Let’s hear what our customers think! Randi reads the first comment, Nick reads the second, and Kelly reads the last. Back to Sara to jump into the thesis.
While Spirit went public just last May, what we would like to do is present a financial overview looking at current data as well as how Spirit managed to weather the storm through the recession while comparing to other industry competitors. (Cue Dec Q bullet)While this statistic is impressive in and of itself, with respect to margins, we like to evaluate performance over time and not simply as a snapshot. (Cue averaged comparison chart)
The Return on Invested Capital was 17.7% in 2011 which ranks among the top 10 airlines globally. (Cue Figure)To put this in perspective, we have provided Average industry ROIC with respect to Weight Average Cost of Capital. In an industry whose ROIC averages just above 5%, Spirit’s performance stands out among the rest.
Beyond Profit Margins and Return on Invested Capital, Spirit has a strong liquidity position. Stately bluntly, they have cash and are operating without debt. They have demonstrated an ability to grow profitably, which Mark will expand upon shortly while Randi will explain how they manage these financial returns using their ultra low-cost revenue model. Before, Sara will offer industry comparisons.
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Like all companies, Spirit Airlines strives to achieve low-cost operations to gain greater profits. However, Spirit does it just one step better by following an everyday business model designed to target low-cost operations and it is with this model, Spirit is able to develop effected processes that make them an attractive investment. Imbedded within this model are different business segments and strategies and the first one to be discussed is Fleet Operations. Fleet OperationsWhen it comes to plane loyalty, Spirit is all about the utilization of the Airbus A320, which is a single aisle plane with roughly 30 rows of 4. Their dedication to the Airbus A320 continues into their future company goals as they placed an order back on December 31, 2011 for an additional 106 A320 between 2012 and 2021. Spirit significantly improves on their operating costs with the utilization of one style of aircraft. For example, if there were to be a maintenance issue with one plane, all maintenance employees available are able to fix the problem instead of having to locate a subject matter expert. This also assists in the areas of repairs and inventory. Repairs can be completed in an extremely face pace as appropriate training was provided and there should be sufficient inventory as all planes use the exact same parts. Employee EfficiencySpirit employs just over 2,500 employees, including pilots, flight attendants, dispatchers, mechanics, and support staff. Following the fleet description, Spirit is able to have a versatile group of individuals. This is because the employees are trained on A320 processes and they are then able to work on any Spirit flight. This has a positive and direct effect on the operating costs as labor costs is only 20% of the total operating cost for Spirit Airlines. Strategic Distribution and MarketingSpirit Airlines is does not have a strong presence in online search tools so there is a, according to Spirit Airlines annual report, 67.1% of their sales in 2011 came directly from purchases made through their website by consumers looking for cheap flights. Lean Flight PlansSpirit currently houses a small fleet of plans, but they utilize their resources extremely well. This is evident as they configure the cabin to hold 178 passenger seats, while JetBlue maintains 150 passengers per plane. Fitting this many people on the plane allows Spirit to limit the amount of trips between locations. With such a small amount of aircrafts, it is vital that all planes are ready for flights in a timely manner. Having the skilled maintenance workers and the necessary materials, Spirit is able to rapidly fix airplanes. Lean maintenance also includes lean logistics for the airplanes. When combining the flight size and the maintenance abilities, more schedule options are available for customers. What does this mean as an investor? It means maintenance can complete the repairs in an accurate and time efficient manner, the products for repairs will be in stock, and more revenue can be created with the increase in available flights with the seat configuration resulting in low operating costs and high revenues meaning net income will be sufficiently high.
Randi:Spirit customers have to pay for any and all of the additional services they want ranging from carry-on and checked bags, to a bigger seat with more leg room, to advanced seat selection, to in flight snacks and beverages, and more! These are known as non-ticket or ancillary fees. Even though the customers may not be pleased with these ancillary fees, it’s a smart business move by Spirit Airlines. (USE MOUSE TO BRING UP IMAGE 1)There are both revenue AND cost benefits to Spirit’ s strategy. Customers are less price sensitive to ancillary fees than to the base ticket price, and the ancillary fees are less seasonal than base ticket prices. As you can see on the screen, compared to Southwest Airlines and Frontier Airlines, Spirit’s ancillary fees make up 30% of their operating revenue! That’s huge! Additionally, as I mentioned earlier, these non-ticket fees provide cost benefits and economic incentives that drive down the base ticket price. For example, when Spirit began charging fees for carry on and checked bags, that encouraged customers to check fewer bags which, in turn, meant less weight on the plane which allows Spirit to burn less fuel! Less carry on and checked bags also allows passengers to load and unload from the plane faster which promotes faster turn times between flights!Now, I’ll pass it off to Kelly who will talk a bit more about this innovative revenue generation approach!KELLY: (USE MOUSE TO BRING UP IMAGE 2) This unbundling strategy has enabled Spirit to grow the average non-ticket revenue per customer from $5 in 2006 (before they were a ULCC) to $45 in 2011. One may think that Spirit tricks its passengers by hiding these fees. Picture yourself flying from Detroit to Miami, stuck in a cramped seat all the way in the back that is next to a screaming baby and you are just dying for the Pepsi and bag of peanuts you expected an hour ago only to find out that these will cost you money…. Well, too bad. You could have avoided this surprise by checking their website beforehand. All of these additional fees are listed on their official website under “Optional Fees”. (USE MOUSE TO BRING UP IMAGE 3) Ben Baldanza, Spirit’s CEO, addresses the issue of their optional fees by stating, “The people who fly us get it! OK, I don’t get as much legroom, but I saved $40 vs. my other options… You don’t get the same thing at Wal-Mart that you do at Nordstrom’s, right?”. Thus, remember that while you may not want to FLY Spirit, you should BUY their stock! This innovative revenue generation approach is a part of their ULCC business model that has helped Spirit remain profitable over the past several years. REFERENCES FOR THIS PAGE:Gilbertson, D. (2012, February 13). Spirit Fees 'a badge of honor' . USA Today. Retrieved from http://www.lexisnexis.com.proxy1.cl.msu.edu/hottopics/lnacademic/Schrader, A. (2012, February 25). Fees Fatten Spirit Revenue. Denver Post. Retrieved from http://www.lexisnexis.com.proxy1.cl.msu.edu/hottopics/lnacademic/United States Securities and Exchange Commission, (2011). Spirit Airlines, INC. Annual Report (001-35186). Retrieved from website: http://ir.spirit.com/annuals.cfm
Service from DFW began in May of 2011 with 2 routes; Las Vegas and the home base of Ft. Lauderdale, FL. There will be 10 by this May; 14 by June. This is a great example of how Spirit is capitalizing on markets it can quickly gain market share and to leverage that to grow profitably in that segment; they have recognized D/FW where they can expand and liberate customers from high fares, and they are quickly taking advantage of that. This is a great example of Spirits flexibility – they are constantly (daily/weekly/monthly) monitoring all routes and potential routes. Management is very willing to quickly move planes where they are able to recognize growth opportunities Leveraging Brand through $9 fare club, which is paying a yearly fee in order to be able to get some flights for just $9. By having these incentives, they get loyalty from their consumers, loyalty they might not get any other way given the service issues we’ve discussed, its even cheaper for consumers to fly with them than it was before, when Spirit already proved to that consumer that they had the cheapest flight.This growth will eventually be returned to shareholdersTie back to thesis
Spirits financial performance is defying the industry odds. They have a low-cost revenue model and ample growth opportunities as they emerge into new markets and establish new routes.
This is a “Just-in-Case” visual aid. If someone points out that, in general, airlines are terrible industry in which to invest, we need to be prepared to demonstrate that while long term investment is not always advisable, airlines can generate sizeable financial returns.
Satchell, A. (2010, December 22). Spirit airlines:$50 off fare deal . Retrieved from http://blogs.sun-sentinel.com/south-florida-travel/2010/12/22/spirit-airlines50-off-fare-deal/ Nick Giacona, Randi Roehling, Sara Stacharczyk, Kelly Burns, Katie Johnson, Mark Woodiring
Customer Reviews “Don‟t be fooled by „low prices‟! A great airline if you get a “I could‟ve flown on a cheaper discount flight and don‟t“Extremely with American or Copa. The flight disappointed take anything with you. The food and beverage included, and I could‟ve in the bags are you get service, options were poor, andgotten pay for.”You don‟t know if a drink. they even whatSpirit is a rip-off until you check you charge for a cup of water.” in.”Unknown. (n.d.). Skytrax web reviews. Retrieved from
Thesis Don‟t FLY Spirit Airlines, BUY their stock! Invest in Spirit Airlines over other airlines because they have…. : Leading industry returns Ultra Low-Cost Carrier (ULCC) business model Innovative revenue generation Significant growth opportunities
Agenda1. What Proves Spirit‟s Strength?2. How Do They Do It?3. A Final Review (Quiz & Conclusion)
Breakout Financial Performance December Q operating margin of 13.8%/3.9+ YOY (Highest among U.S. coverage)Deutsche Bank. (2012). Spirit. 2012 Detailed stock valuation report [Financial data Available from Thomson Investext Online
Breakout Financial Performance (cont.) After tax ROIC was 17.7% in 2011 (top 10 globally)Deutsche Bank. (2012). Spirit. 2012 Detailed stock valuation report [Financial data Available from Thomson Investext Online
Breakout Financial Performance (cont.) Strong liquidity position – no debt Capacity grew 15% - ability to grow profitably Ultra low cost/distinctive revenue modelDeutsche Bank. (2012). Spirit. 2012 Detailed stock valuation report [Financial data Available from Thomson Investext Online
Comparisons Southwest Delta SpiritQuote media: Dynamic market data solutions. (2012, April 5). Retrieved from http://www.quotemedia.com/results.php?qm_page=15601&qm_symbol=SAVEQuote media: Dynamic market data solutions. (2012, April 5). Retrieved from http://www.quotemedia.com/results.php?qm_page=42974&qm_symbol=DALQuote media: Dynamic market data solutions. (2012, April 5). Retrieved from http://www.quotemedia.com/results.php?qm_page=47226&qm_symbol=LUV
Ultra Low-Cost Business Model Fleet Operations Employee Efficiency • Dedication to Airbus A320 • Versatile flight crew • Addition of 106 new planes between 2012 • Around 20% of operating costs and 2021 • Maintenance, inventory, and repair efficiency Low-Cost Model Strategic Distribution and Marketing Lean Flight Plans • Mainly utilizes Spirit.com for their ticket • Seat configuration with 178 passengers sales • Short ground times • Only used 0.2% of total revenue on advertising in 2011United States Securities and Exchange Commission, (2011). Spirit Airlines, Inc. Annual Report (001-35186). Retrieved from website: http://ir.spirit.com/annuals.cfm
Innovative Revenue Generation Operating revenue from ancillary fees Southwest – 6.2% Frontier – 7% $50 $40 Spirit – 30% $30 $20 $45 $10 “The people who fly us get it! OK, I $0 $5 don’t get as much leg room, but I saved $40 vs. my other options. You 2006 2011 don’t get the same thing at Wal-Mart Non-ticket revenue per that you do at Nordstrom’s, right?” passenger - CEO of Spirit, Ben Baldanza United States Securities and Exchange Commission, (2011). Spirit Airlines, Inc. Annual Report (001-35186). Retrieved from website: http://ir.spirit.com/annuals.cfmGilbertson, D. (2012, February 13). Spirit Fees a badge of honor . USA Today. Retrieved from Schrader, A. (2012, February 25). Fees Fatten Spirit Revenue. Denver Post. Retrieved fromhttp://www.lexisnexis.com.proxy1.cl.msu.edu/hottopics/lnacademic/ http://www.lexisnexis.com.proxy1.cl.msu.edu/hottopics/lnacademic/
Growth DFW service Leverage Brand to increases Grow Revenue in Detroit underserved and Toluca(Mexico City) overpriced markets San Diego Flexibility “…liberating Customers from high fares…”Maxon, Terry. Dallas Morning News. “Spirit to expand D/FW Service with flights to Detroit, San Diego, Toluca.” 4 April, 2012. Spirit Airlines Annual Report
Pop Quiz – Question 1 Compared to the rest of the airline industry, Spirit‟s ROIC is: A. Less than industry ROIC B. Consistent with industry ROIC C. Greater than industry ROIC Considerably greater than the industry average *17.7% in 2011 vs. 4.9% global industry averageReturn on invested capital (ROIC) and weighted average cost of capital (WACC) from IATA (1993-2004) and Deutsche Bank (for 2010-2012 estimates)
Pop Quiz – Question 2 How much revenue per passenger did Spirit generate last year (2011) through their non- ticket fees/ancillary fees? A. $5.00 B. $10.00 C. $45.00 *Answer: C, $45.00/passengerUnited States Securities and Exchange Commission, (2011). Spirit Airlines, Inc. Annual Report (001-35186). Retrieved from website:http://ir.spirit.com/annuals.cfm
Pop Quiz – Question 3 While Spirit debuted at Dallas/Fort Worth with 2 routes, how many will be in place by May, 2012? A. 4 B. 8 C. 10 *Answer: C, 10 routesMaxon, Terry. Dallas Morning News. “Spirit to expand D/FW Service with flights to Detroit, San Diego, Toluca.” 4 April, 2012. Spirit Airlines Annual Report
A Final Review Based on industry returns, a low-cost business model, innovative revenue generation and significant growth opportunities, we recommend that you invest in Spirit Airlines. Don‟t FLY it, BUY it!
Spirit is the Exception “The lesson here is that you dont have to be afraid of terrible industries. Just think of moves of these types as six-to-12-month trades - as opposed to longer-term investments. It takes a lot of confidence, experience and nimbleness, but a bad industry can still deliver good (and sometimes great) returns.” -Lucas Kent Lucas, Taipan Dailyhttp://moneymorning.com/2010/05/07/airline-industry/