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Will Spirit Airlines Continue Aggressive Capacity Expansion in 2016?

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Apr. 27 2016, Published 8:58 a.m. ET

Capacity growth exceeds demand

Like all other airline companies, Spirit Airlines also took advantage of the low oil cost environment to expand its capacity. Spirit Airlines has been aggressively expanding its capacity for the past few years, and it plans to continue the trend in 2016.

For 1Q16, SAVE’s capacity has grown by 26.5% more than its peers. Allegiant Travel (ALGT) increased capacity by 17.9% in 1Q16, JetBlue Airways (JBLU) by 14%, and Southwest Airlines (LUV) by 9%. Investors can gain exposure to airline stocks by investing in the iShares Transportation Average ETF (IYT), which invests ~21% of its portfolio in airlines.

Capacity growth is one of the major revenue drivers for airlines if they can ensure similar growth in traffic, which is the case for SAVE.

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Travel demand

For 1Q16, Spirit’s traffic has grown by 26%, slightly slower than its capacity growth in the period. The traffic growth was boosted by lower airfares, strong network expansion, and overall strength in the industry and economy.

Load factor falls on capacity growth

The strong traffic and capacity growth were offset by a decline in average operating yields and slightly lower load factors. The load factor fell by 0.2 percentage points for the first quarter of 2016.

Outlook

For 2016, the airline expects to continue its aggressive expansion plan. Capacity is expected to increase by 20% for the full-year 2016.

However, one of the major differences as compared to the past capacity expansion is that SAVE will now focus on routes that are unserved by legacy players American Airlines (AAL), Delta Airlines (DAL), and United Continental (UAL). Earlier, SAVE was aggressively targeting the biggest hubs served by legacy players. This is expected to keep price wars in check, which was one of the major concerns for SAVE in 2015.

Analysts are also estimating that SAVE’s capacity will grow by 20%, backed by similar traffic growth.

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