uploads///Leverage

Spirit Airlines Is Increasing Debt: What It Means for Investors

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Feb. 2 2017, Updated 10:37 a.m. ET

High debt

Most airlines are reducing debt in these times of profitability. But Spirit Airlines (SAVE) has been steadily increasing its debt since the fourth quarter of 2014. Its total debt has risen from $646.0 million at the end of 4Q15 to $979.0 million at the end of 3Q16.

Its saving grace up to 2Q16 was that it still had more cash than debt on its balance sheet, which resulted in a negative net debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) ratio. However, at the end of 3Q16, Spirit Airlines’ balance sheet had a total of $926.0 million in cash, which is lower than the debt component.

Below are the net debt-to-EBITDA ratios at the end of 4Q16 for other airlines:

  • United Continental Holdings (UAL): 3.1x
  • Delta Air Lines (DAL): 2.9x
  • American Airlines (AAL): 12.0x
  • Alaska Air Group (ALK): -0.56x
  • JetBlue Airways (JBLU): 0.52x
  • Southwest Airlines (LUV): 0.03x
  • Allegiant Travel (ALGT): 3.2x
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Spirit Airlines’ cash

As we’ve already seen, Spirit Airlines already has $926.0 million in cash. The good news is that it also has good free cash flow generation, which will help it build up its cash pile. For the first nine months of 2016, Spirit Airlines generated free cash flow of $148.5 million.

Outlook

Although SAVE’s leverage is currently not a concern, it’s still important to track its leverage in case it increases to unmanageable levels. It also becomes increasingly important since Spirit plans to purchase more airplanes instead of leasing them. These purchases will be financed through debt, so SAVE’s leverage will rise.

If SAVE manages to maintain a balance between debt and cash, it could be in a much better position than its peers with significant debt.

You can get exposure to airline stocks by investing in the First Trust Industrials/Producer Durables AlphaDEX ETF (FXR), which invests ~1.3% of its portfolio in airlines.

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