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Spirit Airlines' Problems: No End in Sight?

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Part 4
Spirit Airlines' Problems: No End in Sight? PART 4 OF 7

Spirit Airlines Takes a Big Hit to 3Q17 Guidance: More To Come?

Hurricane Harvey

Hurricane Harvey mainly hit Houston, one of Spirit Airlines’ (SAVE) major markets, accounting for almost 160 or 10% of the carrier’s flights. The airline estimates that the hurricane will cost it $8.5 million in revenues for the third quarter.

Spirit Airlines Takes a Big Hit to 3Q17 Guidance: More To Come?

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Hurricane Irma

Hurricane Irma is expected to impact another two important markets for Spirit Airlines: Fort Lauderdale, which is its largest market (~400 flights per week) and Orlando, its third-largest market (~210 flights per week). Though Irma didn’t hit either of these cities, both airports have remained shut due to hurricanes. The hurricane impact could linger well into the fourth quarter.

Aggressive pricing

Another major problem for Spirit is falling airfares. Airlines are resorting to aggressive pricing in order to gain market share and fill up the extra seats they’ve added.

Cost respite

One respite for Spirit Airlines comes from falling costs. The company now expects its cost per available seat mile or CASM-ex fuel to fall in the range of 2%–3%. The earlier guidance was for a range of -1% to +1%. According to the airline, this outlook was due to lower re-accommodation costs.

Outlook

As a result, SAVE expects unit revenues to fall in the third quarter. According to its latest guidance, unit revenue is expected to fall 7% to 8.5%. Of this fall, ~1% is attributed to Hurricane Harvey while the rest is attributed to an aggressive pricing environment. The guidance doesn’t include the impact of Hurricane Irma. The company had been expecting unit revenue to fall in the range of 2%–4%. The cost decline should help offset some pressure from the unit revenue decline.

Investors can gain exposure to Spirit Airlines by investing in the SPDR S&P Transportation ETF (XTN), which invests 2.6% of its portfolio in SAVE. It also invests 2.9% in Allegiant Travel (ALGT), 2.8% in American Airlines (AAL), and 2.7% in Southwest Airlines (LUV).

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