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Can Spirit Airlines’ Traffic Continue to Outpace Capacity Growth?

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Aug. 30 2016, Published 10:21 a.m. ET

Traffic growth

Spirit Airlines’ (SAVE) traffic grew by 18.4% YoY (year-over-year) in July 2016, which is slightly higher than its capacity growth one month previously. YTD (year-to-date), the airline’s traffic has grown by 23.9%. Its traffic growth for fiscal 2015 was 27.1% higher YoY, and this growth has been boosted by lower airfares, strong network expansion, and overall strength in the industry and economy.

Remember, airline traffic is measured by RPM (revenue passenger miles). RPM is the number of revenue passengers multiplied by the total distance traveled.

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Low-cost strategy

SAVE has been able to grab market share from other players mostly due its ultra-low-cost strategy. The strategy has involved reducing base airfares as much as possible, unbundling all other services like carry-on bags, checked bags, boarding passes, and food and drinks. This way, customers only pay for services they use and do not subsidize other customers’ travel preferences. This strategy should continue to be a traffic booster in the future.

Passenger travel demand

Passenger travel demand had a great start in 2016, growing by ~7% YoY—its highest rate since 2012. However, the IATA (International Air Transport Association) suspects that the industry might be reaching the end of the recent traffic boost phase provided by low oil prices. This suggests that travel demand could slow down, which will adversely impact airlines.

Poor reputation

According to the Department of Transportation, in 2015, SAVE had the worst on-time arrival score. The situation has improved slightly in 2016, with SAVE coming in tenth place in on-time arrivals, ahead of Virgin America (VA) and American Airlines (AAL).

SAVE also has the highest number of consumer complaints—11.73 customers for every 100,000, as compared to the average of eight complaints per 100,000 customers—as well as the highest cancellation rate. If Spirit does not address these issues soon, it could lose loyal customers.

Notably, investors can gain exposure to airline stocks by investing in the iShares Transportation Average ETF (IYT), which also invests in SAVE’s peers Southwest Airlines (LUV) and JetBlue Airways (JBLU).

In the next part, we’ll discuss utilization rates.

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