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Comparing Spirit Airlines’ Profitability to Industry Peers

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Operating margins: Spirit versus peers

Spirit (SAVE) has one of the highest operating margins in the United States. For the trailing twelve months to Q2 2015, Spirit recorded an operating margin of 20.7%, which was the highest among its peers. For the same period, Allegiant (ALGT) had operating margin of 20.5%, followed by Southwest (LUV) at 16.4%, JetBlue (JBLU) at 14.2%, and American (AAL) at 12.5%. Spirit has continuously increased its operating margins over the last three years. Spirit recorded an operating margin of 13.4% in 2012, which increased to 17% in 2013. For 2014, Spirit further increased its operating margin to 18.4%.

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EBITDA margins: Spirit versus peers

Spirit Airlines had an EBITDA margin of 20.8% for fiscal 2014. This is an improvement compared to the 19% in fiscal 2013, 14.3% in fiscal 2012, 14.1% in fiscal 2011, and 9.5% in fiscal 2010. The increase in the company’s EBITDA margin was largely driven by low fuel costs and a continued focus on low-cost operations. Only Allegiant had a better EBITDA margin than Spirit among its competitors in fiscal 2014, with 21.2%. JetBlue, Southwest, and American recorded 14.4%, 17%, and 13.5%, respectively, for the same period.

EBITDAR margin: Spirit versus peers

The EBITDAR margin is used to measure profitability in sectors that have significant rental and lease expenses such as airlines, hotels, and casinos. This way, you can compare companies with different rental and lease expenses. Spirit topped the list in terms of EBITDAR margins with 30.9% for fiscal 2014, which grew from 29.2% in fiscal 2013 and 25.2% in fiscal 2012. Spirit was followed by Allegiant at 22.4%, Southwest at 18.6%, JetBlue at 16.5%, and American at 16.4% for fiscal 2014.

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Why Spirit had a higher EBITDAR ratio than Allegiant

Spirit had a higher EBITDAR margin than Allegiant but its EBITDA margin is lower than Allegiant’s. This difference is due to Spirit’s higher rent and lease expenses. Spirit had an aircraft-rental-to-operating-expenses ratio of 12.4% in 2014, whereas Allegiant’s ratio was 1.6%.

High profit margins versus peers

Spirit has the highest profitability among its peers due to its exceptional expense management. Its wages paid to employees are among the lowest in the industry. Spirit spent just 16.3% of its operating expenses for wages in 2014. Allegiant spent about 17.0% of its operating expenses on employees in the same year, whereas American Airlines and Southwest spent 20% and 22.3%, respectively.

Spirit also had the lowest maintenance and repair expenses compared to its peers, at 3.8%, due to its young and single-family fleet. CASM is the operating cost per available seat mile. Even though Spirit has a low PRASM (passenger revenue per available seat mile), it managed to stay profitable by maintaining the lowest CASM among its peers at 8.3 cents. Spirit’s PRASM has grown from 8.7 cents in fiscal 2010 to 9.6 cents in fiscal 2014. Its load factor, a measure of capacity utilization, has grown from 82.1% in fiscal 2010 to 86.7% in fiscal 2014.

Investors can gain exposure to the airlines industry through the iShares Dow Jones Transportation Average ETF (IYT), the U.S. Global Jets ETF (JETS), and the SPDR S&P Transportation ETF (XTN).

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