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Will Spirit Airlines’ Capacity Expansion Boost Its Revenues?

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1Q16 performance

Spirit Airlines’ (SAVE) revenues grew more than expected at 9.1% year-over-year (or YoY) in the first quarter of 2016 to $538.1 million. However, all of this growth has come from non-ticket revenues, as passenger revenues continued to decline.

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Unit revenues continue to decline

Spirit’s expansion on routes served by other legacy players led to severe pricing wars, affecting yields not only for SAVE but also its legacy peers American Airlines (AAL), Delta Airlines (DAL), and United Continental (UAL). The effect has been more pronounced for SAVE.

Average ticket revenue declined by 20.5%, leading to a 13.6% year-over-year decline in average yields to $10.6 cents. TRASM (or total operating revenue per available seat mile) fell by 13.8% to 9.0 cents. As a result, passenger revenues fell by 0.3%.

Non-ticket revenues help

As discussed earlier, all of Spirit Airlines’ revenue growth in the quarter came from non-ticket revenues. The airline has managed to find various innovative ways to generate more non-ticket revenue by charging for almost everything above its base air fares.

Non-ticket revenues for 1Q16 grew by 20% to $266 million. This was despite pressures on baggage and change fees due to low fares.

Outlook

In 4Q15, SAVE’s CFO mentioned that the pricing environment had stabilized in the past few months. However, in the 1Q16 earnings call, SAVE’s CEO said that the company continues to see price competition similar to that of 6–9 months ago. Despite this, Spirit Airlines expects pressure on unit revenues to start easing in 3Q16.

Investors can gain exposure to airline stocks by investing in the iShares Transportation Average ETF (IYT), which invests ~21% of its portfolio in airlines.

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