IPO Preview: Spirit Airlines

| About: Spirit Airlines (SAVE)
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Based in Miramar, Florida, Spirit Airlines (proposed ticker: SAVE) is scheduling a $300 million IPO with a market capitalization of $951 million at a price range mid-point of $15 for Wednesday, May 25, 2011. The full IPO calendar includes seven others totaling $3.25 billion.

Summary -- SAVE is a niche airline servicing customers who pay for their own travel. Comparing the March 2011 quarter with the 2010 quarter:
. Revenue was up 27% to $233 million
. Profit was up 12% to $28 million

Valuation-- The closest business model comparison is Allegiant Travel (NASDAQ:ALGT). ALGT operates a low-cost passenger airline marketed to leisure travelers in small cities.

SAVE Valuation Metrics

Annualizing the March quarter for price to earnings the ratios are: SAVE (8); ALGT (13). On a price to book basis SAVE is at a preimum to ALGT, the ratios are; SAVE (2.8); ALGT (2.4). On a price to sales basis the ratios are comparable: SAVE, (1.0), ALGT (1.1).

Both SAVE and ALGT are priced at a premium compared to JetBlue (JBLE), Sky West (NASDAQ:SKYW) and Southwest Airlines (NYSE:LUV). The following ratios respectively are for price to sales, price to earnings, and price to book.

JetBlue Airways: 0.4, 152, 1.1
SkyWest: 0.2, -19, 0.6
Southwest Airlines: 0.8, 459, 1.4

SAVE Valuation Metrics

In the past year ALGT’s stock peaked at $55.63 and is down 16% from the high to $46.79. SAVE is an interesting speculation on the IPO based on the P/E comparison and also on SAVE's growth plan (below).

Business-- SAVE is a low cost airline focused on leisure and VFR (Visiting Friends and Relatives). The target market is customers who pay for their own travel costs.

Non-Ticket Revenue -- Non-ticket revenue is a critical part of SAVE’s business model. Non-ticket revenue per passenger flight segment has grown by 600% since 2006.

Products and Services -- SAVE provides low-fare passenger airline service primarily to leisure and VFR travelers. SAVE offers basic passenger airline service for a low fare combined with other optional travel-related products or services for additional fees.

Fares do not require a minimum stay (e.g., Saturday night stay). Low fares are designed to stimulate demand from price-sensitive leisure and VFR travelers who might not otherwise have flown to destinations, due to the expense or inconvenience involved in traveling there.

In 2010 and the first three months of 2011, SAVE’s average base fare was approximately $77 and $82, respectively, and SAVE regularly offer promotional base fares of $9 or less.

Due to the young age of SAVE’s fleet (approximately 4.0 years on average at March 31, 2011), maintenance expense in 2009, 2010 and in the first three months of 2011 remained relatively low. As the fleet ages, SAVE expects that maintenance costs will increase in absolute terms and as a percentage of revenue

Growth Plan -- SAVE intends to add 33 new A320-family aircraft to a present fleet of 26 A319, seven A320 and two A321 aircraft. The new A320s are configured with 178 passenger seats as compared to 150 passenger seats per plane utilized by some of competitors, including JetBlue Airways.

Industry -- Three main categories of passenger airlines operate in the markets in which SAVE competes: the traditional or legacy network airlines, domestic regional airlines and low-cost carriers.

(1) The passenger airline industry in the United States has been dominated historically by the traditional network carriers, which presently consist of American Airlines, Delta Air Lines, United Airlines and US Airways.

(2) Regional airlines, such as Air Wisconsin, American Eagle, Comair, Horizon, Mesa, Mesaba, Pinnacle, Republic and SkyWest, typically operate smaller aircraft on lower-volume routes than the network airlines and most low-cost airlines.

(3) Low-cost carriers largely developed in the wake of deregulation of the U.S. airline industry in 1978, which permitted competition on many routes for the first time and thereby introduced fare competition on those routes. The largest airlines based in the United States that define themselves as low-cost carriers include: Southwest Airlines, JetBlue Airways, AirTran Airways, Allegiant Travel Company, Frontier Airlines (now owned by Republic Airlines) and Virgin America. Southwest Airlines and AirTran Airways merged in May 2011, but continue to operate as separate carriers.

Use of Proceeds -- SAVE expects to net $276 million from the IPO and intentds to use $124mm to repay debt, $1.6 million for management termination fee and the balance of $150 million for general corporate purposes, including cash reserves, working capital (including termination of the letter of credit facility), sales and marketing activities, general and administrative matters and capital expenditures, including future flight equipment acquisitions

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.