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Overview: Lone Pine Capital's new position in Spirit Airlines

Part 6
Overview: Lone Pine Capital's new position in Spirit Airlines (Part 6 of 7)

Why Spirit Airlines has an aggressive capacity expansion plan

Spirit’s aggressive capacity expansion plan

Lone Pine Capital disclosed a brand new position in Spirit Airlines (SAVE) through a 13G filing this week. According to the filing, the fund owns a 6% stake in the airline company with 4,373,632 shares. During 2013, Spirit Airlines improved its available seat miles (or ASM), which is a key measure of capacity, by 22.2%. It was driven by the growth of its fleet of Airbus single-aisle aircraft from 45 to 54. Spirit added 25 new nonstop routes during the year. For the 1Q14, Spirit said it saw a 21% capacity growth and added on the earnings call that it “estimates for the full year 2014, our capacity growth will be up 17.8% year-over-year versus our previous estimate of up about 17%.”

SAVE capacityEnlarge Graph

For 2015, the management estimates that Spirit’s “capacity will grow around 29% compared with 2014, given the run rate effects from the 11 aircraft delivering in 2014, seven of which delivered in the fourth quarter, along with 14 new aircraft delivering during 2015.” As of March 31, 2014, Spirit had 56 Airbus A320-family aircraft in its fleet comprised of 29 A319s, 25 A320s, and 2 A321s. With the scheduled delivery of 9 A320s during the remainder of 2014, it expects to end 2014 with 65 aircraft in its fleet. Spirit spokesperson DeAnne Gabel said in a news report in April that the company “plans to more than double its fleet from the current 56 aircraft to 143 aircraft by the end of 2021.”

However, the possible capacity expansion will add to the carrier’s cost pressures. It estimated that its costs will increase 2% to 3% for 2Q14 and 1%–2% in 2014.

Additional routes to drive growth

Spirit operated over 17% of its capacity to or from Ft. Lauderdale or Hollywood International Airport (or FLL) during 2013. Besides FLL, it also has operations at Dallas-Fort Worth International Airport, McCarran International Airport serving Las Vegas, Chicago O’Hare International Airport, Detroit Metropolitan Wayne County Airport, LaGuardia Airport serving New York City, and Orlando International Airport. News reports in April said the airline company is discussing possible expansion into Miami International Airport. According to FLL’s monthly statistics for May, Spirit had a 17.7% market share at the airport, below Jet Blue (JBLU) and Southwest (LUV), but above Delta Airlines (or DAL). Spirit recently announced it will serve Kansas City International Airport in August this year. Its management said on the first quarter earnings call that, “We anticipate we will add one or two more dots to our route map in 2014, but the primary focus of our growth this year will be to add new routes that make connections between destinations we currently serve.”

Ultra low-cost carriers (or ULCCs) such as Spirit and Allegiant Travel (ALGT) have benefited from economic recovery, and consolidation in the airline space which has reduced competition. The ULCCs have also seen opportunities for expanding market share because of travel demand exceeding capacity growth due to capacity discipline among major carriers such as American Airlines, Delta, United, and Southwest. A Federal Aviation Administration (or FAA) forecast report said capacity restraint by the carriers along with stable fuel prices helped boost industry profits in 2013 despite system wide real yield decreasing by 1%. The research cited 2013 data and said reporting passenger carriers had a combined operating profit of $9.6 billion—compared to a $6 billion operating profit for fiscal year 2012. The network carriers reported combined operating profits of $7.1 billion while the low cost carriers reported combined operating profits of $1.8 billion, with all carriers posting profits.

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