Yahoo Finance Why Spirit Airlines’ Low Leverage Isn’t Really That Low
Spirit Airlines' 1Q16 Earnings Analysis: What’s in Store for 2016?
Debt at nominal levels
Spirit Airlines (SAVE) had no debt until 4Q14. Since then, debt has increased. As a result, Spirit Airlines’ debt-to-EBITDA ratio has also increased from 0.72x at the start of 2015 to 1.21x at the end of 1Q16. However, it still has more cash than debt on its balance sheet, resulting in a net-debt-to-EBITDA ratio of -0.33. This is still lower than most of its peers.
At the end of 1Q16, American Airlines (AAL) had a net debt to EBITDA ratio of 1.86x, United Continental (UAL) had a ratio of 1.1x, Delta Air Lines (DAL) had a ratio of 0.57x, Southwest Airlines (LUV) had a ratio of -0.05x, and Alaska Air Group (ALK) had a ratio of -0.55x. At the end of 2015, Allegiant Travel (ALGT) had a net-debt-to-EBITDA ratio of 0.66x, and JetBlue Airways (JBLU) had a ratio of 0.62x.
Because the airline industry is capital intensive, airlines tend to have high debts on their balance sheets. However, airlines also often make use of operating leases for their most expensive purchase, aircraft. Operating lease is an off balance sheet financing where an asset is leased for a period less than its economic life without any transfer of ownership. We should thus analyze airlines’ leverage ratio adjusting for the impact of these leases.
Spirit Airlines’ net debt plus operating leases to EBITDAR (earnings before interest, taxes, depreciation, and rental costs) ratio at the end of fiscal 2015 was at 1.8x. This number is higher than other low-cost carriers like JetBlue Airways (JBLU), Southwest Airlines (LUV), and Allegiant Travel (ALGT), which were at 1.3x, 0.8x, and 0.7x, respectively. But it’s lower than American Airlines (AAL) and United Continental (UAL) at 3.4x and 3.1x, respectively.
Outlook
Spirit Airlines’ low leverage is currently not a concern, but it’s still important for investors to track SAVE’s leverage, in case it increases to unmanageable levels.
The airline industry fundamentals have improved tremendously, and margins are expected to have reached their peak. If margins decline as analysts estimate, reduced cash flows will make it difficult to make interest payments, leaving little to nothing on the table for investors.
On the other hand, if SAVE does manage to maintain this balance between debt and cash, it would put SAVE in a much better position than peers with significant debt.
Investors can gain exposure to airline stocks by investing in the iShares Transportation Average ETF (IYT), which invests ~21% of its portfolio in airlines.
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