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Spirit Airlines’ Low Debt: More than Meets the Eye

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Apr. 26 2016, Updated 11:08 p.m. ET

High debt

Spirit Airlines (SAVE) had negligible or no debt on its balance sheet until 4Q14. At this time of record profitability for airlines, in which most airlines have tried to strengthen their balance sheets by reducing debt, Spirit Airlines has increased its debt.

As a result of increasing debt, Spirit Airlines’ debt-to-EBITDA ratio increased from 0.72x at the start of 2015 to 1.1x at the end of 2015. However, it still has more cash than debt on its balance sheet, resulting in a net debt-to-EBITDA ratio of -0.27. This is still lower than most of its peers.

At the end of 2015, the net debt-to-EBITDA ratio of the major carriers were:

  • Alaska Air Group (ALK): -0.4x
  • Allegiant Travel: 0.66x
  • American Airlines (AAL): ~1.9x
  • Delta Air Lines (DAL): 0.51x
  • JetBlue Airways (JBLU): 0.62x
  • Southwest Airlines (LUV): 0.09x
  • United Continental (UAL): 0.93x

Airlines often make use of operating leases for their most expensive purchases—aircraft. Operating leases constitute off–balance sheet financing, in which an asset is leased for a period less than its economic life without any transfer of ownership.

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Spirit Airlines’ net debt-plus-operating-leases-to-EBITDAR ratio at the end of fiscal 2015 was at 1.8x. This number is higher than other low-cost carriers. In this category, JetBlue Airways (JBLU), Southwest Airlines (LUV), and Allegiant Travel (ALGT) have ratios of 1.3x, 0.8x, and 0.7x, respectively. However, this is lower than American Airlines (AAL) and United Continental (UAL) at 3.4x and 3.1x, respectively.

Outlook

Although Spirit Airlines’ (SAVE) leverage is currently not a concern, it is still important for investors to track SAVE’s leverage to ensure it remains within manageable levels.

On the other hand, if Spirit Airlines does manage to maintain this balance between debt and cash, it would put the airline in a much better position than its peers that have significant debt.

Investors can gain exposure to airline stocks by investing in the SPDR S&P Transportation ETF (XTN), which invests ~24% of its portfolio in airlines.

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