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Spirit Airlines' Expansion Efforts Impress, Competition a Drag

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On Sep 29, we initiated coverage on Miramar, FL-based ultra low-cost carrier, Spirit Airlines (SAVE - Free Report) .

The carrier, which went public in 2011, follows a strategy of unbundling its services and offering customers (Frill Control) options for purchase – from bags and seat assignment to refreshments. This strategy of the company has been much appreciated as the unbundled base fares do away with the components that are traditionally included in ticket prices. The company maintains a young all-airbus fleet, which operates more than 385 daily flights across 56 destinations in the U.S., the Caribbean and Latin America.

We are also positive on the carrier’s constant efforts to expand its operations. The U.S. Department of Transportation’s (DOT) decision to grant final approval to eight carriers, including Spirit Airlines, to initiate commercial flights to Havana is highly encouraging. The verdict confirmed the tentative approval awarded on Jul 7, 2016. Havana will become Spirit Airlines' 59th destination. Following the approval, the carrier announced its intention to initiate flights (twice a day) to Havana's José Martí International Airport from the Fort Lauderdale-Hollywood International Airport. The service will start from Dec 1, 2016, subject to approval from the Cuban government.

The carrier has an impressive track record with respect to earnings. Spirit Airlines outpaced the Zacks Consensus Estimate in each of the last four quarters with an average earnings beat of 4.35%. In the second quarter of 2016, Spirit Airlines reported better-than-expected earnings aided by low oil prices. Moreover, earnings improved 7.8% on a year-over-year basis. We expect the company to continue deliver impressive earnings figures in the coming quarters on the back of cheap oil.

However, the carrier is struggling on the top-line front. The company reported lower-than-expected revenues in the second quarter of 2016. The top line was hurt by a 3.9% dip in passenger revenues.

Spirit Airlines, like its peers, continues to struggle with unit revenue issues. Total operating revenue per available seat mile (TRASM: a key measure of unit revenue) declined 14.3% in the second quarter. Average yield decreased 14.7%. Unit revenue issues are expected to hurt Spirit Airlines in the third quarter as well. TRASM is anticipated to fall around 9% in the third quarter

Moreover, Spirit Airlines operates in a highly competitive market. Other low-cost carriers like JetBlue Airways (JBLU - Free Report) and Southwest Airlines (LUV - Free Report) pose significant competition to the company. The stock may be significantly hurt if competition intensifies. Moreover, the surge in terror attacks has hurt airline stocks in general and Spirit Airlines is no exception.

Zacks Rank & A Key Pick

Spirit Airlines currently carries a Zacks Rank# 3 (Hold). Investors interested in the airline space may consider Copa Holdings (CPA - Free Report) sporting a Zacks Rank # 1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The Panama City-based carrier has been an impressive performer this year with its shares surging more than 86%, year to date. The carrier has a robust earnings history. It outpaced the Zacks Consensus Estimate in three of the last four quarters with an average beat of 37.04%. In fact, the Zacks Consensus Estimate for 2016 has climbed 10 cents to $4.55 per share over the last 30 days.

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