Spirit Airlines: More Hated Than Cruise Lines (NYSE:SAVE)


The market remains so negative about the airlines that cruise lines, generally, not back in business yet, are trading better than airline stocks. Spirit Airlines (SAVE) hardly got a boost on Friday despite a reported recovery high in TSA traffic. My investment thesis remains very bullish on a breakout in the airline stock as treatments, vaccines, and general comfort with wearing masks should lead to a further rebound in travel despite the fears of a second COVID-19 wave.

Source: Spirit Airlines website

Winter Dip Not In The Cards

As Labor Day passes, the Summer vacation season starts coming to an end. The market has hyped a lot of the current travel related to leisure travel for vacations, but Spirit Airlines traditionally has similar revenue trends in Q3 and Q4. The only major dip occurs in Q1 each year.

The amazing part of the story is that the cruise line stocks continue to perform in a similar manner to Spirit Airlines despite not even having an operating business. Carnival Corp. (CCL) recently jumped due to a few limited cruises occurring at Italy-based Costa Cruises. Spirit Airlines recently flew ~65% of their 2019 routes in August, yet over the course of this year one can’t see any difference between their stock and rival cruise lines Carnival and Royal Caribbean Group (RCL).

ChartData by YCharts

Royal Caribbean has actually outperformed Spirit Airlines this year despite no revenue in Q3. The airline industry saw recent pre-Labor Day traffic hit a new recovery high of 969K passengers on the Friday prior to the weekend.

Source: John Gilluly

The air travel industry still faces a ton of restrictions similar to the cruise lines with certain NE states still requiring quarantines and even the lack of cruises reducing air travel demand. Even with ongoing restrictions, people continue to slowly ramp up flying demand.

Over the Independence Day weekend (July 2-6), traffic was only 3.4 million passengers. The Labor Day weekend (Sept. 3-7) traffic was 4.1 million passengers for ~20% growth between the holidays. The weekends weren’t exactly equal with Independence Day having a Friday holiday and Labor Day being on a Monday. Still, Labor Day had ~700K additional passengers for the 5 days surrounding the holidays.

The biggest concern is that a ramp up in new COVID-19 cases in the Fall during normal flu season could damper travel. Part of the market mindset is that airlines typically see reduced demand during Q4. In reality, Spirit Airlines saw Q4 revenues last year only dip $22 million from the $992 million level in Q3.

Royal Caribbean saw revenues last Q4 dip $670 million from the peak $3.2 billion level in Q3’19. The cruise lines face substantial demand hits during the colder months.

The airlines don’t normally see a material dip in Q4 traffic. Don’t forget, an approved vaccine in late October/November would provide a quick boost to travel demand as the healthy passenger base would no longer have to fret passing along the virus to the vaccinated vulnerable.

Not to mention, the reduction in new cases despite ever higher testing and lower hospitalizations should boost confidence in ramping up travel. At the same time, the recent ramp in new cases didn’t correspond with elevated levels of deaths suggesting better treatments have already reduced the mortality rate of those infected.

All of the data points suggest the airlines are better investments here, yet the cruise lines are trading as well as the airline sector.

Cheap Stock

While the work-from-home tech sector trades at elevated levels, the airline stocks are still down around 50% for the year. With new confirmed COVID-19 cases at the lows and a vaccine on the horizon, a stock like Spirit Airlines shouldn’t still trade near the lows.

When the airline reported Q2 results on July 22, Spirit Airlines had effectively reduced daily cash burn rates to break-even levels for the month of June. Spirit Airlines had liquidity of ~$2 billion in a tough environment.

My previous estimate had the airline generating around $4.11 per share in normalized profits. This amount accounted for up to 100 million shares of outstanding shares due to dilution. The assumption was that the PSP and Loan Program warrants are purchased by the company before the U.S. Treasury exercises the shares.

The travel environment hasn’t improved at the level originally expected in August and September, but the passenger levels are up compared to 2019 levels. In addition, the airline had access to $2 billion in liquidity with the $741 million potential loan form the U.S. Treasury.

Takeaway

The key investor takeaway is that the market continues to be negatively obsessed with the airlines. The cruise lines can hardly get back to business, yet those stocks are doing as well as Spirit Airlines. The airline stock remains an easy Buy here below $18 and trading at ~4x normalized earnings.

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Disclosure: I am/we are long SAVE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.

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