MIAMI — Last week, ultra-low cost carrier Spirit Airlines reported a net profit of $176.92 million, or $2.42 per diluted share for calendar year 2013, a 71.0% increase year-over-year from $108.46 million ($1.49/share) in 2012.

For the fourth quarter of 2013, Spirit recorded a net profit of $41.0 million ($0.56/share), up 109.9% YOY from $19.5 million.

Spirit’s results were powered by sizzling 25.5% YOY growth in operating revenues to $1.65 billion. Passenger revenues (which at Spirit only include fares paid by customers), grew 26.0% YOY to $986.02 million, while non-ticket revenues jumped 24.8% to $668.37 million.

For Spirit, its revenue growth is driven by a mix of market stimulation and theft of market share from other carriers. Moreover, the carrier still has not tapped fully into the potential for variation in fees based on demand period.

On the unit revenue side, total revenue per available seat mile (RASM) for the 2013 was up 2.6% YOY to 11.94 cents, while yields increased just 1.1% to 13.79 cents due to longer stage lengths. Average revenue per passenger (Spirit carried 12.41 million passengers in 2013 against 10.42 in 2012) rose 5.4% to $133.27. Ticket prices led the way by growing 5.8% to $79.43 while non-ticket revenues grew 4.8% to $53.84.

Ticket revenue increased largely because the carrier’s nationwide growth increased the average stage length of its flights. Capacity grew 22.2% as measured in available seat miles (ASMs) mainly due to the launch of 25 new routes and two new destinations in 2013. Demand actually outpaced this rapid capacity growth, however, growing 24.2% and driving a 1.4 pt. increase in load factor.


Turning to expenses, operating expenses grew 19.9% YOY to $1.37 billion, with line item expenses all declining on a per-ASM basis save landing fees/other rents (up 22.3 YOY on an aggregate basis to $83.60 million, up less than 0.1%/ASM), and depreciation and amortization (up 109.4% YOY to $31.95 million).

The former can be attributed to the new airports added to the network which skewed the comparisons, while the latter is of little consequence for near term financials. Salary costs rose 19.7% to $262.15 million, though the carrier might face salary cost pressures as its flight attendants recently voted against ratifying a new tentative contract agreement with management, which could eventually lead to a strike if not managed properly.

Spirit is already suffering from weak operational performance and a financial model that magnifies cost pressures during unforeseen events such as the weather troubles this January, and a flight attendant strike would only exacerbate those challenges. Cost per available seat mile (CASM) fell 1.9% to 9.90 cents, while CASM excluding fuel fell 1.5% to 5.91 cents. The decline in CASM was driven primarily by fuel, as average economic fuel cost per gallon declined 2.7% to $3.21.

Spirit continues to position itself as the darling of the financial analysts community with its laser-sharp focus on cost discipline (see above), and delivering shareholder returns. Spirit holds no debt on its balance sheet and currently holds $530.6 million in unrestricted cash and cash equivalents for a negative net debt. Spirit spent $19.8 million in capital expenditures during the quarter, yielding an overall free cash flow of $134.36 million and free cash flow yield of 3.4% at current share prices.

Spirit recorded an operating profit of $282.29 million and a net pretax profit of $282.41 million, yielding an industry-leading operating margin of 17.1%. Even after paying an effective tax rate of 37.4%, Spirit still delivered an industry-best 31.8% pretax return on invested capital (ROIC), and a 19.9% post-tax return on invested capital. Return on equity came in at 23.0%.

Spirit Airlines continues to deliver industry leading margins and financial results. For all of the negative press that has developed around Spirit’s business model, by and large it has proved resilient. Customers continue to flock to the carrier in droves, and its future growth prospects look unequivocally bright. There are really two ways to visualize Spirit Airlines’ potential growth.

The first is to consider it in terms of Ryanair, who is perhaps the best proxy for Spirit given that it uses a similar business model in a similarly sized air travel market. The chart below illustrates that Ryanair is roughly seven times the size of Spirit relative to the overall market (and still growing), implying that the long term potential for Spirit is nearly limitless.


A more nuanced view using Spirit Airlines’ own figures would take into account the fact that the delta (gap) between Spirit Airlines’ CASM and that of the overall industry is actually widening at a rate of about 2% each year. At the current CASM delta, Spirit has already identified 400 large markets (more than 200 passengers per day each way) with high fares and significant potential for market stimulation.

And with the widening CASM gap, Spirit sees the potential for 50 to 75 additional markets to be uncovered by the end of 2015. Thinking about this on an aggregate basis, the 400 new routes would conservatively represent about a 350% increase in capacity for Spirit, fueled by the 130 new aircraft (85 current generation A320 family, 45 A320neo) that the carrier has on order.

Assuming that the carrier can maintain similar operating margins, Spirit has the potential to be a financial powerhouse. In the nearer term, however, there is a significant challenge in the form of Frontier Airlines, who has now fully converted to ultra-low cost carrier (ULCC) status under the wing of Spirit’s former owner Indigo Partners.

While Frontier’s business model appears to be tailored more towards that of Allegiant (using secondary airports instead of primary ones like Spirit), it’s growth could put a damper on 2014 revenues.