What Is Driving Spirit Airlines’ Growth?
Spirit Airlines (NYSE: SAVE), an ultra-low-cost carrier, derives its revenue through two sources – Passenger Revenues and Non-Ticket Revenues. Below, we expand on these sources, their historical performance, and our expectations going forward.
- Passenger Revenues are generated by the low base fares that customers pay for travel. The company operates on an unbundled pricing strategy, which allows it to charge lower base fares and gives its passengers the option to choose and pay for the products or services that they want to utilize. This, along with the fact that the company’s aircraft has high-density seating configurations, allows Spirit to maintain a pricing advantage over competitors. Passenger revenue contributes about 51% of Spirit Airlines’ total revenue and saw 13.8% growth in 2017, on account of a 14% increase in traffic and a slight increase in average ticket revenue per passenger flight segment. The carrier also launched service in 36 new markets and added two new destinations to its portfolio. To cater to the needs of growing traffic, Spirit added 17 Airbus single-aisle aircraft, increasing its capacity by 16.1%.
- Non-Ticket Revenues include air travel-related services for baggage, passenger usage fees for bookings via company’s call center or third party vendors, advance seat selection, and other revenues such as itinerary changes, hotel and rental car services, and various loyalty programs. The company also generates revenue from selling advertising space on its website and on its aircraft to third parties. Over the last few years, this business has been the standout performer for the company. The 14.3% revenue growth in 2017 was driven by higher baggage and passenger usage fees. As a result, average non-ticket revenue per passenger segment increased from $51.90 in 2016 to $53 in 2017.
We have created an interactive dashboard analysis that shows Spirit Airlines’ key revenue sources and the expected 2018 performance. You can adjust the revenue drivers to see the impact on the overall revenues, EPS, and price estimate.
Rising Oil Prices Will Likely Boost Spirit Airlines’ Load Factor
Load factor, an operating metric used in the airline industry, is the percentage of total aircraft seats actually occupied on a flight and is arrived at by dividing revenue passenger miles (RPM) by average seat miles (ASM). Spirit’s load factor of 83.2% in 2017 was lower than in previous years, indicating the competitive pricing in the airline industry. Spirit differentiates itself by providing low-cost flights. However, as oil prices were relatively low in 2017, competitors were also able to offer affordable fares, thereby taking away business from Spirit. This may change in 2018. With no indication of a slowdown in oil prices, many competitors will be compelled to increase their fares as their business model, unlike Spirit’s, is based on a bundled pricing strategy. This will likely boost the load factor for Spirit. Furthermore, the carrier has been consistently increasing its capacity and adding new routes, which is likely to continue in the near team. However, some increase in stage length (distance traveled by an aircraft from takeoff to landing) will likely exert some pressure.
Non-Ticket Revenue Will Continue On Its Upward Trend
Spirit operates on an unbundled pricing strategy, which allows it to charge lower base fares and gives its passengers the option to choose and pay for the product or service that they want to utilize. As a result, Spirit generates about 48% of its revenue from non-ticket sources, which can make it somewhat less vulnerable to oil price changes. Furthermore, growth in non-ticket revenues closely corresponds to growth in ticket revenues. The increase in load factor will likely have two implications – increased revenues from air travel related services for baggage and a higher number of advance seat selections (as customers may be more willing to pay for a more comfortable eat). Meanwhile, the company launched bundled services offering late last year. Though the bundled services did well in the first quarter of 2018, it may be tough to gain meaningful market share as it is competing directly with major carriers such as American, Delta, and United Airlines.
Finally, we have a $48 price estimate for Spirit Airlines, which is ahead of the current market price. We expect margins to contract on the back of higher costs. Disagree? Detailed steps to arrive at Spirit Airline’s price estimate are outlined in our interactive dashboard, and you can modify our assumptions to arrive at your own estimate for the carrier.
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