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

Part 3
Overview: Lone Pine Capital's new position in Spirit Airlines (Part 3 of 7)

Why Spirit sees double digit revenue growth in 1Q14

Spirit’s revenue growth in 1Q14 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. Spirit reported its first quarter results in April and saw double digit revenue and profit growth despite weather-related cancellations. Spirit’s first quarter results were better than expected with the company reporting a 15.4% increase in adjusted net income for the 1Q14 to $37.8 million—$0.52 per diluted share—compared to $32.8 million—$0.45 per diluted share—for the 1Q13. Total operating revenue was up 18.2% year-over-year (or YoY) to $438 million driven by growth in flight volume. Operating margin in the first quarter was 13.7%.

SAVE revenueEnlarge Graph Revenue impacts from weather and shift of Easter In the 1Q14, Spirit saw 256 weather-related flight cancellations compared to 59 in the 1Q13, which negatively impacted revenue. Average ticket revenue per passenger flight was down 1.6% to $77.79. It was impacted from a calendar shift of Easter occurring in April of this year compared to March last year. However, average non-ticket revenue per passenger flight was up 3% to $56.41. Total revenue per available seat mile (or RASM) for the 1Q14 decreased 2.4% to 11.57 cents. In addition to the Easter shift and weather-related flight cancellations, a 6.3% increase in stage length—the distance traveled by an aircraft from takeoff to landing—resulted in a 3% decrease in RASM YoY. Operating costs see an increase For 1Q14, Spirit’s adjusted operating costs per available seat mile (or CASM) excluding fuel was up 0.3% YoY to 6.06 cents due to higher maintenance, material, and repairs expense and higher depreciation and amortization expenses. These increases were partially offset by lower passenger re-accommodation expense, as a result of improved operational performance. It also saw lower aircraft rent expense on a per-unit basis driven by lease extensions with reduced rates negotiated with the lessor in the 2Q13. Spirit’s labor costs increased and outpaced capacity growth during the quarter mainly due to an increase in pilot workforce in compliance with the new pilot rest periods and work hours required by FAR 117. For the second quarter on a per ASM basis, Spirit estimates that pilot cost related to FAR 117 and depreciation and amortization expenses is expected to contribute an increase of 2% as compared to the 2Q13. It also anticipates some cost pressures as the company begins to ramp up for growth in 2015. Cost pressures and a slower growth rate for the 2Q14 and 3Q14, will push up CASM ex-fuel by 2%–3% for 2Q14. For the full year 2014, CASM ex fuel was estimated to be up 1%–2% YoY. Spirit expects to enhance its capacity or available seat miles 17% in the second quarter. According to a recent investor update, Spirit expects an operating margin of 20.6%–21.3% in 2Q14, and an operating margin of 17.5%–18.5% in fiscal year 2014. Airline companies see profits in first quarter The U.S. airline industry includes mainline legacy carriers American Airlines (AAL), Delta Airlines (or DAL) and United Continental (UAL). It also includes domestic airline Southwest (LUV), niche and hybrid carriers Alaska Air (or ALK), Hawaiian Holdings (or HA), and JetBlue (or JBLU), and ultra low-cost carriers Allegiant (ALGT) and Spirit. An analysis by Airlines for America (or A4A) said net profits of nine major U.S. carriers totaled $401 million in 1Q14 as demand for air travel increased despite cancellations due to the severe weather. A report on CAPA said that part of this profit could be attributed to industry consolidation last year with the merger of American and U.S. Airways. It added that despite the positive results and trends, airlines are facing challenges in the form of declining margins and rising debt levels. For more on American Airlines, please read Must-know: An overview of the American Airline Group.

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