Can Spirit Airlines Continue Flying Higher?

Heading into 2016, Spirit Airlines (SAVE) was my best long idea for the year. The stock has widely outperformed the market and is up almost 30% YTD. I have always touted Spirit Airlines as a long-term investment and advised readers to hold the stock for at least five years. So, despite the recent uptick in share price, I think Spirit Airlines is still a decent buy. My 2016 price target for the stock is $60, signifying a 15% upside from current levels.

Improving fares

With oil prices jumping over 50% in the last few weeks, air fares have increased as well.
However, despite the jump in oil prices, airlines are still saving millions of dollars as oil is still way below the level it was in 2014. But the recent rally in crude has given airlines a chance to boost their ticket prices. Falling unit revenue amid a weak airfare environment was the primary cause of Spirit Airlines’ downfall in 2015.

Airlines are now focused on improving unit revenue as evident by Delta Air Lines latest earnings report. Delta said, "We are focused on getting unit revenues back to a positive trajectory and we will make adjustments to our fall capacity levels if we are not making sufficient progress over the coming months,"

Increasing unit revenue is good news for the entire aviation industry, but it is more important for Spirit Airlines as the company’s unit revenue declined the most amid the price war last year. Now that Spirit Airlines has guided above expectations, investors can be certain that unit revenue is gradually increasing. Spirit Airlines guided for Q1 operating margin of 21.5% from a prior view of a range for 19.0% to 20.5%. Also, adjusted cost per available seat mile is estimated to be down 2%, also better than the prior forecast.

After the acquisition of Virgin America by Alaska Airlines, analysts are expecting further consolidation in the industry, which in turn is good news for Spirit Airlines as reducing competition will lead to higher ticket prices.

Spirit Airlines itself can merge with Frontier whereas Hawaiian Airlines is seen as a nice target for JetBlue. All in all, further consolidation in the sector is highly likely and investors can expect the air fares uptrend to continue.

Spirit Airlines stands to benefit the most from the increasing fares, which is why I think investors can still consider buying the stock.
Published on Apr 20, 2016
By Ayush Singh

Copyrighted 2020. Content published with author's permission.

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