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Spirit Airlines: Lower Occupancy Can Be A Huge Problem

May 05, 2020 9:05 AM ETSpirit Airlines, Inc. (SAVE)26 Comments


  • In my view, Spirit Airlines presents a mixed bag of pros and cons. Today, I add one important item to the latter.
  • While per seat economics have benefited from an environment of high occupancy, margins should suffer from much emptier planes.
  • The combination of high operating and financial leverage likely leading to intense stock price volatility pushes me away from the company.
  • Looking for a helping hand in the market? Members of Storm-Resistant Growth get exclusive ideas and guidance to navigate any climate. Get started today »

I have recently written about Spirit Airlines (NYSE:SAVE), after completing a sector-wide study in which I picked likely winners and losers in the space. In my article, I rated the ultra-low cost carrier stock a "Hold" due to an apparent mixed bag of pros and cons.

On the bullish side of the fence, the bare-bones approach to cost management could help the airline during times of distress, and so could the company's lower exposure to international travel while cross-border traffic is likely to be limited. On the bearish end of the spectrum, Spirit seems too leveraged, just when balance sheet robustness becomes a crucial item to consider in assessing an investment opportunity in the airline space.

Today, I present a more subtle reason not to bet on SAVE during turbulent times: the relatively larger impact of lower occupancy rates.

I have rated the ultra low-cost carrier stock a "hold" due to an apparent mixed bag of pros and cons

(Image Credit: Airbus)

Let's revisit the fundamentals

I will start the discussion by briefly addressing the basic economics of air travel. Operating an airline is costly, and many of the expenses are fixed (or very close to it) on a per flight basis. Think about it: to fly even a fairly empty segment, an air carrier still needs to fill up the tank, compensate the flight crew (US law mandates one flight attendant for every 50 commercial passengers), perform maintenance and pay the airport fees.

Safely carrying as many passengers as possible at once is, in part, what has made the airline industry much more profitable after the mass reorganization wave of large US airlines in the early 2000s. When occupancy rises (i.e., more passengers carried per number of seats available), fixed costs can be better spread across each revenue-generating unit - a friendly synonym for "people on board". Profit maximization, by the way, is largely the reason why we now have what feels like two inches of leg room when

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This article was written by

DM Martins Research profile picture
Tracking Economic Inflection Points To Guide Your Asset Allocation Strategy

Daniel Martins is a Napa, California-based analyst and founder of independent research firm DM Martins Research. The firm's work is centered around building more efficient, easily replicable portfolios that are properly risk-balanced for growth with less downside risk.

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Daniel is the founder and portfolio manager at DM Martins Capital Management LLC. He is a former equity research professional at FBR Capital Markets and Telsey Advisory in New York City and finance analyst at macro hedge fund Bridgewater Associates, where he developed most of his investment management skills earlier in his career. Daniel is also an equity research instructor for Wall Street Prep.

He holds an MBA in Financial Instruments and Markets from New York University's Stern School of Business.

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On Seeking Alpha, DM Martins Research partners with EPB Macro Research, and has collaborated with Risk Research, Inc.

DM Martins Research also manages a small team of writers and editors who publish content on several TheStreet.com channels, including Apple Maven (thestreet.com/apple) and Wall Street Memes (thestreet.com/memestocks).

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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