Some analysts are starting to make a case for Spirit Airlines (NYSE:SAVE). Though many if not most investors will need convincing, SAVE stock initially appears attractive for speculation.
I’m not a big fan of the airline industry under present circumstances. As you know, when the novel coronavirus pandemic first hit us, among the most prominent signs of the devastation was empty airports. Nobody wanted to travel, which negatively affected individual airliners.
On top of that, the pandemic isn’t just a health issue. Of course, that’s the most pressing concern. But the infectiousness of this virus has prompted shutdowns of national and state economies, devastating multiple labor force segments.
However, coronavirus cases have declined sharply from this summer’s peak, which bodes well for SAVE stock. With the unemployment rate declining, more people are returning to work, helping to increase the airliner industry’s potential consumer base.
Second, no matter what is going on, you can never take away the resilience of the American people. Frankly, I’m impressed with how our nation has responded in terms of remote work. Genuinely, we should all be proud of ourselves as we shifted remarkably quickly to remote work and online education.
Plus, this is a clear indicator that there will always be demand for certain products or services. Travel is one of them. Not only that, cheap travel is at a premium, which improves the narrative for SAVE stock.
Admittedly, the new normal is a positive for Spirit. Nevertheless, you want to be careful. On a broader level, airline demand has simply not returned to a capacity that is adequate enough to support the many players in the airline industry. According to data from the Transportation Security Administration, for the month of October (up to the ninth day), air travel demand is only 34% that of the year-ago period.
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I’m sorry but that’s not going to cut it. In addition, the recovery narrative for air travel has started to wane significantly. Back in April, passenger volume was less than 5% that of the year-ago period. By July, this metric improved to 26%, which is obviously great news.
However, in August, that metric improved slightly to 29%. Last month, air travel demand was only 32% compared to the same period in 2019. Until we have a major catalyst, the risk to buying SAVE stock — or any airliner — is that the industry could be stymied for years to come.
Load Factor Is a Plus for SAVE Stock But That’s About It
In my write-up about JetBlue Airways (NASDAQ:JBLU), I mentioned that if load factor — or the profitability ratio per flight — is a significant consideration, JBLU was in trouble. But that wasn’t meant as a dig against JBLU. Indeed, most airliners have substandard load factors during this awful crisis.
According to data from the Bureau of Transportation Statistics, the average load factor for all U.S.-based carriers in June 2020 (the latest available data at time of writing) was only 56%. Even strong names like Delta Air Lines (NYSE:DAL) was down at 49%. So, this is a terrible look for most companies.
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But the exception is Spirit Airlines. Back in June, it had a load factor of a blistering 79.3%. And because this was a time when coronavirus cases were rising toward their summer peak, it suggested that among consumers who were willing to fly during the pandemic, price really mattered.
What does Spirit specialize in? A no-frills experience that will get you to point A to point B safely. Obviously, this is a company geared toward cheap flights, so SAVE stock has an advantage during this pandemic.
However, Spirit is winning in a smaller pond, which is a Pyrrhic victory if there ever was one. Furthermore, I’m not sure if the company can sustain this win. According to Gurufocus.com, Spirit has poor financial stability based on its balance sheet. True, competing balance sheets don’t look all that great either. But Spirit had been working through underperforming years and was finally gaining momentum.
Then, the coronavirus struck. Yes, the cheap flights angle is positive but SAVE stock needs an economic recovery just as badly as its rivals. Moreover, I find it interesting that Gurufocus considers SAVE a possible value trap.
The New Normal Could Last a Generation at Least
Finally, my hesitation regarding SAVE stock revolves around the social impact of the novel coronavirus. According to Nature.com’s analysis of Yale University professor Frank M. Snowden’s book, Epidemics and Society: From the Black Death to the Present, “Snowden’s broader thesis is that infectious diseases have shaped social evolution no less powerfully than have wars, revolutions and economic crises.”
I don’t doubt Snowden’s argument for one bit. Yeah, we talk about how “we’re all in this together.” But imagine how you would feel when we eventually go mask-less and someone sneezes. Would you react with “God bless you!” or instead with dreadful terror?
As we traverse this nightmare, I believe we are seeing a degradation of social trust. Until that improves, I’d be very careful about SAVE stock, and any other airliner.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.
