It’s still a long road ahead, but airlines are slowly coming back. And, among the various airline stocks out there, few hold a candle to Spirit Airlines (NYSE:SAVE) stock.
The best value in the sector, this low-cost carrier stands a greater chance of getting “back to normal” sooner than legacy rivals like American Airlines (NASDAQ:AAL), Delta Airlines (NYSE:DAL) and United Airlines (NASDAQ:UAL).
Not only that, Spirit is well ahead when it comes to minimizing cash burn. In fact, this airline basically broke even back in June. Granted, “break-even” doesn’t sound like smashing success. But, considering carriers like American burned through $40 million per day that month, this carrier may be knocking it out of the park by comparison.
Add in its strong liquidity position, and it’s clear this remains one of the best ways to play the inevitable airline recovery. Once the novel coronavirus is over and done with, low-cost names like this one aren’t going to just survive but thrive as well.
And with shares holding steady around $18 per share, today’s price level is the perfect entry point.
SAVE Stock and The Air Travel Recovery
Since the outbreak first hit the U.S., there has been many false starts for a recovery. Back in June, investors rushed back into airline stocks on the hopes of a faster-than-expected recovery. But a surge in cases across the country brought that excitement to a halt.
Now, with positive developments regarding cases and a vaccine, travel demand could see a boost this fall. Air traffic levels have improved since bottoming out in the spring. But domestic traffic remains down 70% year-over-year. All bets are off whether this means a rapid increase in traffic from now through the end of 2020.
But the situation is improving, not getting worse. As InvestorPlace’s David Moadel wrote, that’s clear from the TSA daily screening numbers that are trending higher.
But what does this all mean for investors looking for opportunity in this hard-hit sector? Firstly, some carriers are going to bounce back sooner than the rest. Namely, low-cost names like Spirit Airlines.
Between its lower cost structure, strong balance sheet, and lack of exposure to harder-hit segments of the travel market, low-cost airlines have an edge when it comes to staging a comeback. And that may be the key to this stock’s success over the next year.
Why Spirit Will Bounce Back Fast
Many investors may see opportunity making airline comeback plays by buying beaten-down legacy carriers like American, Delta and United.
Yet, this across-the-board buying may not be the best move. Burdened with heavy cost structures, and facing more hurdles, there are many risks on the table buying old-school airline stocks today.
So, what does that mean? If you are looking for opportunity in this space, you have to go with low-cost plays like SAVE stock. Firstly, this carrier’s low-cost structure may bring it back to profitability much sooner than the major players in the industry.
Namely, with a lower cost structure, Spirit can better compete on price. And, with airlines clamoring for a shrunken domestic travel market, price is going to be a major factor in getting reservations.
Secondly, as this commentator wrote back in June, this carrier’s bread-and-butter is domestic leisure travel, which is a stark contrast to the major carriers, more dependent on harder-hit international and business travel. It’s safe to say international travel will take much longer to recover. And, with corporate America going virtual with meetings and conferences, a business travel rebound looks questionable as well.
The domestic traveler market has relatively better prospects. Sure, many may still shun air travel until social distancing and face mask requirements are lifted. Yet, life goes on. People will need to travel by plane to attend weddings and other family functions. Six months of cabin fever may compel more vacationers as well. In short, demand will continue to trend higher.
Thirdly, with its strong liquidity and balance sheet, this carrier stands to weather the storm, if said storms linger on through next year. In short, there are plenty of reason to remain bullish on this name.
One of The Best Ways to Play An Airline Comeback
Granted, it’s not all a slam-dunk for Spirit Airlines. With the risk of continued headwinds, the carrier is already made plans to furlough 30% of its workforce. But, while its smartly planning for the worst-case scenario, it may get through this much better than Wall Street currently expects.
Between a cost-structure advantage, a focus on the domestic passenger market, and its strong liquidity, SAVE stock remains one of the strongest airline recovery plays out there.
Thomas Niel, contributor to InvestorPlace, has written single-stock analysis since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.