Was I Wrong to Doubt This Company?

At the beginning of 2012, I called out ultra-low-cost Spirit Airlines as the company I would be avoiding at all costs. Well, since then, the company's stock is up 27%, besting the S&P 500 by about 5 percentage points.

Today alone, Spirit's stock is up as much as 7% on earnings being released. Read below to see if I've changed my tune about the airline, and at the end, I'll offer access to a special free report on our top stock for 2013 here at the Motley Fool.

First, just the facts
Coming into the company's fourth-quarter earnings announcement, expectations were relatively low. Hurricane Sandy had wreaked havoc on a number of different airlines, and both revenue and earnings were expected to drop from previous estimates as a result.


Spirit came out this morning and reported a $0.03 beat on earnings, and healthy revenue growth of almost 20%. That, combined with the fact that the company is rapidly expanding its footprint across North and Central America -- adding 27 new routes between October 2012 and June 2013 -- meant investors were more than happy to buy up shares today.

I haven't liked this model from the start
There's no doubt that ever since the turn of the millennium, airlines have been doing all they can to increase revenue. This has primarily taken the form of fewer on-flight amenities, and charges for checked baggage.

But Spirit has taken "optional fees" to a ridiculous level. On a round-trip flight, you could pay up to $20 just for an agent to print your boarding passes; $200 for two carry-on bags; $200 for two checked bags; $3 for a glass of water... the list goes on and on. See if you can figure it all out at their fees website.

Some airlines have followed suit: Allegiant Air now charges for carry-ons, and last year, Delta significantly increased its fees for checked baggage. But no one -- and I speak from experience using the airline -- comes even close to what Spirit does.

Digging deeper into earnings
My original thesis for betting against the company -- on my All-Star CAPS profile -- was pretty simple: Though the company appears to be growing revenues by leaps and bounds, I simply didn't believe there were enough travelers out there who are willing to put up with Spirit's nickel-and-diming to provide a solid stream of repeat customers.

Although the company said many times in the earnings release that Hurricane Sandy had a significant impact on results, I also believe that such incidents are commonplace in the airline industry, and could easily continue into the foreseeable future.

First things first: Spirit increased revenue by 19.8% during the fourth quarter of 2012. Not bad at all. But consider that during the quarter, available seat miles increased by 28.3% -- meaning that the revenue growth was likely due to more -- and longer -- flights being available than to organic growth in existing markets.

In fact, the amount of money the company took in for every available seat mile shrunk by 6.6% from the same time last year.

But probably most concerning is this: Where once Spirit made just over 10% of its money from all its add-on costs, the airline now counts on such charges for 42.5% of its revenue.

To me, it seems a possibly dangerous paradigm is converging. Some results point to the fact that in markets where Spirit has a presence, customers are starting to get wise to Spirit's low publicized ticket fees, and high actual fees.

I would guess that as long as Spirit is able to open in new markets -- which, to be honest, could last for years -- it will be able to grow revenues. But customers in established markets, I believe, will eventually decline and plateau, as one's experience with the airline affects future decisions about which airline to fly.

I think Spirit's model is a creative experiment in pricing, but I simply can't see it playing out well in 10 years.

I think you'd be better served with other choices for your money.  In fact, I think it'd be worthwhile to check out the No. 1 stock for the next year, as chosen by The Motley Fool's chief investment officer. Find out which stock it is in the brand-new free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.

The article Was I Wrong to Doubt This Company? originally appeared on Fool.com.

Fool contributor Brian Stoffel has no position in any stocks mentioned. The Motley Fool owns shares of Spirit Airlines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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