the investment market and for this reason it remains undervalued, as Spirit executives get out and about to put their message to investors so their price will start to move and the moment will be lost. But there is a short term downside to move through first during 2012 and that is due to oil prices.
Brent crude broke through the $121 mark yesterday as Iran banned exports to France and the UK and China fiddled with its markets again in an attempt to boost growth. Most analysts now say the $127 a barrel mark will be broken very soon. It is also looking increasingly likely that Israel is more or less ready to begin bombing Iran if UN talks go ill. Any wild movements in oil will be spikes but we can now argue that $115-120 a barrel is the new bottom line for 2012 averages. This means that another round of prices increases are required in the USA by the airlines. This seems likely and possible. The airlines have made fare increases stick thus far and it is important to note that in all this the US public have just come to the conclusion that Southwest Airlines is their favourite brand!
In a recent survey, the opposite sexes chose budget firm Southwest Airlines as the American company they both desired the most. Using the new buzzword of neuro-marketing, the study analysed people's relationships with the country's biggest brands on a conscious and, crucially, a subconscious level. The Dallas-based low-cost airline came out top for both men and women because they offered accessible, affordable memories, according to the survey conducted for Forbes.
Now that, surely, provides room for another round of air fare increases does it not?