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Is Spirit Airlines’ Passenger Demand Sufficient to Fill Its Additional Capacity?

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Jun. 16 2017, Published 3:06 p.m. ET

Traffic growth

Spirit Airlines’ (SAVE) traffic grew 6.6% YoY (year-over-year) in May 2017—much slower than its 9.0% YoY capacity growth for the same month. In fact, Spirit Airlines traffic growth has been lagging behind its capacity growth for the past eight months.

This gap between capacity growth and traffic growth has, however, narrowed. In the first quarter of 2017, Spirit’s capacity growth was outpacing traffic growth by ~4.2 percentage points. This figure fell to 0.1% in April 2017 and to 2.4% in May 2017. But the trend is too volatile right now for solid interpretations.

As of May 2017, traffic at Spirit Airlines had grown 10.2% YoY, as compared to the first five months of 2016—slower than its 13.2% YoY capacity growth during the same period.

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A low-cost strategy

Spirit Airlines’ ultra-low-cost strategy, which includes reducing basic fares as much as possible, has helped the company grab market shares from other players. At the same time, services such as boarding passes, bags, carry-on bags, food, and drinks come with extra charges, so that customers don’t have to pay for services they don’t use.

Such a model—wherein customers aren’t subsidizing the travel needs of others—has become a huge selling point for Spirit, and its low costs will likely keep attracting customers who are extremely price sensitive about fares.

Poor reputation negative

Spirit Airlines has scored poorly, however, on customer satisfaction ratings. According to the recent American Customer Satisfaction Index Travel Report, Spirit Airlines was ranked last among peers, though it’s now working hard to improve its customer service.

According to the Department of Transportation, Spirit had the highest number of consumer complaints and the worst on-time arrival among the 13 US carriers in 2015. In January 2017, Spirit’s consumer complaints showed a decline of ~50% YoY, and in February, complaints fell 70%.

Notably, investors can gain exposure to Spirit Airlines by investing in the First Trust Industrials/Producer Durables AlphaDEX Fund (FXR), which invests 1.8% of its portfolio in Spirit Airlines. FXR also invests 2% apiece in Delta Air Lines (DAL), United Continental (UAL), and JetBlue Airways (JBLU)

Meanwhile, Spirit Airlines has had other recent troubles with pilots and customers. We’ll discuss these in more detail in the next part of this series.

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