One of the hardest-hit industries affected by COVID-19 is the airline industry with load factors dropping by 95% in some cases. And like any distressed industry, the strong will survive and prosper but how long will that take in this instance?
That is the question you have to ask yourself as an investor.
Spirit Airlines (SAVE) is an airline receiving a lot of attention because they are very well-run, efficient, and, until recently, profitable.
But when you dig deeper, alarm bells go off and you have to wonder how long it will take Spirit to recover to anywhere near their results from 2019.
Here are 5 reasons to avoid Spirit.
1. They are losing $4 million a day.
Scott Haralson, CFO:
Today, the operation is at a level that is 95% below our planned capacity. At these capacity levels with basically zero cash sales net of refunds, we estimate our operating cash burn per day is about $4 million.
To put that in perspective, 90 days at that level would be more than the near-record profit, $335 million, they made in 2019.
Of course, that $4 million will drop over time to $3, $2, and eventually $1 million a day. But just how long will a million dollars a day losses continue?
Boeing CEO David Calhoun thinks it will be 2-3 years before airlines return to 2019 levels.
It will take two to three years for travel to return to 2019 levels and an additional few years beyond that for the industry’s long-term growth trend to return.”
If Calhoun is right, there is a lot of downsizing and/or losses yet to come.
2. Spirit has very low costs but their profit is less than a penny per seat mile.
CASM is an acronym for “Cost per Available Seat Mile.” And when it comes to CASM, Spirit is an industry leader. As you can see below, they are the low-cost leader – more than 50% less than Delta (NYSE:DAL), United (NASDAQ:UAL), and American Airlines (NASDAQ:AAL).
According to their 10K, Spirit had about 42 billion available seat miles, so with a 2019 profit of $335 million that comes out to $.008 per mile.
The problem is that 5.58 cents is based upon 84% load factor and they are now at a 5% load factor.
So until they get back to 84% load factor there will be only losses on the horizon.
3. Which of their CASM costs can they cut while they wait?
If you look at the cost breakdown you can see some items that will not be able to be cut much, if any. For example, depreciation and amortization, maintenance, distribution which is basically marketing, and aircraft rent. Salaries and wages can be cut but not by 95%. So CASM costs are going up significantly and will wipe out that less than penny profit for a long time.
4. Will Spirit’s low-cost, high-density model be as viable going forward?
Spirit’s low-cost model has been successful for them. But with the new world of COVID and increased disease awareness of the public, how long will it be before that packed-as-close-as-sardines aka high-density, is completely acceptable to the public again?
Consistent with our ULCC business model, each of our aircraft is configured with a high density seating configuration, which helps us maintain a lower unit cost and pass savings to our customers. Our high density seating configuration accommodates more passengers than those of our competitors when comparing the same type of aircraft.
It may well come back successfully again, but how long will that ramp be? That is one of the many unknowns that will determine how long that $4 million a day loss continues.
5. Warren Buffett hates, hates, hates airlines.
The bloom is certainly off the rose when it comes to Buffett’s deification, but he still wields a lot of influence on stock buyers.
He didn’t just sell airlines, he dumped them unceremoniously. And two of which are considered best of breed – Delta and Southwest (NYSE:LUV).
As an investor, I don’t think you can underestimate Buffett’s effect on airline stock prices going forward. You can just hear a prospective buyer saying “If Buffett sold them should I be buying them?”
Sometimes bad things happen to good companies through no fault of their own. That is the case with Spirit and COVID.
They have a lot of liquidity, approaching $2 billion now, but in this environment that could be equivalent to the old saying “money down the drain” as losses mount and go on for a long period of time. And if that liquidity is used for operations it can’t be used for other things.
Avoid Spirit and all airlines.
Risks, alarm bells and red flags.
Airlines seem especially unsuited to investment right now.
In addition, there could be a recession coming or even a depression according to several economists.
“Economic data in the near future will be not just bad, but unrecognizable,” Credit Suisse economists led by James Sweeney wrote last week. “Anomalies will be ubiquitous and old statistical relationships within economic data or between market and macro data might not always hold… There is no blueprint for the current shock, and uncertainty about the extent of contagion and the economic consequences is overwhelming.”
In a volatile environment like we are facing now, cash is always a viable alternative.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Source: Seeking Alpha