Why Spirit Airlines is the Fairest of Them All

  • While shares of other airlines have fallen, Spirit Airlines (SAVE) stock is up almost 10% this year.
  • JetBlue (JBLU) and Frontier (ULCC) both want to buy it, at a premium to today’s price.
  • If life and business ever return to normal, airlines are undervalued.
SAVE stock - Why Spirit Airlines is the Fairest of Them All

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Spirit Airlines (NASDAQ:SAVE), the ugly duckling among airlines, and a punchline on late night comedy, is suddenly the belle of the industry ball.

Spirit is the only airline stock that is up for 2022, recently posting a gain of 9%. Every other airline has followed the market lower.

Spirit is attractive because rival Frontier Airlines (NASDAQ:ULCC) offered to buy it in February for stock then worth $3.3 billion. JetBlue (NASDAQ:JBLU) topped that with an all-cash offer of $3.6 billion. That offer has since sent JetBlue stock down more than 40%.

It’s all playing out against a backdrop of disruptions and cancellations that have consumers complaining and investors fleeing the sector.

Ticker Company Price
SAVE Spirit Airlines $22.75

Why Buy SAVE Stock?

Beyond its route system and valuable landing “slots,” Spirit is seen as a potential turnaround story. It’s worthwhile because it’s worth less, currently valued at 25% less than its annual revenue. Southwest Airlines (NYSE:LUV), which also began as a budget carrier, is now worth $21 billion on revenue of $16 billion.

There’s also the fact that even minimal improvement would bring Spirit into line with the other carriers. Over 5,000 formal complaints were lodged against U.S. airlines in April. Spirit led the pack, but larger American Airlines (NYSE:AAL) was right behind it. No one is covering themselves in glory.

It’s not too late for investors to get in on this action. Sprit’s market cap of $2.6 billion is still below both the Frontier and JetBlue offers. Frontier recently offered a $250 million “reverse breakup fee,” cash that will flow directly to Spirit if regulators reject the merger. (JetBlue has offered a $200 million fee.)

Spirit management wants shareholders to support the Frontier deal, although the meeting to approve it was postponed until June 30 after JetBlue sweetened its offer.

Airline Potential

Either merger would create the industry’s fifth-largest carrier. Consumer advocates fear this consolidation will lead to even-higher fares and even-lower standards for service.

Airlines long-ago replaced buses and trains as the primary method for travel. Fares have been rising as consumers lock-in post-pandemic plans, and the Ukraine war keeps fuel costs high.

The hope in airline stocks was always that, when travel levels returned to pre-pandemic levels, profits would flow. This hasn’t happened. Most airline stocks are still down 40% to 50% from where they were five years ago. Even with the recent tech wreck, the average Nasdaq stock is up 76% in that time.

But still, well-run airlines like Delta Airlines (NYSE:DAL) were recording 10% of their revenue as net income before the pandemic. Speculators believe that if the airlines can hire and train more staff, and if the government can get more air traffic controllers, those profitable days will return.

Despite Spirit’s continuing problems people are still booking flights on it, attracted by its low prices, willing to suffer extra fees for nearly any service. Slightly improved performance could bring big rewards.

The Bottom Line

My late mother liked to say that “if wishes were horses, beggars would ride.”

Investors may wish for better performance from airlines, but post-pandemic profit promises have not been kept.

With so many great companies selling for a fraction of their real value, it seems silly to speculate on a return to glory for the industry. Even a 25% gain on Spirit once either Frontier or JetBlue gets the go-ahead to buy seems modest.

Still, this is a gamble a young speculator can take. I doubt regulators would scuttle either deal. Five strong carriers make more sense than four strong ones and a few weak hands. If things work out, you should have a fat gain this time next year. The key word in that sentence is if.

On the date of publication, Dana Blankenhorn held no shares in any company mentioned in this story. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his Substack.

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