Spirit Final Presentation

Analyst ReportJune 2016

Announcement

“Ladies & Gentlemen, thank you for traveling with Spirit Airlines.

We are now 30,000ft high. Please remain buckled up and enjoy the ride…

Our friendly flight attendant will start serving you in just a moment. “

Open

Spirit Airlines – Company Description

§ ULCC Pricing Model

§ “Bare-bones” fares

§ Additional fees for all other services

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Pricing Model

§ Unbundled fares

§ $9 Fare Club

§ Non-reclining seats

§ Additional charge for carry-on bags ($25-50) and check-in bags ($20-45)

§ Big Front Seat - extra width and legroom

Open

Pricing Model Open

Consumer dissatisfaction ranges from:

§ outrage over the airline’s hefty add-on fees

§ no-exceptions policy

§ crammed seating.

OpenUnapologetic Management

OpenUnapologetic Management

1st minute

Customer Satisfaction Open

Top 10 most hated companies in the U.S. 1

1 Based on 24/7 Wall St “America’s most hated companies” as of 14th January 2016. 2 Based on American Customer Satisfaction (ACSI) Index 2016

Customer Satisfaction Benchmark by Airline Industry 2

Customer Satisfaction Open

Airline IndustryTHE AIRLINE INDUSTRY

HELPS DRIVE NEARLY

$1.5 TRILLION INU.S. ECONOMIC ACTIVITY COMMERCIAL AVIATION

HELPS DRIVE MORE THAN

11 MILLION JOBS IN THE U.S.

U.S. GDPCONTRIBUTION OF

5%

+122% REVENUE GROWTH IN 2015TOTAL $ 18.92 BILLION NET INCOME

696 MIILION DOMESTIC PASSANGERS

MORE THAN 50 Airlines

Forceasted growth rate of 1.9% CAGR until 2035 1

1 Based on estimation of the Federal Aviation Administration (FAA Aerospace Forecast Fiscal Years 2015-35)

Economic Environment

0.6% 0.4%

3.2%

5.8%

16.6%

5.32%

13.74%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

12.6%

12.8%

13.0%

13.2%

13.4%

13.6%

13.8%

14.0%

14.2%

2011 2012 2013 2014 2015 2011-2015Avrg.

U.S. Airlines S&P 500Sources: Standard and Poor’s (S&P), Airlines for America (A4A), Bureau of Transportation Statistics and Oliver Wyman: Airline Economic Analysis

Six Years Post-Recession, Pre-Tax Profit Margnis of U.S. Carriers

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Competitive Environment

79.24%

13.52%

7.24%

Big 4 Mid-tier / Hybrids ULCC

Total Domestic Market Share (RPM) – Spirit Peer Group

We define Spirit Peer Group as follows: Big 4 = American, Delta, Southwest & United< Mid-Tier/Hybrids = Alaska, JetBlue, & Virgin America, ULCCs = Allegiant, Frontier, & Spirit

Very large carriers with that are in a very mature phase of their growth cycle

Smaller carriers than the Big 4 trying to attract premium yields with their product offerings

Carriers with Ultra-Low Cost structures designed to compete on the basis of price(price leader approach)

• ULCCs’ Share of the U.S. Domestic Market is expected to Increase Significantly

• INPUT

• https://skift.com/2016/01/14/u-s-legacy-carriers-vs-low-cost-rivals-in-8-charts/

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Expanding Markets

§ Spirit has the abilility to grow in profitable markets.

§ Just expanded our Latin American routes.

§ The “Spirit Entry Effect” is real - the number of additional travelers after we enter a market generally increases enough for us achieve an 85% or greater load factor without taking share from other carriers.

§ Spirits untapped market is growing as their cost structure improves. (Lower-income&Frugal Flyers)

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Underserved Market

§ A Large base of frugal flyers looking for the cheapest base fair.

§ These flyers are hit with a multitude of unexpected costs creating averseness among customers.

§ Customer retainment has not been well addressed with Spirits current operations.

§ Currently, this has not proved to be a problem considering the observed growth in Spirits sales.

Open

Turning Point?

§ Slump in revenue growth in 2015

§ Stock price plunged from $74 in early 2015 to $40 at year-end

§ CEO Ben Baldanza sacked

Open

“Number one, cash is king […]”

Jack Welch

Financial Performance Open

Operating Performance

0%

5%

10%

15%

20%

25%

30%

35%

40%

0

1,000,000

2,000,000

3,000,000

2011 2012 2013 2014 2015Passenger Non-ticket Operating Profit Margin Sales Growth Operating Expenses

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Revenue Distribution

Passenger55%

Non-ticket45%

Passenger92%

Non-ticket1%

Special revenue adjustment

1%

Other6%

Spirit Airlines Southwest Airlines

Open

Sales Growth

Income Margins(2015)

37.11%

23.08%25.49%

16.76%

10.87%

22.66%

29.36%

9.13%

3.58%5.12%

6.53%

10.74%

2010-2011 2011-2012 2012-2013 2013-2014 2014-2015 Average


14.81% 11.03%

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13.5% 13.2%

17.1%18.4%

23.8%

17.2%

4.4% 3.6%

7.2%

12.0%

20.8%

9.6%

2011 2012 2013 2014 2015 Average


Operating Profit Margins Open

16.5%

11.8%

15.0%14.2%

12.5%14.0%

1.0%2.3%

3.9%

5.8%

10.2%

4.6%

2011 2012 2013 2014 2015 Average

Return on Total Asset


Strong Financial Performance Open

Investment in Flight Equipment

§ Massive investments in Flight Equipment in 2014 & 2015

§ Southwest already has established a much larger fleet

Open

§ Why the ROA declines?

Expansion

PP&E investment

Balance Sheet analyses

Strong Financial Performance Open

Short Term Solvency

1.95 1.98 1.93 1.97

2.2

0.87 0.810.7 0.61

0.5

2011 2012 2013 2014 2015

Quick Ratio

Spirit Southwest

CFFO Investing Acitvities Finance Actitvities

Cash Flow Analysis

§ Strong operative results and high clash flow margin

22.1%

16.3%

10.3%

§ High capital expenditures into flight equipment

§ IPO in 2011 ($170mn.)

§ Nearly no changes in the capital structure between 2012-2013

§ Leveraged finance with long-term debt of 14 new airplanes 2014 ($536mn.)

§ Repurchase of common stock since 2015 ($112mn.)

§ No dividend payments

Cash Flow Analysis

343.328 416.816530.631

632.784

803.632

-800

-600

-400

-200

0

200

400

600

800

1000

2011 2012 2013 2014 2015

CFO Investing Cash Flow Finance Cash Flow Closing Cash Balancein $k

Conclusion

Market Profitability Liquidity

§ High generic market growth and positive future forecast

§ Establishing of a market niches due to a unique pricing model and generating new customers without taking away these from existing airlines

§ Strong increase in all operating KPIs and the ability of the firm to generate cash from sales

§ High growth potential due to expansion of fleet and optimization in CASM (Cost of available seats per mile)

§ Operating expenses are increasing at a slower rate than sales

§ No threat of short-term bankruptcy

§ Effects from long-term debt and leasing obligations in the future on liquidity creates uncertainty

✔ ✔ ✔

Spirit Final Presentation

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Transcript of Spirit Final Presentation