Spirit Airlines (SAVE) is worth a look during market crisis, despite risks

Aviation industry in the one of the worst hit by the covid-19 pandemic, with flights being grounded across the globe and airlines scrambling to avert liquidity crunch. Smaller players like Spirit Airlines (NYSE: SAVE) are exploring ways to stay afloat after passenger traffic came to a standstill.

The company’s stock plunged to a record low recently, but pared a part of the loss this week. After several rounds of schedule cuts, amid the social distancing campaign, travel demand has dropped to almost nil.

For the Florida-based airline, 2019 was a year of revival when it expanded the fleet, launched new services and initiated steps to achieve operational efficiency. Despite heavy capital spending, Spirit ended the year with a decent cash balance of $1.1 billion, which makes it better positioned to deal with the crisis than others. The company generated cash flow of $409 million in 2019.

Unique Model

Las year, ancillary services accounted for about 50% of Spirit’s revenue, which compensated for the low ticket fares and helped it end the year on a positive note. This strategy, combined with the low fuel prices, should give the company an advantage over rivals when the demand for air travel recovers in future.

Investing in SAVE

Still, the emerging uncertainty makes the stock pretty risky, which calls for caution as far as investing is concerned. With more units scheduled to join the fleet, there will be a spike in costs this year in the form of interest and lease expenses. At the same time, investors would not want to ignore the low stock price and healthy cash position. Analysts are divided in their recommendations, but the average price target points to a sharp gain in value.

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During the three months ended December, earnings dropped 10% annually to $1.24 per share due to an increase in costs. In contrast, revenues rose 12% to $970 million reflecting a double-digit growth in flight volumes. The results also came in above the estimates.

Widespread Slump

Almost all aviation firms, including industry leaders like American Airlines (AAL), Delta Air Lines (DAL) and United Airlines (UAL) lost considerable market value in the past few weeks. The schedule-cuts have forced the companies to slash their financial outlook and seek external funding to strengthen balance sheet.

Shares of Spirit Airlines closed the last trading session at $16.51, after losing 59% since the beginning of the year. The stock, which has remained steady in the past twelve months, dropped 69% during that period.