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TheStreet Open House

At Spirit Airlines, Low Fares Bring High Fees and Bad News is Good

MIRAMAR, FLA. (TheStreet) -- In some ways, innovative Spirit Airlines (SAVE) is a Teflon-coated airline where bad news is good news, low fares bring high fees, and financial metrics including the share price continue to improve despite constant criticism.

As an example: last week, Jerry Meekins died. In April, Meekins, a 76-year-old Vietnam vet, made national news because Spirit refused to refund his $197 ticket even though he was dying of esophageal cancer, had purchased the ticket before his doctor told him he was too ill to fly, and wanted to get to New Jersey to see his daughter.

As the furor grew, Spirit CEO Ben Baldanza stepped in, telling reporters that Meekins should have bought ticket insurance. This remark, not surprisingly, was viewed as heartless. So Baldanza apologized, saying "I did not demonstrate the respect or the compassion I should have." He personally refunded Meekins' fare and Spirit made a $5,000 contribution to Wounded Warriors, a charity that Meekins selected.

In the Tampa Bay Times on Tuesday, the last sentence in the Meekins story was a quote from the deceased veteran's girlfriend. "I'm glad that Spirit Airlines gave him something to be excited about at the end of his life," Carol Gray said. "I do believe it added probably a good month to the end of his life."

This is something to remember the next time you read a negative blog about Spirit fees, or a suggestion by a member of Congress that the carrier's pricing model ought to be outlawed.

Certainly, the Spirit model is not what we are used to. Fares are low. Seats are jammed together. Scheduling typically means limited frequencies. The bias, at least in Meekins' case, is against flexibility. Everything, including carry-on bags, sodas and assigned seats, comes with a fee: a third of Spirit revenues are derived from fees.

The model limits the range of passengers that Spirit can attract. "Spirit's success seems to have been primarily on leisure routes, where passengers tend to be infrequent travelers," says aviation consultant Sandy Rederer. "Does Spirit get repeat business with passengers who understand its actual costs and quality of service? Probably a lower proportion than other airlines."


Although it has a hub in Fort Lauderdale, from which it serves domestic and Caribbean markets, Spirit has taken a scatter-shot approach to growth, recently adding leisure destinations like Orlando and Atlantic City and competitors' hubs such as Dallas and Minneapolis. "They seem somewhat enigmatic," says aviation consultant Stan Hula. "From a traditional strategy point of view, their objectives are difficult to discern."

But Deutsche Bank analyst Mike Linenberg wrote, in a recent report that "Spirit's strategy behind network planning is simple: Fly where the company will make the highest returns."

In May 2011 Spirit began service in Dallas, where it now has 15 destinations. In a recent interview with The Dallas Morning News, Barry Biffle, Spirit chief marketing officer, explained: "We're growing 15 to 20%, so I'm going to grow somewhere. Dallas/Fort Worth has some of the highest fares and we believe we have a cost advantage versus other carriers in the market."

American Airlines (AAMRQ.PK) has more than 700 daily flights at the airport, but Biffle told the newspaper that Spirit "is not after any given incumbent airline." In fact, Spirit has just one or two daily departures in most Dallas markets. The carrier has said it does not chase business travelers, who want schedule frequencies and seats with at least a bit of legroom and who are sought by mainline carriers.

In Spirit's favor is the lowest costs in the airline industry -- cost per available seat mile excluding fuel is around 6.05 cents-- and increasing numbers of passengers as capacity grows. "Spirit's load factors and organic growth (prove) that the business model is effective despite a steady stream of less-than-glowing media reports and complaints from over-entitled customers," wrote Wolfe Trahan analyst Hunter Keay, in a report issued Friday.


In fact, Spirit capacity in June was 20% higher than a year earlier. Only Hawaiian (HA) grew faster, at 23%: Overall industry growth was flat.

Spirit's share price is also growing, up 44% so far this year, the second biggest gain among major carriers after merger-hungry, unhedged US Airways (LCC), which is up 177%. Spirit shares closed Friday at $22.75, up 57 cents.

Analysts expect the trend to continue. Keay has an outperform on the shares and a $27 price target. Linenberg has a $28 price target and Avondale Partners analyst Fred Lowrance has a $35 target. Shares reached an all-time high of $24.75 in April, then slipped to $19.04 on July 1. On that date, Morgan Stanley analyst William Greene issued a report saying Spirit "has been a notable laggard as the legacy airlines have rallied in recent months -- we consider this weakness an opportunity."

Last week, a still-positive Greene wrote that Spirit, with its low cost/low fare model and exposure to the growing Latin American market, still "offers compelling upside."



-- Written by Ted Reed in Charlotte, N.C.

>To contact the writer of this article, click here: Ted Reed

>To follow the writer on Twitter, go to http://twitter.com/tedreednc.

>To contact the writer of this article, click here: Ted Reed

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