Despite this rapid growth, Spirit has also been one of the most profitable airlines in the country; the company has actually been improving its already-stellar pre-tax margin recently. Last month, Consumer Reports ranked Spirit at the bottom of the airline industry in terms of customer service, but passengers continue to flock to the airline because of its rock-bottom fares.
With revenue and earnings consistently increasing, Spirit Airlines Incorporated (NASDAQ:SAVE) ordered 20 new Airbus A321 aircraft at last week’s Paris Air Show to meet the significant untapped demand for its services. The company also upgraded 10 of its Airbus A320 aircraft on order to the larger A321 model. This order signals that management intends for Spirit to continue its rapid growth for the foreseeable future. As the company expands, it could become an increasingly potent threat to higher-priced competitors.
Rapid growth to continue
Spirit Airlines Incorporated (NASDAQ:SAVE) currently operates a fleet of 50 Airbus aircraft, consisting of 29 A319s seating 145 passengers, 19 A320s seating 178 passengers, and two A321s seating 218 passengers. All three models are part of the A320 aircraft “family,” which means that they have a similar design and a common cockpit. This allows Spirit to deploy planes based on the level of demand in each market while avoiding much of the crew scheduling and maintenance complexity that comes from flying different types of aircraft.
A Spirit Airlines A320 (courtesy of Spirit Airlines).
As of the end of 2012, Spirit Airlines Incorporated (NASDAQ:SAVE) operated 45 airplanes and planned to grow its fleet to 78 planes by the end of 2016. However, the company was scheduled to see fleet growth taper off to just two aircraft per year in 2017 and 2018 before accelerating again at the end of the decade.
Last week’s order allows Spirit to grow capacity by 15% or more per year (on average) for the next five years. Spirit executives have frequently stated that they see ample growth opportunities ahead, with more than 400 potentially viable markets today. Even with all of these aircraft on order, the company will be able to satisfy just a small portion of that demand.
The choice of A321 aircraft is also a testament to management’s confidence in the robust demand for Spirit’s low-fare, no-frills product. Whereas the majority of Spirit’s planes today are A319s seating 145 passengers, the A321s are 50% larger, with 218 seats. Clearly, Spirit executives think that they could fill more seats in many markets if the company had additional capacity.
A competitive threat
For the most part, Spirit Airlines Incorporated (NASDAQ:SAVE) has been successful by flying under the radar of the major carriers. It is still a very small carrier compared to the major airlines: AMR Corp (OTCBB:AAMRQ), Delta Air Lines, Inc. (NYSE:DAL), Southwest Airlines Co. (NYSE:LUV), and United Continental Holdings Inc (NYSE:UA). Moreover, it generally appeals to a different type of customer than those carriers: one who is extremely price-sensitive.
Many of Spirit’s customers would not fly at all if they didn’t have access to Spirit’s low fares. Thus, to some extent Spirit is not competing directly with other airlines for customers. Still, at the margins, there are obviously some fliers who choose Spirit because it is available but would pay more for a ticket on one of the major airlines if it were the only option.
As Spirit continues to expand rapidly, this indirect competition will increasingly put pressure on the major carriers. Even network airlines like American, United Continental Holdings Inc (NYSE:UA), and Delta Air Lines, Inc. (NYSE:DAL) — which primarily focus on serving business travelers — need to fill the “back of the plane” with price-sensitive leisure customers. For most of these airlines, losing just two or three customers on each flight could be the difference between earning more than the cost of capital or not.
Foolish bottom line
Spirit Airlines Incorporated (NASDAQ:SAVE)’s order last week signals that the company intends to grow rapidly for the foreseeable future. Not only will the carrier add planes to its fleet, but the new planes will also have more seats than the A319s and A320s that make up the backbone of Spirit’s current fleet. Given Spirit’s solid profitability, investors should be happy to see that the company will keep growing rapidly.
So far, Spirit has not presented a severe threat to established carriers because it still has a very small market share and primarily targets customers who could not otherwise afford to fly a traditional carrier. However, if Spirit Airlines Incorporated (NASDAQ:SAVE) continues to grow rapidly, it could start to siphon a significant amount of business away from other airlines due to its very low fares. All airline sector investors should keep their eyes on Spirit, as this little company could become increasingly disruptive within its industry.
The article Spirit Airlines Wants to Keep Growing originally appeared on Fool.com and is written by Adam Levine-Weinberg.
Adam Levine-Weinberg is short shares of United Continental Holdings (NYSE:UAL) and is long Sept. 2013 $33 puts on United Continental Holdings. The Motley Fool recommends Southwest Airlines and owns shares of Spirit Airlines.
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