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Can Spirit Airlines Maintain Its High Margins in 2Q16 and Beyond?

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Analyst estimates

Spirit Airlines’s (SAVE) EBITDA margins are expected to decline to 25% in 2016, compared with the 27% margins seen in 2015. As a result, its EBITDA is expected to decline marginally by 0.2% in 2016, much slower than the growth seen in 2015.

Allegiant Travel’s (ALGT) margins are also expected to decline to 36.9% in 2016. In contrast, most airlines’ margins are expected to expand in 2016. Both Southwest Airlines’s (LUV) and JetBlue Airways’s (JBLU) margins are expected to reach 27% in 2016.

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Unit costs flat

In a strategic move, Spirit Airlines is now shifting to larger aircraft. Its average seat count is expected to increase by 15% as compared to 2015. Also, the carrier is planning to purchase more planes versus leasing them, which will help reduce its financing costs.

As a result, unit costs have declined in 1Q16, and they are expected to decline by 5% YoY in 2Q16 as well. However, for the remaining half of 2016, units costs are expected to rise owing to maintenance costs. Thus, for 2016, unit costs are expected to remain flat.

Load factor flat too

As discussed earlier, Spirit Airlines’s capacity expansion has closely matched its traffic growth. As a result, for the six months ended June 2016, capacity utilization is 0.1% higher as compared to the six months ended June 2015.

Outlook

Spirit Airlines (SAVE) is one of the smaller airlines in the United States. This gives it ample room to grow and reduce its costs further. In fact, its management is expecting unit costs to be flat to falling in 2017.

The iShares Morningstar Small-Cap ETF (JKJ) holds 0.65% in SAVE.

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