Compared to more famous companies like American Airlines (NASDAQ:AAL), United Airlines (NASDAQ:UAL), and Delta Air Lines (NYSE:DAL), people tend to think of Spirit Airlines (NYSE:SAVE) as a lesser competitor. As a result, SAVE stock is often left out of discussions among airline-industry investors.
That’s regrettable as the value proposition of SAVE stock is highly compelling right now. Just because Spirit is a “discount” airline doesn’t mean that the company isn’t competitive.
There’s no guarantee whatsoever that SAVE stock will quickly recover from the fiscal impact of the novel coronavirus. Long-term shareholders might have to wait until 2021 before they can get back to the break-even point, unfortunately.
On the other hand, bold investors might take a chance on Spirit as recent data suggests a pickup in domestic airline travel. This, along with the company’s forward-thinking cost-cutting measures, should reassure investors that SAVE stock is ready for takeoff.
A Closer Look at SAVE Stock
For the time being, admittedly, SAVE stock is merely taxiing down the runway. Even prior to the onset of the coronavirus, SAVE shares were in a relentless state of decline.
After peaking at the $64 level in late 2018, SAVE stock had descended to the $43 area by early February of this year. That’s when Covid-19 wreaked havoc on the stock market and there was no soft landing for SAVE investors.
The share price bottomed out at the 52-week low of $7.01, but there was some recovery afterwards and SAVE stock closed near $17 on Aug. 21. Value-focused investors could view this as a rare opportunity to buy the shares at a deep discount.
But whether it’s really a discount depends on the outlook for the company and, just as importantly, the airline industry in general. Does the data suggest that there’s hope on the horizon?
Eyes on the Skies
SAVE investors should remain confident as recent data does indeed indicate a pickup in flying activity, at least domestically. Specifically, in August the Transportation Security Administration (TSA) recorded five consecutive days in which TSA airport staff had screened more than 700,000 daily passengers.
As a point of reference, we can compare this to late April’s domestic travel volumes. Believe it or not, during that time, the number of daily screened passengers fell below 100,000.
Thus, even without a coronavirus vaccine available to the public, there’s already been a marked pickup in air travel activity. Evidently, even a global pandemic can’t destroy the aviation market.
And Warren Buffett, who famously sold off his airline shares a few months ago, might have made a big mistake in doing so. Yet, what sets Spirit apart from the company’s competitors?
Smaller Can Be Better
During these challenging economic times, being known as a discount airline could actually prove to be a major advantage for Spirit. While some of the other airlines might be bigger and fancier, Spirit is known for providing a cheap way to fly.
That’s an advantage when people and businesses are operating on a tight budget. In that light, times of slow growth could actually favor a budget-friendly airline like Spirit.
Citigroup analyst Stephen Trent seems to concur with this assessment.
“An ongoing, choppy traffic recovery, combined with what looks to be continued weak pricing, looks like a good setup for Buy-rated Spirit,” Trent wrote.
This factor, along with cost-cutting measures, add up to a compelling reward-to-risk profile for SAVE stock. Spirit recently provided advance notice that in October the company might furlough 20% to 30% of its pilots, flight attendants and other staff.
That’s bad news for the folks at Spirit who might lose their paychecks. For shareholders, however, it’s a sign that Spirit is prepared to do what’s necessary to stay in business.
The Bottom Line
Contrarian investors should view SAVE stock as a beaten-down asset with “recovery trade” written all over it. When times get tough, low-cost carriers can outperform and Spirit shares could fly high when we least expect them to.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.