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Can SAVE’s Aggressive Capacity Expansion Boost Revenue Growth?

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4Q15 revenue grows at solid pace

Spirit Airlines’ (SAVE) revenues grew strongly at 9.6% year-over-year in 4Q15 to $519.8 million. The airline has benefited from its strong low-cost model that allows the airline to keep its airfares very low. For fiscal 2015, revenues grew by 11% to $2,141 million as compared to $1,931 million in 2014.

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Unique pricing structure helps

Spirit Airlines (SAVE) has managed to find a variety of innovative ways to generate more non-ticket revenue by charging for almost everything above its base airfares. Other traditional airlines usually include other costs in their base airfares.

Spirit Airlines also generates substantial revenues from its $9 Fare Club subscriptions as well as by offering a host of third-party travel products including hotel rooms, transportation, and other tickets for attractions. Non-ticket revenues for 4Q15 and 2015 grew by 24% to $252 million and $972 million, respectively.

Price wars and declining unit revenues

However, SAVE’s expansion on routes served by other legacy carriers led to pricing battles. The effect was more pronounced for SAVE than for its legacy peers American Airlines (AAL), Delta Air Lines (DAL), and United Continental (UAL).

As a result, 2015 ticket revenues declined by 18.5%, leading to an 18% year-over-year decline in average yields. TRASM (total operating revenue per ASM) declined by 15% to 10.08 cents. Excluding this, SAVE would have been able to clock a much higher revenue growth.

Outlook

According to SAVE’s chief financial officer, Ted Christie, the pricing environment has stabilized in the past few months. Spirit Airlines expects that its unit revenues could rise sequentially throughout 2016. This could mean a higher revenue growth in 2016 for SAVE.

Investors can gain exposure to airline stocks by investing in the iShares Transportation Average ETF (IYT), which invests ~24% of its portfolio in airlines.

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