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Why Should Investors Pay Attention to Spirit Airlines’ Leverage?

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Jul. 31 2017, Updated 10:38 a.m. ET

Debt at nominal levels

Spirit Airlines (SAVE) had no debt until 4Q14. Debt rose to $646 million at the end of 2015 and $981.7 million at the end of 2016. Debt has risen further to $1.1 billion at the end of 2Q17.

As a result, Spirit Airlines’ debt-to-EBITDA ratio has also risen from 0.96x at the end of 2016 to 1.8x at the end of 2Q17. At the end of 2Q17, American Airlines (AAL) had a net-debt-to-EBITDA ratio of 14.8x, United Continental (UAL) of 4.3x, Delta Air Lines (DAL) of 2.4x, and Alaska Air Group (ALK) of 1.7x. Both Southwest Airlines (LUV) and JetBlue Airways (JBLU) had more cash than debt on their balance sheets at the end of 2Q17.

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Cash

SAVE had $969.6 million in cash and cash equivalents on its balance sheet at the end of 2Q17, which is just about equal to its debt levels. Strong future free cash flow generation could help it maintain this stability.

Outlook

Though SAVE’s leverage is not a concern right now, it’s still important for investors to track SAVE’s leverage, lest it increases to unmanageable levels.

The airline industry fundamentals have improved tremendously and margins are expected to have reached their peak. If margins fall according to estimates, it would mean reduced cash flows could make it difficult for the company to make interest payments and leave little to nothing on the table for investors.

On the other hand, if SAVE does manage to maintain this balance between debt and cash, it would put SAVE in a much better position than peers with significant debt.

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% each in Delta Air Lines (DAL), United Continental (UAL), and JetBlue Airways (JBLU).

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