Spirit Airlines' low-cost model puts it in the perfect spot to be the big winner of the pandemic, a Deutsche Bank analyst says
- Spirit Airlines will likely be the first — or at least one of the first — airlines to recover from the pandemic, according to an analyst from Deutsche Bank.
- The airline's business model, which focuses on people travel for vacation or to visit friends and relatives in this hemisphere, rather than business travelers or long-haul international flyers, means it will see its target markets come back sooner.
- The airline's low-cost model means it's better equipped to take advantage of those segments compared to the legacy airlines.
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Spirit may not be the first — or even the tenth — choice of most air travelers. But while the COVID-19 pandemic continues to buffet the financials of even the strongest, most popular airlines, the low-cost, no-frills carrier may be in a better place than any of its American competitors.
The budget airline is "well-positioned to lead the industry recovery," analyst Michael Linenberg of Deutsche Bank wrote in a research note this week.
Despite the collapse of air travel demand, Spirit — like most other airlines — has managed to shore up enough cash and reduce costs enough to see it through the rest of the crisis. The company has about $2.1 billion of liquidity available, raised through a mix of senior secured note issuances, equity offerings, and other sources, including the federal Payroll Support Program for airlines, part of the CARES Act.
To be sure, Spirit, like every other US airline, is losing money. The airline burned through about $2.3 million of cash every day in the third quarter, and only expects to cut that down to $2 million for the fourth quarter. Travel demand remains depressed around the US, down 65% to 70% from 2019 levels, with little hope for a robust recovery in the next few years.
But according to Linenberg, Spirit has already been, and will continue to be, the first to reap the benefits of any returning demand and, ultimately, to make a meaningful recovery. "We continue to believe that the company will be one of the first airlines to return to profitability, largely driven by the its [sic] inherently low cost structure," he wrote.
That's because Spirit's core business focuses on customers traveling to visit friends and relatives (known as "VFR" passengers in travel industry parlance) and those traveling for leisure within the larger region. Spirit will fly from Fort Lauderdale to Kingston, Jamaica or Kansas City to Detroit, for instance, rather than San Francisco to Tokyo or Los Angeles to New York. Those two segments — VFR and regional leisure — make up the majority of what travel demand exists today, and the bulk of what is expected to start returning later this year and into 2021.
Meanwhile, business travelers and long-haul international markets — the bread and butter of American, Delta, and United's revenue models — are expected to continue lagging.
Leisure and VFR passengers are typically more price-conscious, and produce lower revenue yields than business passengers. But Spirit's low-cost model, which minimizes operating cost wherever possible to offer a bare-bones but cheap travel option, could mean that the airline can return to profitability even with lower yields. A low-cost operating model allows an airline to make money even off of lower revenues and smaller margins than the major airlines, so in a business environment like what exists today, they're the best positioned to benefit.
So no, Spirit may not be your first choice — but the airline's leadership and employees would presumably accept being the first to get back to cruising altitude instead.
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