spirit final presentation

Analyst  ReportJune  2016

Announcement

“Ladies  &  Gentlemen,  thank  you  for  traveling  with  Spirit  Airlines.

We  are  now  30,000ft  high.  Please  remain  buckled  up  and  enjoy  the  ride…

Our  friendly  flight  attendant  will  start  serving  you  in  just  a  moment.  “

Open

Spirit  Airlines  – Company  Description  

§ ULCC  Pricing  Model

§ “Bare-­bones”  fares

§ Additional  fees  for  all  other  services

Open

Pricing  Model

§ Unbundled  fares

§ $9  Fare  Club

§ Non-­reclining  seats

§ Additional  charge  for  carry-­on  bags  ($25-­50)  and  check-­in  bags  ($20-­45)

§ Big  Front  Seat  -­ extra  width  and  legroom

Open

Pricing  Model Open

Open

Consumer  dissatisfaction  ranges  from:  

§ outrage  over  the  airline’s  hefty  add-­on  fees

§ no-­exceptions  policy

§ crammed  seating.

OpenUnapologetic  Management

OpenUnapologetic  Management

1st minute

Customer  Satisfaction Open

Top  10  most  hated  companies  in  the  U.S.  1

1 Based  on  24/7  Wall  St  “America’s  most  hated  companies”  as  of  14th January  2016.      2   Based  on  American  Customer  Satisfaction  (ACSI)  Index  2016      

Customer  Satisfaction  Benchmark  by  Airline  Industry  2

Customer  Satisfaction Open

Airline  IndustryTHE  AIRLINE  INDUSTRY  

HELPS  DRIVE  NEARLY

$1.5  TRILLION  INU.S.  ECONOMIC  ACTIVITY COMMERCIAL  AVIATION

HELPS  DRIVE  MORE  THAN  

11  MILLION  JOBS  IN  THE  U.S.

U.S.  GDPCONTRIBUTION  OF    

5%

+122%    REVENUE  GROWTH  IN  2015TOTAL $  18.92  BILLION  NET  INCOME    

696  MIILION  DOMESTIC  PASSANGERS

MORE  THAN  50 Airlines

Forceasted  growth  rate  of  1.9%  CAGR  until  2035  1

1 Based  on  estimation  of  the  Federal  Aviation  Administration  (FAA  Aerospace  Forecast  Fiscal  Years  2015-­35)  

Economic  Environment

0.6% 0.4%

3.2%

5.8%

16.6%

5.32%

13.74%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

12.6%

12.8%

13.0%

13.2%

13.4%

13.6%

13.8%

14.0%

14.2%

2011 2012 2013 2014 2015 2011-­2015Avrg.

U.S.  Airlines S&P  500Sources:  Standard  and  Poor’s  (S&P),  Airlines  for  America  (A4A),  Bureau  of  Transportation  Statistics  and  Oliver  Wyman:  Airline  Economic  Analysis

Six  Years  Post-­Recession,  Pre-­Tax  Profit  Margnis  of  U.S.  Carriers  

Open

Competitive  Environment

79.24%

13.52%

7.24%

Big  4 Mid-­tier  /  Hybrids ULCC

Total  Domestic  Market  Share  (RPM)    – Spirit  Peer  Group

We  define  Spirit  Peer  Group  as  follows:  Big  4  =  American,  Delta,  Southwest  &  United<  Mid-­Tier/Hybrids  =  Alaska,  JetBlue,  &  Virgin  America,   ULCCs  =  Allegiant,  Frontier,  &  Spirit

Very   large  carriers  with   that  are   in  a  very  mature   phase  of   their  growth  cycle

Smaller  carriers  than  the   Big  4  trying  to  attract   premium  yields  with   their  product  offerings

Carriers  with  Ultra-­Low  Cost  structures   designed   to  compete   on  the   basis  of  price(price  leader   approach)

• ULCCs’  Share  of  the  U.S.  Domestic  Market  is  expected  to  Increase  Significantly

• INPUT

• https://skift.com/2016/01/14/u-­s-­legacy-­carriers-­vs-­low-­cost-­rivals-­in-­8-­charts/

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Expanding  Markets

§ Spirit  has  the  abilility  to  grow  in  profitable  markets.

§ Just  expanded  our  Latin  American  routes.

§ The  “Spirit  Entry  Effect”  is  real  -­ the  number  of  additional  travelers  after  we  enter  a  market  generally  increases  enough  for  us  achieve  an  85%  or  greater  load  factor  without  taking  share  from  other  carriers.

§ Spirits  untapped  market  is  growing  as  their  cost  structure  improves.  (Lower-­income&Frugal  Flyers)

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Underserved  Market

§ A  Large  base  of  frugal  flyers  looking  for  the  cheapest  base  fair.

§ These  flyers  are  hit  with  a  multitude  of  unexpected  costs  creating  averseness  among  customers.

§ Customer  retainment  has  not  been  well  addressed  with  Spirits  current  operations.

§ Currently,  this  has  not  proved  to  be  a  problem  considering  the  observed  growth  in  Spirits  sales.

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Turning  Point?

§ Slump  in  revenue  growth  in  2015

§ Stock  price  plunged  from  $74  in  early  2015  to  $40  at  year-­end

§ CEO  Ben  Baldanza sacked

Open

“Number  one,  cash  is  king  […]”

Jack  Welch

Financial  Performance Open

Operating  Performance

0%

5%

10%

15%

20%

25%

30%

35%

40%

0  

1,000,000  

2,000,000  

3,000,000  

2011 2012 2013 2014 2015Passenger Non-­ticket Operating  Profit  Margin Sales  Growth Operating  Expenses

Open

Revenue  Distribution

Passenger55%

Non-­ticket45%

Passenger92%

Non-­ticket1%

Special  revenue  adjustment

1%

Other6%

Spirit  Airlines Southwest  Airlines

Open

Sales  Growth

Income  Margins(2015)

37.11%

23.08%25.49%

16.76%

10.87%

22.66%

29.36%

9.13%

3.58%5.12%

6.53%

10.74%

2010-­2011 2011-­2012 2012-­2013 2013-­2014 2014-­2015 Average

Spirit  Airlines Southwest  Airlines

14.81% 11.03%

Open

13.5% 13.2%

17.1%18.4%

23.8%

17.2%

4.4% 3.6%

7.2%

12.0%

20.8%

9.6%

2011 2012 2013 2014 2015 Average

Spirit  Airlines Southwest  Airlines

Operating  Profit  Margins Open

16.5%

11.8%

15.0%14.2%

12.5%14.0%

1.0%2.3%

3.9%

5.8%

10.2%

4.6%

2011 2012 2013 2014 2015 Average

Return  on  Total  Asset  

Spirit  Airlines Southwest  Airlines

Strong  Financial  Performance Open

Investment  in  Flight  Equipment

§ Massive  investments  in  Flight  Equipment  in  2014  &  2015  

§ Southwest  already  has  established  a  much  larger  fleet

Open

§ Why  the  ROA  declines?  

Expansion

PP&E  investment

Balance  Sheet  analyses

Strong  Financial  Performance Open

Short  Term  Solvency

1.95 1.98 1.93 1.97

2.2

0.87 0.810.7 0.61

0.5

2011 2012 2013 2014 2015

Quick  Ratio

Spirit Southwest

CFFO Investing Acitvities Finance  Actitvities

Cash  Flow  Analysis

§ Strong  operative  results  and  high  clash  flow  margin

22.1%

16.3%

10.3%

§ High  capital  expenditures  into  flight  equipment

§ IPO  in  2011  ($170mn.)

§ Nearly  no  changes  in  the  capital  structure  between  2012-­2013

§ Leveraged  finance  with  long-­term  debt  of  14  new  airplanes  2014  ($536mn.)

§ Repurchase  of  common  stock  since  2015  ($112mn.)

§ No  dividend  payments

Cash  Flow  Analysis

343.328 416.816530.631

632.784

803.632

-­800

-­600

-­400

-­200

0

200

400

600

800

1000

2011 2012 2013 2014 2015

CFO Investing  Cash  Flow Finance  Cash  Flow Closing  Cash  Balancein  $k

Conclusion

Market   Profitability Liquidity

§ High  generic  market  growth  and  positive  future  forecast

§ Establishing  of  a  market  niches  due  to  a  unique  pricing  model  and  generating  new  customers  without  taking  away  these  from  existing  airlines  

§ Strong  increase  in  all  operating  KPIs  and  the  ability  of  the  firm  to  generate  cash  from  sales

§ High  growth  potential  due  to  expansion  of  fleet  and  optimization  in  CASM  (Cost  of  available  seats  per  mile)

§ Operating  expenses  are  increasing  at  a  slower  rate  than  sales

§ No  threat  of  short-­term  bankruptcy  

§ Effects  from  long-­term  debt  and  leasing  obligations  in  the  future  on  liquidity  creates  uncertainty

✔ ✔ ✔