Yahoo Finance Can Spirit Airlines Maintain Its High Margins in 2016?
Spirit Airlines' 1Q16 Earnings: The Wind beneath Its Wings?
Analyst estimates
Spirit Airlines’ (SAVE) earnings before interest, tax, depreciation, and amortization (or EBITDA) margins are expected to decline to 25.9% in 2016, compared with its 2015 margins of 27.2%. As a result, its EBITDA growth is expected to slow to 3.7% in 2016, much slower than its 2015 growth.
Allegiant Travel’s (ALGT) margins are also expected to decline to 36.9% in 2016. In contrast, most airlines’ margins are expected to expand in 2016. Both Southwest Airlines’ (LUV) and JetBlue Airways’ (JBLU) margins are expected to reach 27% in 2016. SAVE’s margins are expected to be below most of its regional peers in 2016.
Falling fuel costs
All of Spirit Airlines’ margin expansion has come from fuel savings. Fuel expenses declined by 25% in 2015, although most of its other costs have increased. Fuel costs fell from $2.99 per gallon in 2014 to $1.82 per gallon in 2015. This cost is lower than most of its peers.
Declining load factor
Spirit Airlines’ aggressive capacity expansion has led to its declining capacity utilization. The airline’s 2015 capacity increased by almost 30%. As a result, its load factors have declined throughout the year. For 2015, its utilization fell by 2%.
Outlook
If crude oil prices decline, Spirit Airlines (SAVE) should see lower fuel costs, which could help its margins to expand instead of declining, as currently predicted. In that case, analysts are expected to revise their estimates upward.
Investors should remember that fuel prices have declined tremendously and that it is only a matter of time before crude bounces back. Increasing oil prices could add substantial pressure to margins, especially if the airlines cannot pass the expense to their passengers. In fact, analysts may be factoring this in as they expect EBITDA margins to decline in 2016 and 2017.
For 2016, Spirit Airlines (SAVE) expects its capacity to grow by 20%, mostly driven by growth in the international markets. Analysts are also predicting a similar growth rate, which is expected to add pressure to utilization and margins.
As a result, investors should closely watch the airlines’ utilization in 2016 and analysts’ estimates for their margins. Investors can gain broad-based exposure to the airline industry by investing in the SPDR S&P Transportation ETF (XTN), which invests ~24% of its portfolio in airlines.
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