1.
1
1.0
Executive
Summary
The
purpose
of
this
report
is
to
provide
a
comprehensive
analysis
of
Spirit
Airlines
(SAVE)
through
qualitative
and
quantitative
examinations
of
its
financial
data
and
business
model.
We
intend
for
our
findings
to
contain
useful
and
beneficial
information
for
potential
investors
in
the
company
as
well
other
interested
parties.
None
of
the
authors
of
this
report
hold
positions
in
the
stocks
discussed
nor
have
any
connections
whatsoever
to
the
corporation.
Spirit
Airlines
represents
an
intriguing
outcome
of
an
airline
industry
undergoing
major
changes.
The
rise
in
lower-­‐income
flyers,
uncertainty
over
global
oil
prices,
and
demographic
shifts
towards
urbanization
have
all
contributed
to
the
creation
of
a
two-­‐
tiered
industry
in
which
ultra
low-­‐cost
carriers
like
Spirit
have
thrived.
The
airline’s
unconventional
and
often
controversial
marketing
techniques
have
also
given
it
unique
recognition
in
the
aviation
business.
The
information
in
this
report
is
presented
in
two
main
parts.
The
first
section
provides
an
evaluation
of
Spirit
Airlines
from
a
qualitative
standpoint.
The
corporation’s
management,
competitive
environment,
and
industry-­‐specific
challenges
are
among
topics
discussed
in
this
section.
The
second
part
of
the
report
encompasses
detailed
analysis
of
quantitative
data
derived
from
the
airline’s
Form
10-­‐K
filing
with
the
SEC.
This
section
includes
extensive
use
of
financial
ratios
and
common-­‐sized
data
to
conduct
a
thorough
appraisal
of
the
corporation’s
financial
and
economic
position.
Much
of
our
analysis
involves
data
comparisons
with
the
carrier’s
main
competitor
Southwest
Airlines.
We
conclude
our
findings
with
an
overall
assessment
of
the
airline
as
well
as
advice
for
potential
investors.
The
appendix
contains
all
financial
statements
–
for
both
airlines
–
and
data
analyzed
in
this
report.
The
combination
of
qualitative
and
quantitative
analyses
included
in
our
evaluation
intends
to
give
a
multi-­‐faceted
and
complete
perspective
of
Spirit
Airlines.
We
hope
that
this
report
serves
as
a
valuable
source
of
information
for
anyone
looking
to
invest
in
the
airline
or
learn
more
about
why
the
corporation
is
such
a
fascinating
player
in
the
industry.

2.
2
2.0
Company,
Industry,
and
Environment
2.1
Description
of
Corporation
and
Management
Spirit
Airlines
is
an
ultra
low-­‐cost
carrier
(ULCC)
headquartered
in
Miramar,
Florida.
Founded
in
1964,
the
airline
struggled
for
decades
as
a
mid-­‐tier
operator
with
limited
destinations
on
the
east
coast
until
drastically
transforming
itself
with
the
arrival
of
new
majority
shareholders
Oaktree
Capital
and
Indigo
Partners
in
2005.1
The
new
ownership
hired
maverick
CEO
Ben
Baldanza
to
spearhead
the
rebranding
process.2
After
weathering
a
rough
transition
that
included
a
massive
pilots
strike
in
2006,
Baldanza
succeeded
in
implementing
a
new
business
plan
focused
solely
on
providing
the
lowest
ticket
prices
to
a
narrow
segment
of
the
air
travel
market.3
While
its
larger
competitor
Southwest
Airlines
had
previously
championed
flying
on
a
budget,
Spirit
pioneered
a
marketing
strategy
with
its
entire
emphasis
on
the
unrivaled
based
fares
offered
by
the
carrier.
In
January
of
2016,
Spirit
hired
Robert
Fornaro
to
replace
Baldanza
as
CEO
after
a
prolonged
period
of
low
stock
prices
and
slipping
revenues.
Despite
describing
the
change
as
necessary
for
the
airline’s
future,
the
management
has
publicly
stated
that
Baldanza’s
“no
frills”
business
model
has
been
key
to
the
company’s
success
and
that
they
have
no
intention
of
changing
it.4
“Our
ultra
low-­‐cost
structure
is
the
foundation
of
our
competitive
advantage,”
said
CFO
Ted
Christy
in
February.5
Industry
analyst
Seth
Kaplan
of
Airline
Weekly
in
Fort
Lauderdale
agreed
that
“Spirit
made
a
good
choice
in
Baldanza's
replacement.
Sometimes
one
CEO
is
the
right
person
to
grow
a
company
to
a
certain
point,
and
then
someone
else
is
the
right
person
for
the
next
phase.”6
1
http://commons.erau.edu/cgi/viewcontent.cgi?article=1602&context=jaaer
2
http://www.seatmaestro.com/airlines-­‐seating-­‐maps/spirit-­‐airlines/history/
3
http://commons.erau.edu/cgi/viewcontent.cgi?article=1602&context=jaaer
4
http://atwonline.com/blog/bob-­‐fornaro-­‐s-­‐plan-­‐spirit-­‐airlines
5
Ibid
6
http://www.sun-­‐sentinel.com/business/tourism/fl-­‐spirit-­‐airlines-­‐new-­‐ceo-­‐20160105-­‐story.html

3.
3
2.1.1
Pricing
Philosophy
Spirit
Airlines’
pricing
philosophy
follows
the
belief
that
passengers
should
only
pay
for
the
services
they
use
and
should
not
subsidize
the
services
used
by
other
passengers.7
Spirit
accordingly
sells
tickets
at
low,
unbundled
base
fares
that
remove
components
traditionally
included
in
the
price
of
a
flight.8
These
“bare-­‐bones”
fares
only
cover
the
price
of
the
seats
themselves
and
allow
each
passenger
to
bring
on
one
small
carry-­‐on.
All
other
services
–
checking
one’s
bags,
getting
a
can
of
soda,
or
even
getting
one’s
boarding
pass
printed
at
the
gate
–
are
provided
at
additional
fees.9
By
allowing
customers
to
save
by
paying
only
for
the
options
they
choose,
the
company
claims
to
bring
in
a
level
of
transparency
unlike
many
other
competitors.10
Former
CEO
Baldanza
describes
Spirit’s
characterization
as
so:
"We're
selling
low
prices,
and
compete
for
customers
on
the
basis
of
price
and
price
alone.
In
the
retail
world,
we
would
be
the
dollar
store."11
Spirit’s
unconventional
pricing
model
has
come
at
the
cost
of
its
public
image,
with
the
airline
consistently
ranked
among
the
ten
most
hated
companies
in
the
United
States
each
year.12
Consumer
dissatisfaction
ranges
from
outrage
over
the
airline’s
hefty
add-­‐on
fees,
no-­‐exceptions
policy,
and
crammed
seating,
to
disgust
over
the
company’s
bizarre
advertising
regime.
Spirit’s
management
has
been
largely
unapologetic
about
these
issues,
claiming
that
these
characteristics
are
simply
reflective
of
the
low
fares
passengers
pay.13
Former
CEO
Baldanza
has
dismissed
the
majority
of
complaints
as
“irrelevant”
and
cited
a
particular
Yelp
customer’s
review
as
his
reason
why:
"I
travel
on
Spirit
all
the
time.
I
know
they
suck!
But,
for
a
cheap
ticket,
I
will
endure
anything".14
7
http://marketrealist.com/2015/11/understanding-­‐spirit-­‐airlines-­‐low-­‐cost-­‐business-­‐model/
8
http://www.reuters.com/finance/stocks/companyProfile?symbol=SAVE.O
9
http://www.reuters.com/finance/stocks/companyProfile?symbol=SAVE.O
10
http://marketrealist.com/2015/11/understanding-­‐spirit-­‐airlines-­‐low-­‐cost-­‐business-­‐model/
11
http://articles.sun-­‐sentinel.com/2013-­‐03-­‐24/business/fl-­‐spirit-­‐airlines-­‐ceo-­‐q-­‐and-­‐a-­‐
20130321_1_spirit-­‐
ceo-­‐ben-­‐baldanza-­‐low-­‐cost-­‐carrier-­‐spirit-­‐airlines
12
http://finance.yahoo.com/news/america-­‐most-­‐hated-­‐companies-­‐145925561.html
13
http://www.cnbc.com/2016/02/18/spirit-­‐airlines-­‐triggered-­‐the-­‐most-­‐complaints.html
14
http://abcnews.go.com/Travel/spirit-­‐airlines-­‐crazy-­‐airline-­‐taking-­‐world/story?id=16921444

4.
4
2.1.2
Non-­‐ticket
Revenue
Unbundled
pricing
is
just
one
part
of
Spirit’s
multifaceted
ancillary
revenue
strategy.
Spirit
is
the
world’s
leader
in
airline
non-­‐ticket
revenue
production
with
approximately
40%
of
revenue
being
derived
from
non-­‐ticket
sources.15
This
non-­‐ticket
revenue
comes
from
the
following
additional
travel-­‐related
options:
(a)
$9
Fare
Club,
(b)
hotels
and
rental
cars,
(c)
GDS
exchange,
(d)
Big
Front
Seat,
and
(e)
travel
insurance,
and
Other:
(a)
on-­‐board
advertising,
(b)
online
advertising,
and
(c)
a
co-­‐branded
credit
card.16
Spirit
Airlines’
exceptional
ability
to
manage
costs
through
techniques
such
as
high
craft
utilization,
a
high-­‐seat-­‐density
configuration,
and
efficient
flight
scheduling
also
help
the
company
to
get
more
revenue
out
of
each
aircraft
than
any
other
airline.17
2.1.3
Advertising
Campaign
Spirit
aggressively
promotes
its
low
fares
and
unbundled
pricing
with
unapologetic
and
often
bizarre
advertisements.
These
include
the
infamous
M.I.L.F.
(Many
Islands
Low
Fares)
promotions
using
the
slogan
“hotter
and
cheaper
than
ever”,
as
well
as
a
TV
commercial
that
features
a
model
undressing
herself
to
promote
the
“Bare
Fare”.18
The
carrier
has
even
become
known
for
launching
provocative
advertisements
that
blatantly
reference
controversial
events,
such
as
the
BP
oil
spill
in
2010
(“Check
out
the
oil
on
our
b*ches”)
and
the
celebrity
naked
photos
scandal
in
2014
(“Our
Bare
Fare
was
hacked!”).19
While
the
airline’s
tasteless
and
irreverent
marketing
techniques
have
drawn
formal
complaints
from
customers,
employees,
and
even
groups
like
the
Association
of
Flight
Attendants,
Spirit
maintains
the
belief
that
consumers
ultimately
care
only
about
their
wallets.
Former
CEO
Baldanza
once
defended
the
advertisements
by
saying:
“The
only
thing
that’s
obscene
is
the
fares
that
most
of
our
competitors
charge.”20
15
http://docs.lib.purdue.edu/cgi/viewcontent.cgi?article=1018&context=atgrads
16
http://docs.lib.purdue.edu/cgi/viewcontent.cgi?article=1018&context=atgrads
17
http://marketrealist.com/2015/11/understanding-­‐spirit-­‐airlines-­‐low-­‐cost-­‐business-­‐model/
18
http://viewfromthewing.boardingarea.com/2014/09/04/spirit-­‐airlines-­‐promoting-­‐naked-­‐photos/
19
http://www.npr.org/2013/09/03/218625844/spirit-­‐airlines-­‐sees-­‐business-­‐take-­‐off-­‐with-­‐raunchy-­‐ads
20
http://www.forbes.com/sites/grantmartin/2014/07/09/spirit-­‐airlines-­‐tries-­‐to-­‐improve-­‐image-­‐by-­‐
giving-­‐away-­‐free-­‐miles/#41fae1cd1c52

5.
5
2.2
Industry
Analysis
and
Competitive
Environment
2.2.1
Industry
Overview
The
U.S.
airline
and
aviation
industry
comprises
a
significant
portion
of
the
national
economy,
contributing
over
one
million
domestic
jobs
and
five
cents
of
every
dollar
of
U.S.
gross
domestic
product
(GDP).21
The
market
recorded
an
all-­‐time
high
of
$18.92
billion
in
net
income
in
2015,
which
saw
growth
of
over
122
percent
from
2014.
The
preceding
year
had
recorded
$8.5
billion
in
net
income,
with
71
percent
of
revenues
generated
through
inland
(domestic)
flights.22
After
a
rapid
decline
in
2008
associated
with
the
stock
market
crash,
the
amount
of
passengers
carried
by
airlines
steadily
increased,
reaching
an
all-­‐time
high
of
696
million
passengers
in
2015.23
Figure
I:
Domestic
market
share
of
leading
U.S.
airlines
between
February
2015
and
January
2016
24
Source:
Bureau
of
Transportation
Statistics
21
http://airlines.org/industry/#economic
22
Based
on
own
calculations
-­‐
See
Appendix
1
23
Based
on
own
calculations
-­‐
See
Appendix
2
24
Market
share
based
on
Revenue
Passenger
Miles;
February
2015
–
January
2016

6.
6
The
four
biggest
airlines
–
Southwest,
Delta,
American,
and
United
–
currently
have
a
total
market
share
of
63.6
percent
based
on
operating
revenue
and
provide
80
percent
of
total
air
passenger
traffic.
This
industrial
oligarchy
emerged
from
the
consolidation
of
ten
major
airlines
into
four
dominant
mega-­‐carriers
due
to
a
series
of
bankruptcies
and
mergers
over
the
past
12
years.25
Acquisitions
have
continued
into
the
present,
with
the
most
recent
example
being
Alaska
Air
Group’s
share
purchase
of
Virgin
America
for
$2.6
billion
in
early
April
of
2016.26
The
deal
allowed
Alaska
Airlines,
owned
by
Alaska
Air
Group
along
with
its
sister
carrier
Horizon
Air,
to
leapfrog
JetBlue
and
become
the
fifth-­‐largest
U.S.
carrier
in
terms
of
traffic.27
While
these
consolidations
have
hit
consumers
with
increased
ticket
prices,
the
airline
industry
as
a
whole
has
consistently
achieved
net
profit
margins
above
15
percent
in
the
last
decade.
The
decline
of
energy
(especially
oil)
prices
has
aided
this
development,
as
well
as
improvements
in
matching
capacity
to
consumer
demand.28
Market
entry
barriers
are
considered
at
this
time
to
be
prohibitively
high,
as
the
industry
is
capital-­‐intensive
and
involves
both
enormous
fixed
and
variable
costs.
Aircraft
are
expensive
to
acquire
and
maintain,
while
airlines
spend
an
average
of
nearly
35
percent
of
their
revenue-­‐per-­‐plane
on
fuel.29
Price-­‐matching
between
carriers
has
also
greatly
affected
the
industry,
with
many
larger
airlines
willing
to
suffer
financially
in
order
to
gain
a
greater
market
share
on
their
competitors.30
The
increased
prevalence
of
price-­‐matching
emerged
as
a
direct
response
to
the
rising
status
of
ultra
low-­‐cost
carriers.
With
its
ability
to
offer
the
lowest
fares
threatened
by
bigger
airlines
that
operate
at
far
greater
volumes,
Spirit
suffered
a
dramatic
reduction
in
revenue
growth
in
2015.
The
resulting
plunge
in
the
company’s
share
price
(shares
went
from
$74
in
January
to
$40
at
year-­‐end)
spelled
the
end
of
Ben
Baldanza’s
tenure
as
CEO.31
25
http://money.cnn.com/infographic/news/companies/airline-­‐merger/
26
https://www.virginamerica.com/cms/news/virgin-­‐america-­‐merger-­‐with-­‐alaska-­‐airlines
27
http://www.fool.com/investing/general/2016/04/11/why-­‐alaska-­‐air-­‐bought-­‐virgin-­‐america.aspx
28
Oliver
Wyman
-­‐
Airline
Economic
Analysis
S
2015-­‐16
29
http://www.wsj.com/articles/SB10001424052702303296604577450581396602106
30
S&P
500
Capital
IQ
Spirit
Airlines
31
http://www.fool.com/investing/general/2015/12/22/1-­‐piece-­‐of-­‐great-­‐news-­‐for-­‐spirit-­‐airlines-­‐
incorpor.aspx

7.
7
2.2.2
Opposing
Business
Models
The
U.S.
domestic
airline
industry
is
a
competitive
and
volatile
environment
with
a
high
sensitivity
to
outside
elements.
Factors
that
influence
the
performance
of
carriers
include
airport
capacities,
route
structures,
governmental
regulations,
technological
deployment,
aircraft
inventory
management,
weather,
urban
economic
development,
and
consumer
spending
on
airline
transport
services.32
The
industry
is
currently
split
into
two
tiers:
the
legacy
carriers
and
low-­‐cost
carriers.
Their
opposing
business
models
differ
not
only
in
terms
of
cost
structure,
but
other
components
such
as
the
services
they
offer
to
customers
(an
unbundled
fare
with
an
$8
bag
of
chips
as
opposed
to
a
traditional
ticket
including
a
“free”
can
of
soda)
and
their
route
network
configurations
(determining
which
and
how
many
destinations
they
service).33
The
legacy
carriers
comprise
of
American,
Delta,
and
United
Airlines.
These
carriers
employ
a
product-­‐differentiation
approach
to
achieve
a
competitive
advantage
by
providing
to
their
customers
greater
benefits
and
comfort
in
their
flying
experience.34
Legacy
carriers
are
also
able
to
maximize
their
degree
of
connectivity
through
a
complex
“hub-­‐and-­‐spoke”
network
model.
This
allows
them
to
consolidate
their
passengers
at
a
hub
airport
and
then
fly
them
to
their
final
destinations
in
smaller
aircraft.
As
a
result,
legacy
carriers
are
able
to
increase
load
factors
and
decrease
fares,
while
also
flying
to
more
destinations.35
Disadvantages
include
higher
operating
costs
required
to
maintain
the
complex
transport
infrastructure,
longer
travel
durations,
and
flight
delays
due
to
travelers
having
to
transit
through
the
hub.36
32
http://www.investopedia.com/features/industryhandbook/airline.asp
33
http://upcommons.upc.edu/bitstream/handle/2099/16292/1191-­‐6795-­‐2-­‐PB.pdf
34
http://scholarworks.wmich.edu/cgi/viewcontent.cgi?article=3635&context=honors_theses
35
The
Low
Cost
Carrier
Revolution
Continues:
Evidence
From
The
US
Airline
Industry,
Bogdan
Daraban,
Shenandoah
University,
USA
36
http://www.investopedia.com/articles/investing/022916/economic-­‐analysis-­‐lowcost-­‐airline-­‐industry-­‐
luvdal.asp

8.
8
Low-­‐cost
carriers
(LCCs)
include
Southwest
and
JetBlue,
as
well
as
the
ultra
low-­‐cost
carriers
(ULCCs)
Spirit,
Frontier,
and
Allegiant
Air.
These
airlines
appeal
to
price-­‐sensitive
travelers
by
applying
a
discount-­‐leadership
approach
to
the
market.
British
transport
policy
expert
Kenneth
J.
Button
describes
describes
the
low-­‐cost
model
as
being
designed
to
“attract
traffic
from
competitors
in
the
short
term,
while
generating
new
traffic
to
cover
their
immediate
costs,
with
the
hope
of
forcing
traditional
carriers
from
the
market”.37
The
utilization
of
a
“point-­‐to-­‐point”
network
model
connects
each
origin
and
destination
via
non-­‐stop
flights.
By
eliminating
intermediate
stops,
LCCs
achieve
substantial
cost
savings
in
comparison
to
“hub-­‐and-­‐spoke”
airlines.38
The
savings
come
at
the
disadvantage
of
limited
destinations,
since
there
are
only
a
finite
number
of
economically
reasonable
city-­‐to-­‐city
flight
routes.
To
make
up
for
revenue
lost
in
discounted
ticket
prices,
LCCs
(and
especially
ULCCs
like
Spirit)
catch
up
to
their
legacy
carrier
rivals
through
non-­‐ticket
revenue.
This
income
is
generated
by
charging
customers
for
any
extras
services
beyond
being
guaranteed
a
seat
on
the
plane.
While
all
LCCs
and
ULCCs
have
unique
pricing
models,
common
services
that
come
at
an
extra
charge
include
priority
boarding,
extra
baggage,
and
the
offering
of
food
and
beverages.
Despite
the
negative
publicity
and
poor
customer
feedback
that
typically
accompany
the
“no-­‐frills”
business
model,
LCCs
have
succeeded
in
establishing
a
profitable
market
niche
by
carving
out
shares
from
the
large
legacy
carriers.39
37
Button,
K.
(2014).
Low-­‐cost
airlines:
A
failed
business
model?
Transportation
Journal,
51(2),
197–219.
http://doi.org/10.1353/tnp.2012.0017
38
http://www.investopedia.com/articles/investing/022916/economic-­‐analysis-­‐lowcost-­‐airline-­‐industry-­‐
luvdal.asp
39
http://www.lek.com/sites/default/files/Volume_VI_Issue_2.pdf,
http://centreforaviation.com/analysis/us-­‐major-­‐airlines-­‐recognise-­‐the-­‐ulcc-­‐threat-­‐marketplace-­‐
dynamics-­‐will-­‐change-­‐but-­‐beware-­‐cost-­‐creep-­‐250994

9.
9
2.3
Economic
Climate
and
Market
Outlook
2.3.1
Global
Economy
Although
Spirit
Airlines
still
has
limited
international
operations,
global
economic
events
play
a
role
in
future
expectations.
China’s
sluggish
economy
and
financial
instability
have
threatened
a
global
economic
slowdown.40
Commodity-­‐rich
Brazil,
a
massive
producer
of
raw
materials
needed
for
industry,
has
seen
a
sharp
decline
in
the
value
of
its
exports
in
the
last
two
years.41
The
European
Union
is
struggling
with
both
a
massive
migrant
crisis
and
concerns
over
sovereign
debts
of
member
states,
while
Russia
has
been
steeped
in
a
recession
since
2008.42
A
heated
rivalry
between
China
and
the
United
States,
with
the
largest
and
second
largest
economies
measured
by
purchasing
power
parity
(PPP)
in
the
world,
respectively,
has
been
a
major
fixture
in
the
global
economy.43
Political
posturing
between
the
two
nations
threatens
to
have
long
term
effects
on
business
interests
around
the
world.
However,
global
GDP
is
still
expected
to
grow
at
2.5
percent
in
2016,
while
the
U.S.
economy
continues
to
experience
steady
growth
despite
a
downturn
in
the
stock
market
at
the
beginning
of
the
year.44
2.3.2
Latin-­‐American
Economy
Spirit
currently
offers
flights
to
several
destinations
in
the
Caribbean
and
Central
America,
as
well
as
in
Peru
and
Colombia.45
Therefore,
economic
conditions
in
that
region
do
have
an
impact
on
the
airline’s
bottom
line.
Approximately
10
percent
of
the
carrier’s
flight
revenue
is
generated
by
flights
to
and
from
Latin
America.46
40
http://www.bloombergview.com/articles/2016-­‐02-­‐23/two-­‐wrong-­‐ways-­‐to-­‐think-­‐about-­‐china-­‐s-­‐
slowdown
41
http://www.ft.com/intl/cms/s/0/699def92-­‐dbb3-­‐11e5-­‐9ba8-­‐3abc1e7247e4.html#axzz47HmoYg1m
42
https://www.conference-­‐board.org/data/globaloutlook/
43
http://www.theatlantic.com/international/archive/2016/01/global-­‐economy-­‐2016/422475/
44
https://www.conference-­‐board.org/data/globaloutlook/
45
https://www.spirit.com/routemaps.aspx
46
http://www.transtats.bts.gov/Data_Elements_Financial.aspx?Data=7

10.
10
Economic
growth
in
Latin
America
has
slowed
in
recent
years
amid
the
global
economic
downturn.47
Mexico
in
particular
has
seen
its
manufacturing
sector
and
oil
exports
decline
sharply.48
However,
the
country’s
unemployment
rate
stands
at
3.7
percent
and
shows
better
economic
health
than
most
other
Latin
American
nations.
Another
success
story
in
the
region
is
Colombia,
which
has
experienced
a
historic
economic
boom
since
the
early
2000s.49
The
nation’s
growth
has
been
fueled
by
a
burgeoning
middle
class
accompanied
by
its
strength
in
petroleum
and
manufacturing
exports.50
As
of
now,
Spirit
serves
four
different
destinations
in
Colombia,
more
than
in
any
other
country.51
2.3.3
U.S.
Economy
The
activities
and
monetary
policies
of
the
Federal
Reserve
have
a
significant
impact
on
the
health
of
the
U.S.
economy.
In
early
2016,
the
Fed
indicated
through
its
“dot
plot”
of
future
expectations,
that
four
interest
rate
hikes
were
planned
for
this
year.
However,
the
Federal
Reserve’s
Open
Market
Committee
(FOMC)
declared
on
April
27
that
U.S.
interest
rates
(currently
at
0.5
percent)
would
remain
unchanged
at
least
until
June.52
The
Fed
has
stated
its
intent
to
eventually
raise
the
rates
in
the
near
future,
citing
the
strengthening
U.S.
economy
as
justification.53
At
5
percent,
the
U.S.
unemployment
rate
is
at
its
lowest
point
since
2008.54
However,
participation
in
the
labor
force
is
remarkably
low,
with
only
62.7
percent
of
Americans
working
or
actively
seeking
employment.55
Due
to
the
quality
of
jobs
available,
as
well
as
the
diversity
in
the
labor
force,
neither
of
these
statistics
accurately
reflect
the
prosperity
of
the
economy.56
47
http://money.cnn.com/2016/04/29/news/economy/mexico-­‐brazil-­‐latin-­‐america-­‐economy-­‐
gdp/index.html
48
Ibid
49
http://www.heritage.org/index/country/colombia
50
https://www.eia.gov/dnav/pet/PET_MOVE_EXPC_DC_NUS-­‐NCO_MBBL_M.htm
51
https://www.spirit.com/routemaps.aspx
52
http://www.theguardian.com/business/2016/apr/27/janet-­‐yellen-­‐federal-­‐reserve-­‐interest-­‐rate-­‐hike
53
http://www.theguardian.com/business/2016/apr/27/janet-­‐yellen-­‐federal-­‐reserve-­‐interest-­‐rate-­‐hike
54
http://data.bls.gov/timeseries/LNS14000000
55
http://money.cnn.com/2016/02/06/news/economy/obama-­‐us-­‐jobs/
56
Ibid

11.
11
Corporate
spending
in
the
United
States
has
declined
heading
into
the
second
quarter
of
2016.
Deutsche
Bank
analyst
Michael
Linenberg
states:
"We
have
observed
a
slowdown
in
U.S.
corporate
profits,
which
is
a
concern
given
that
they
are
a
leading
indicator
of
economic
activity,
and
therefore,
could
lead
to
reduced
demand
for
corporate
travel."57
Nonetheless,
he
believes
that
consumer
spending
and
the
demand
for
leisure
travel
remain
at
a
healthy
level.58
As
an
ultra
low-­‐cost
carrier
that
exclusively
targets
consumers
looking
for
cheap
leisure
travel,
Spirit
Airlines
has
not
suffered
financially
from
the
decline
in
corporate
travel.59
The
airline
therefore
currently
has
an
edge
over
its
larger
counterparts
that
are
invested
in
business
traveling.
2.3.4
Oil
Market
A
large
factor
influencing
volatility
in
the
airline
industry
comes
from
the
cost
to
operate
per
seat
(CASM),
because
this
measurement
reflects
changing
fuel
costs.
For
Spirit,
fuel
efficient
technology
and
strategic
management
have
led
to
the
airline
having
one
of
the
best
CASM
ratios
in
the
market.60
Low
oil
prices
in
2015
and
2016
have
also
benefitted
the
carrier,
which
does
not
hedge
its
oil
prices
(essentially
protecting
themselves
against
major
price
increases).
61
Bigger
airlines
that
do
this
common
industry
practice
have
been
unable
to
benefit
from
the
lowest
oil
prices
since
2002.62
Because
airlines
sell
tickets
months
in
advance,
daily
changes
in
oil
prices
make
it
difficult
for
airlines
to
keep
their
revenue
margins
consistent.
Since
prices
began
to
drastically
drop
in
2014,
Spirit
has
been
able
to
secure
industry-­‐high
profit
margins
of
nearly
20
percent.63
57
https://www.etrade.wallst.com/v1/stocks/news/search_results.asp?newsType=headlines
58
https://www.etrade.wallst.com/v1/stocks/news/search_results.asp?newsType=headlines
59
Ibid
60
http://airwaysnews.com/blog/2015/02/16/analysis-­‐spirit-­‐airlines-­‐bends-­‐the-­‐cost-­‐curve/
61
http://www.fool.com/investing/general/2015/12/08/3-­‐airlines-­‐that-­‐could-­‐soar-­‐with-­‐lower-­‐oil-­‐
prices.aspx
62
http://www.macrotrends.net/1369/crude-­‐oil-­‐price-­‐history-­‐chart
63
http://www.fool.com/investing/general/2015/12/08/3-­‐airlines-­‐that-­‐could-­‐soar-­‐with-­‐lower-­‐oil-­‐
prices.aspx

12.
12
Oil
prices
are
creeping
upward
again,
and
stand
at
around
$50
per
barrel
at
the
time
of
writing.64
However,
predicting
the
oil
market
is
both
difficult
and
contentious.
Forbes
columnist
Bill
Gilmer
explains:
“The
process
took
me
through
a
number
of
current
oil
price
forecasts
from
banks,
investment
houses,
and
consultants,
and
the
differences
in
opinion
are
wide
and
discouraging.”65
The
oligopoly
of
oil-­‐producing
nations
known
as
Organization
of
the
Petroleum
Exporting
Countries
(OPEC)
heavily
influences
prices
by
controlling
the
level
of
output.
Despite
oversaturation
of
the
market
driving
down
prices
since
2014,
OPEC
has
refused
to
cut
production
thus
far.66
The
most
historically
accurate
indicator
of
oil
prices
is
the
oil
futures
market,
which
is
becoming
more
widely
used
but
is
still
susceptible
to
volatility.67
Based
on
the
current
state
of
the
market,
Spirit
may
continue
to
benefit
from
avoiding
oil
hedging
at
least
in
the
short
term.
64
http://www.oil-­‐price.net/
65
http://www.forbes.com/sites/uhenergy/2016/01/19/why-­‐are-­‐oil-­‐prices-­‐so-­‐hard-­‐to-­‐
forecast/#7dd9fcc6563e
66
http://money.cnn.com/2015/06/05/investing/opec-­‐decision-­‐oil-­‐prices/
67
http://www.forbes.com/sites/uhenergy/2016/01/19/why-­‐are-­‐oil-­‐prices-­‐so-­‐hard-­‐to-­‐
forecast/#7dd9fcc6563e

13.
13
2.4
Other
Factors
2.4.1
Introduction
of
New
Aircraft
In
2013,
Spirit
ordered
seven
new
Airbus
A319s
and
ninety-­‐eight
A320s,
including
forty-­‐five
A320neos
(new
engine
option).
The
airline
also
opted
to
replace
ten
old
A320ceos
(current
engine
option)
with
thirty
aircraft
in
the
larger
A321
class.
The
A320neo,
which
is
fitted
with
a
new
style
of
winglets
(named
“sharklets”
by
Airbus)
for
better
aerodynamics,
burns
16
percent
less
fuel
than
its
predecessor
(A320ceo)
and
costs
nearly
15
percent
less
to
maintain
annually.68
The
plane
also
seats
185
passengers
in
a
single-­‐class
layout
while
offering
substantially
increased
storage
inside
the
cabin.69
The
A321
is
the
largest
plane
in
the
fleet,
seating
220
passengers.
Spirit
offers
fewer
seats
with
extra
legroom
on
this
model,
allowing
for
a
tighter
seating
map.70
The
newest
additions
to
Spirit’s
fleet
have
been
used
to
accommodate
the
airline’s
increasing
traffic
fueled
by
added
destinations
in
the
Caribbean
and
Latin
America.71
Traffic
(measured
in
revenue
passenger
miles)
increased
nearly
30
percent
between
2014
and
2015.72
The
new
aircraft,
in
particular
the
A320neos
and
A321s,
carry
more
passengers
at
a
lower
operating
cost,
while
also
offering
an
improved
travel
experience
with
greater
amenities.
This
has
allowed
the
airline
to
lower
its
fares
at
times
when
most
of
its
competitors
have
raised
prices.
Airbus
Chief
Operating
Officer
John
Leahy
commented
the
following
after
Spirit’s
order
for
brand
new
planes
in
the
A320
class:
“Spirit’s
priority
has
always
been
to
save
its
passengers
money,
while
transporting
them
as
comfortably
as
possible.
That
is
exactly
what
the
A320
allows
the
airline
to
achieve.
These
are
eco-­‐efficient
machines
with
wonderful
comfort.”73
68
http://aviationnews.eu/news/2011/02/tam-­‐becomes-­‐first-­‐a320neo-­‐customer-­‐in-­‐latin-­‐america/
69
http://www.airbus.com/presscentre/pressreleases/press-­‐release-­‐detail/detail/spirit-­‐airlines-­‐to-­‐grow-­‐
fleet-­‐with-­‐largest-­‐airbus-­‐single-­‐aisle-­‐model/
70
http://traveltips.usatoday.com/type-­‐planes-­‐spirit-­‐airlines-­‐use-­‐62835.html
71
https://www.flightglobal.com/news/articles/in-­‐focus-­‐how-­‐to-­‐power-­‐a320neo-­‐is-­‐tough-­‐choice-­‐for-­‐
airlines-­‐383733/
72
http://ir.spirit.com/releasedetail.cfm?ReleaseID=916968
73
Ibid

14.
14
2.4.2
Government
Regulation
Since
the
Airline
Deregulation
Act
of
1978,
the
U.S.
Department
of
Transportation
no
longer
controls
ticket
prices
or
services.74
The
deregulation
of
the
industry
led
to
a
boom
in
air
traffic,
as
flights
became
affordable
for
more
Americans
during
the
1980s.
The
rise
of
competitive
pricing
also
meant
that
airlines
could
no
longer
survive
without
innovative
management
and
robust
cost
controls.75
While
larger
carriers
have
since
consolidated
or
gone
bankrupt,
low-­‐cost
carriers
have
emerged
as
big
winners
by
taking
advantage
of
the
influx
of
new
lower-­‐income
flyers.
In
2015,
Southwest
Airlines
was
(and
continues
to
be)
the
largest
U.S.
carrier
in
terms
of
domestic
passenger
traffic
–
an
impossibility
without
a
deregulated
airline
industry.76
Government
regulation
of
the
airline
industry
today
is
mostly
limited
to
ensuring
flight
and
passenger
safety.
However,
despite
having
the
freedom
to
choose
their
own
fares
and
services,
airlines
are
subject
to
numerous
special
fees
and
taxes
in
addition
to
income
and
payroll
taxes.77
These
expenses
are
incurred
in
each
and
every
jurisdiction,
either
domestic
or
abroad,
that
an
airline
operates
in.
The
stated
purposes
of
taxes
paid
by
airlines
typically
involve
national
security,
environmental
protection,
agriculture
inspection,
infrastructure
enhancement,
airport
operation
and
maintenance,
as
well
as
agency
financing
(U.S.
Department
of
Transportation
subsidiaries
associated
with
air
travel
include
the
Federal
Aviation
Administration,
the
Transportation
Security
Administration,
and
the
Immigration
and
Customs
Enforcement).78
Among
the
most
common
ticket
taxes
are
the
Domestic
Passenger
Ticket
Tax
(7.5
percent
of
the
ticket
price,
collected
for
the
FAA),
the
September
11th
Security
Fee
(collected
for
the
TSA),
and
the
Passenger
Facility
Charge
(collected
for
airports).79
74
http://www.investopedia.com/ask/answers/041315/how-­‐does-­‐government-­‐regulation-­‐impact-­‐
aerospace-­‐sector.asp
75
http://aviationweek.com/blog/law-­‐changed-­‐airline-­‐industry-­‐beyond-­‐recognition-­‐1978
76
Ibid
77
http://airlines.org/data/government-­‐imposed-­‐taxes-­‐on-­‐air-­‐transportation/
78
Ibid
79
http://www.usatoday.com/story/travel/columnist/mcgee/2015/07/01/airline-­‐fees-­‐taxes/29518427/

15.
15
New
fees
and
taxes
imposed
by
the
government
directly
raise
ticket
prices,
as
airlines
typically
pass
the
full
cost
onto
their
passengers.
For
this
reason,
airlines
are
held
to
the
“full
fare”
rule,
making
it
mandatory
for
them
advertise
their
fares
with
government
fees
and
taxes
included.80
The
FAA
also
protects
consumers
by
requiring
airlines
to
provide
basic
services
to
passengers
in
case
of
lengthy
tarmac
delays,
as
well
as
offer
compensation
to
flyers
who
are
bumped
from
their
flights
or
whose
bags
are
lost
by
the
carrier.81
2.4.3
Environmental
Regulation
The
global
aviation
industry
produces
12
percent
of
carbon
dioxide
emissions
from
all
transportation
sources.82
While
this
number
pales
in
comparison
to
the
74
percent
contributed
from
road
transport,
regulatory
agencies
like
the
EPA
have
recently
accelerated
efforts
to
curb
aviation
emissions.
Over
the
past
five
years,
the
International
Civil
Aviation
Organization
(ICAO),
a
U.N.
agency,
has
been
working
to
develop
global
aircraft
emissions
standards
for
the
first
time.83
The
standards
largely
focus
on
developing
better
technology
for
aviation
while
phasing
out
impaired
and
inadequate
equipment.84
Given
concerns
over
the
economic
ramifications
of
new
regulations
imposed
on
the
industry,
EPA
officials
claim
they
are
not
likely
to
adopt
the
proposed
ICAO
standards
until
2017.
This
still
gives
airlines
limited
time
to
position
themselves
favorably
under
stricter
rules,
especially
large
carriers
like
Delta
that
have
aging
fleets.85
With
an
average
fleet
life
of
only
5.3
years,
Spirit
Airlines
is
at
the
forefront
of
modernization
stemming
from
the
new
environmental
initiatives.
According
to
environmental
aviation
watchdog
group
Green
80
http://ideas.time.com/2013/12/16/spirit-­‐airlines-­‐president-­‐the-­‐government-­‐is-­‐hiding-­‐taxes-­‐in-­‐your-­‐
airfares/
81
https://www.transportation.gov/briefing-­‐room/us-­‐department-­‐transportation-­‐expands-­‐airline-­‐
passenger-­‐protections
82
http://www.atag.org/facts-­‐and-­‐figures.html
83
http://www.icao.int/Newsroom/Pages/New-­‐ICAO-­‐Aircraft-­‐CO2-­‐Standard-­‐One-­‐Step-­‐Closer-­‐To-­‐Final-­‐
Adoption.aspx
84
http://www.icao.int/Newsroom/Pages/New-­‐ICAO-­‐Aircraft-­‐CO2-­‐Standard-­‐One-­‐Step-­‐Closer-­‐To-­‐Final-­‐
Adoption.aspx
85
http://www.airfleets.net/ageflotte/Delta%20Air%20Lines.htm

16.
16
Air,
Spirit
has
“chosen
the
efficiency
route
by
deploying
new,
efficient
fleets
and
technologies
as
well
as
more
efficient
operational
practices.”86
Southwest
Airlines,
despite
an
older
average
fleet
life
of
12.4
years,
has
also
begun
to
prepare
for
new
regulations.87
The
carrier
directly
acknowledges
the
future
liability
of
compliance
costs
in
its
10-­‐k:
“On
July
1,
2015,
the
Environmental
Protection
issued
a
proposed
endangerment
finding
for
greenhouse
gas
emissions
from
aircraft...published
an
advance
notice
of
proposed
rulemaking
summarizing
international
efforts
to
regulate
aviation
emissions.
Regardless
of
the
method
of
regulation,
policy
changes
with
regards
to
climate
change
are
possible,
which
could
significantly
increase
operating
costs
in
the
airline
industry
and,
as
a
result,
adversely
affect
operations.88
While
inconsequential
at
present,
environmental
regulation
will
become
increasingly
relevant
for
airlines
in
the
future.
2.4.4
Passenger
Usage
Fee
Controversy
Spirit
has
been
subject
to
numerous
legal
troubles
as
a
result
of
its
unforgiving
pricing
model.
A
controversial
lawsuit
in
2014
alleged
that
the
carrier
“concealed
the
existence
and
purpose
of
the
Passenger
Usage
Fee
and
that
the
airline
used
the
mails
and
wire
to
defraud
consumers
into
thinking
they
owed
less
money
for
their
tickets.”89
Although
the
airline
claimed
that
the
fee
was
issued
to
provide
website
and
phone
service
to
customers,
in
reality
it
“offered
no
service
or
advantage
to
the
flyer”,
and
served
primarily
to
be
another
hidden
source
of
income
disguised
as
a
government-­‐required
ticket
fee.90
Despite
being
habitually
cited
and
fined
by
the
Department
of
Transportation
(DOT)
for
deceptive
advertising,
Spirit
has
continued
to
charge
its
passengers
the
Passenger
Usage
Fee
to
this
day.91
Since
2008,
the
scheme
has
profited
the
airline
to
the
tune
of
$40
million,
far
outweighing
the
periodic
fines
paid
to
the
DOT.92
86
http://www.greenaironline.com/news.php?viewStory=1853
87
http://www.airfleets.net/ageflotte/Southwest%20Airlines.htm
88
http://www.sec.gov/Archives/edgar/data/92380/000009238016000175/luv-­‐12312015x10k.htm
89
http://www.condonlaw.com/2014/10/michael-­‐holland-­‐2/
90
http://www.classaction.org/spirit-­‐airlines
91
http://www.huffingtonpost.com/2012/08/07/spirit-­‐airlines-­‐slapped-­‐with-­‐lawsuit_n_1752955.html
92
Ibid

17.
17
3.0
Statement
of
Cash
Flows
The
statement
of
cash
flows
allows
analysts
and
investors
to
understand
how
a
company
funds
its
operations
and
where
it
obtains
cash.
Unlike
the
income
statement
and
balance
sheet,
this
financial
statement
measures
changes
in
cash
flows
during
the
year
while
discounting
accrued
figures
or
sales
made
on
credit.
For
this
reason,
the
change
in
a
company’s
cash
account
rarely
equals
its
net
income.
The
following
section
highlights
important
components
of
Spirit’s
cash
flows
as
compared
to
those
of
Southwest
Airlines.
3.1
Cash
Flow
from
Operations
(CFO)
Cash
flow
from
operations
reflects
the
cash
that
is
used
and
received
by
the
revenue-­‐generating
activities
in
a
business.
This
portion
of
the
statement
of
cash
flows
serves
as
an
effective
barometer
of
a
company’s
efficiency
in
managing
its
receivables,
inventory,
and
short-­‐term
cash
obligations.
Investors
want
to
see
positive
cash
flow
from
normal
and
recurring
operations
in
a
business
–
a
negative
CFO
can
indicate
severe
liquidity
and
debt
problems.
For
the
most
comprehensive
analysis,
it
is
always
important
for
investors
to
cross-­‐reference
accounts
in
the
statement
of
cash
flows
with
corresponding
figures
in
the
income
statement.
3.1.1
Growth
in
CFO
93
http://www.marketwatch.com/investing/Stock/LUV/financials/cash-­‐flow
Growth
rates
in
CFO
from
2011-­‐201593
2014-­‐15
2013-­‐14
2012-­‐13
2011-­‐12
Spirit
81.6%
33.3%
71.9%
33.6%
Southwest
11.7%
16.9%
20.4%
48.2%

18.
18
Spirit
has
shown
tremendous
growth
in
its
CFO
since
2011,
roughly
corresponding
to
increasing
net
income
figures
in
the
same
time
period.
The
overall
growth
can
be
largely
explained
by
the
airline’s
expansionary
activity
in
the
last
five
years.
Spirit
has
expanded
its
operations
to
new
domestic
and
international
destinations
while
also
offering
more
flights
between
major
cities
(the
airline
added
24
non-­‐stop
routes
in
2014
alone).94
The
expanding
network
has
given
the
carrier
a
significant
boost
in
sales.
As
mentioned
earlier
in
this
report,
Spirit
has
also
benefitted
massively
from
the
steep
decline
in
oil
prices
since
early
2014.
Cheaper
fuel’s
positive
effect
on
the
carrier’s
operating
costs
is
reflected
by
the
81.6
percent
growth
in
CFO
between
2014
and
2015.
3.1.2
Cash
Flow
Margin
The
cash
flow
margin
expresses
how
much
a
company
generates
from
its
core
operations
per
dollar
of
sales.
A
high
margin
can
indicate
a
company’s
strong
ability
to
convert
sales
into
cash,
and
may
also
suggest
high
earnings
quality.
The
operating
cash
flow
can
be
found
on
the
company's
statement
of
cash
flows,
and
the
revenue
can
be
found
on
the
income
statement.
𝐶𝑎𝑠ℎ
𝑓 𝑙𝑜𝑤
𝑚 𝑎𝑟𝑔𝑖𝑛 =
𝐶𝑎𝑠ℎ
𝑓 𝑙𝑜𝑤
𝑓 𝑟𝑜𝑚
𝑜 𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔
𝑎 𝑐𝑡𝑖𝑣𝑖𝑡𝑖𝑒𝑠
𝑁𝑒𝑡
𝑠 𝑎𝑙𝑒𝑠
Spirit’s
cash
flow
margin
grew
significantly
in
2015.
This
is
explained
by
both
the
airline’s
extensive
expansion
(driving
up
both
cash
flow
from
operating
activities
and
net
sales)
as
well
as
lower
fuel
costs
reducing
the
airline’s
operating
expenses.
Due
to
its
practice
of
oil
price
hedging,
Southwest
did
not
experience
a
similar
jump
in
cash
flow
94
http://www.sun-­‐sentinel.com/business/tourism/fl-­‐spirit-­‐airlines-­‐expansion-­‐update-­‐20150313-­‐story.html
95
http://csimarket.com/stocks/at_glance.php
Cash
Flow
Margin
2015
2014
2013
2012
2011
Spirit
22.1%
13.5%
11.8%
8.8%
16.0%
Southwest
16.3%
15.6%
14.0%
12.1%
8.9%
Industry
Average
10.3%95

19.
19
margin
in
2015.
However,
both
airlines’
margins
exceed
the
industry
average,
demonstrating
strong
earnings
quality
and
relative
efficiency
in
converting
sales
into
cash.
3.1.3
Fixed
Charge
Coverage
Ratio
𝐹𝑖𝑥𝑒𝑑
𝑐ℎ𝑎𝑟𝑔𝑒
𝑐 𝑜𝑣𝑒𝑟𝑎𝑔𝑒
𝑟 𝑎𝑡𝑖𝑜
=
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠
𝑏 𝑒𝑓𝑜𝑟𝑒
𝑖 𝑛𝑡𝑒𝑟𝑒𝑠𝑡
𝑎 𝑛𝑑
𝑡 𝑎𝑥𝑒𝑠 + 𝐿𝑒𝑎𝑠𝑒
𝑒 𝑥𝑝𝑒𝑛𝑠𝑒
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡
𝑒 𝑥𝑝𝑒𝑛𝑠𝑒 + 𝐿𝑒𝑎𝑠𝑒
𝑒 𝑥𝑝𝑒𝑛𝑠𝑒
Fixed
Charge
Coverage
Ratio
2015
2014
2013
Spirit
3.2
times
2.8
times
2.7
times
Southwest
10.6
times
4.7
times
3.1
times
Spirit’s
expansion
in
2014
and
2015
saw
the
airline
invest
in
hundreds
of
new
aircraft,
many
of
them
leased.
For
this
reason,
the
airline
has
considerable
lease
expenses
each
year.
The
fixed
charge
coverage
indicates
a
company’s
ability
to
cover
interest
and
lease
expenses.
Both
Spirit
and
Southwest
show
strong
ratios,
with
the
discrepancy
between
them
widening
in
2015
due
to
the
former’s
increase
in
debt
and
lease
obligations.
Lower
fuel
prices
and
higher
efficiency
have
resulted
in
greater
earnings
before
interest
and
taxes.

20.
20
3.2
Cash
Flow
from
Investing
Activities
Cash
flow
from
investing
activities
reports
the
change
in
cash
that
results
from
investment
gains
and
losses
as
well
as
from
any
sales
or
purchases
of
fixed
assets.
This
section
of
the
statement
of
cash
flows
is
important
for
capital-­‐intensive
firms
like
airlines.
Spirit’s
Investing
Activities
2015
2014
2013
Pre-­‐delivery
deposits
for
flight
equipment,
net
(142,323)
(115,802)
(70,288)
Capitalized
interest
(10,159)
-­‐
-­‐
Purchase
of
property
and
equipment
(548,800)
(186,569)
(19,812)
Net
cash
used
in
investing
activities
(701,282)
(302,371)
(90,100)
3.2.1
Capital
Expenditures
Purchase
of
Property
and
Equipment
(
%
of
outflows)
2015
2014
2013
2012
2011
Spirit
64%
59%
22%
37%
16%
Southwest
36%
26%
26%
28%
13.88%
Spirit’s
expansionary
activities
in
2014
and
2015
are
evident
from
the
airline’s
significant
increase
in
capital
expenditures.
This
can
be
seen
in
the
increase
in
property
and
equipment
in
the
balance
sheet,
as
well
as
the
large
cash
outflow
in
the
airline’s
investing
activities
for
purchase
of
property
and
equipment.
Spirit’s
investing
outflow
from
purchasing
new
aircraft
jumped
from
22
percent
in
2013
to
59
percent
in
2014,
rising
further
to
64
percent
in
2015.
In
contrast,
Southwest
only
shows
a
minor
increase
in
cash
outflow
for
property
and
equipment,
as
the
airline
replaces
older
aircraft
in
its
fleet
(which
is
significantly
older
than
Spirit’s).

21.
21
3.3
Cash
Flow
from
Financing
Activities
Cash
flow
from
financing
activities
accounts
for
changes
in
cash
resulting
from
debt
or
equity
financing,
dividend
payments,
and
repurchasing
of
existing
stock.
Spirit’s
cash
flow
from
financing
activities
has
increased
significantly
since
the
airline’s
initial
public
offering
(IPO)
in
2011,
with
cash
proceeds
of
$171.0
million.
While
2012
and
2013
saw
no
major
change
in
capital
structure,
Spirit
began
to
repurchase
common
stock
and
heavily
leverage
with
long-­‐term
debt
between
2014
and
2015.
The
massive
increase
in
debt
was
used
to
finance
the
acquisition
of
new
aircraft
and
the
expansion
of
the
carrier’s
route
network.
Spirit
has
never
paid
dividends
and
does
not
intend
to
ever
do
so,
according
to
the
company’s
management.
Southwest
demonstrates
clearly
different
behavior
with
its
negative
cash
flow
from
financing
activities.
In
2015,
the
company’s
board
of
directors
authorized
a
repurchase
of
up
to
$1.5
billion
of
common
stock
in
addition
to
an
increase
in
dividend
payments.96
The
carrier’s
high
amount
of
long-­‐term
debt
indicates
that
it
is
still
paying
for
heavy
investment
and
expansion
in
the
past.
Southwest
no
longer
has
to
borrow
cash,
but
will
be
in
the
process
of
repaying
long-­‐term
debt
and
capital
lease
obligations
for
the
foreseeable
future.
For
this
reason,
Southwest’s
cash
flow
has
remained
negative
for
the
past
five
years.
96
http://www.sec.gov/Archives/edgar/data/92380/000009238016000175/luv-­‐12312015x10k.htm
Cash
Flow
From
Financing
Activities
(in
millions
of
dollars)
2015
2014
2013
2012
2011
Spirit
399.15
144.01
8.54
-­‐12.82
156.65
Southwest
-­‐1,024
-­‐1,248
-­‐851
-­‐766
-­‐149

22.
22
3.3.1
Repurchase
of
common
stock
and
dividend
policy
In
early
2015,
Spirit
repurchased
approximately
1.5
million
common
shares
for
approximately
$99
million
under
an
initial
share
repurchase
program.
The
company
authorized
another
$100
million
share
repurchase
program
in
October
of
2015.
Prior
to
these
events,
Spirit
had
only
repurchased
common
shares
issued
by
employees
having
restricted
stock
grants.
Due
to
good
results
in
cash
flow
from
operations
(82
percent
year-­‐
to-­‐year
growth),
Spirit
was
able
to
buy
back
its
shares
without
losing
money.
Spirit
does
not
currently
pay
dividends
on
its
common
stock
and
does
not
plan
to
in
the
foreseeable
future.
This
is
unsurprising
considering
the
airline’s
expansion
strategy
of
reinvesting
earnings
to
boost
future
growth
rather
than
to
reward
shareholders.
The
potential
outcome
in
case
of
an
adverse
operating
development
remains
uncertain.
The
lack
of
dividend
payments
may
make
the
carrier’s
stock
unattractive
to
many
investors,
possibly
limiting
Spirit’s
ability
to
finance
operations
through
equity.
Southwest
has
issued
small-­‐percentage
repurchases
of
common
stock
each
year.
In
2011,
the
airline
repurchased
shares
for
an
all
time
high
of
$1.2
billion,
making
up
20.6
percent
of
its
total
outflows.
In
November
of
2015,
Southwest
declared
its
157th
consecutive
quarterly
dividend
of
$180
million,
intended
to
show
a
long-­‐lasting
history
of
profitability
and
growth.
Spirit
could
benefit
from
stock
repurchase
programs
that
would
decrease
the
amount
of
outstanding
shares
on
the
stock
market.
By
reducing
the
dilution
effect,
both
earnings-­‐per-­‐share
and
the
market
price
could
be
impacted
favorably.
Repurchase
of
Common
Stock
2015
2014
2013
2012
2011
Spirit
13.1
0.2
0.1
0.1
0.1
Southwest
20.6
16.6
9.4
7.0
3.9

23.
23
3.4
Summary
Analysis
Spirit
Airlines
Cash
Inflows
2015
Spirit’s
cash
flow
from
operations
has
significantly
grown
(CAGR
of
28.8
percent)
over
the
past
five
years,
contributing
more
than
46
percent
of
total
cash
inflows
in
2015.
The
airline
is
not
only
profitable
(profit
margin
of
14.8
percent
in
the
same
year),
but
also
shows
strong
capability
in
generating
cash
from
operations.
In
2015,
Spirit
entered
long-­‐
term
debt
arrangements
providing
$536.8
million
in
cash
to
cover
capital
expenditures
for
new
aircraft.
The
debt
proceeds
covered
the
investment
amount
by
over
97
percent,
accounting
for
52
percent
of
total
inflows.
While
the
company
has
increased
its
debt
load
significantly,
there
are
currently
no
clear
indications
that
it
may
struggle
to
cover
its
short-­‐
term
and
long-­‐term
obligations.
46.10%
52.32%
1.58%
Operations
(CFFO)
Issuance
of
long-­‐term
debt
Others
64.18%
3.08%
13.13%
16.64%
2.96% Capital
expenditures
Payments
on
debt
and
capital
lease
obligations
Repurchase
of
common
stock
Pre-­‐delivery
deposits
for
flight
equipment

24.
24
4.0
Income
Statement
The
income
statement
measures
the
operating
performance
of
a
business.
It
presents
a
company’s
revenues,
expenses,
net
income,
and
earnings
per
share
for
the
stated
period.
The
following
section
analyzes
Spirit’s
income
statement
in
comparison
to
Southwest’s
over
the
past
five
years.
4.1
Net
Sales
Benefitting
from
its
unconventional
pricing
model,
Spirit
Airlines
leads
the
industry
in
revenue
from
ancillary
(non-­‐ticket)
revenue.
The
ULCC
generates
45
percent
of
its
sales
revenue
from
non-­‐ticket
sales
and
the
remaining
55
percent
from
traditional
passenger
sales.
Competitor
Southwest
Airlines
uses
a
traditional
pricing
model
and
therefore
relies
heavily
on
passenger
sales
making
up
92
percent
of
its
revenue.
Spirit’s
non-­‐ticket
sales
remained
constant
at
40
percent
every
year
from
2012
to
2014.
A
horizontal
analysis
shows
that,
in
2015,
a
23
percent
increase
in
non-­‐ticket
sales
boosted
the
margin
of
non-­‐ticket
sales
revenue
to
45
percent
of
total
revenue.
The
growth
in
Spirit’s
ancillary
revenue
reflects
the
unprecedented
success
of
the
company’s
unbundling
strategy.
The
airline’s
policy
of
charging
extra
for
services
has
ensured
that
its
non-­‐ticket
revenue
continues
to
grow
while
still
attracting
price-­‐sensitive
travelers
with
low
base
fares.97
97
http://marketrealist.com/2015/11/spirit-­‐airlines-­‐assessing-­‐benefits-­‐unbundled-­‐services/

25.
25
4.1.1
Growth
in
Net
Sales
Net
Sales
Growth
2015
% 2014
% 2013
% 2012
% 2011
%
Spirit
2,141,463
10.9% 1,931,580
16.8% 1,654,385
25.5% 1,318,388
23.1% 1,071,186
N/A
Southwest
19,820,000
6.5% 18,605,000
5.1% 17,699,000
3.6% 17,088,000
9.1% 15,658,000
N/A
Spirit’s
net
sales
in
dollars
have
grown
steadily
over
the
past
five
years.
However,
sales
growth
has
slowed
down
since
its
peak
of
25.5
percent
in
2013.
However,
Spirit’s
net
sales
growth
rate
of
10.9
percent
in
2015
is
well
above
Southwest’s
6.5
percent.
The
consecutive
decline
in
net
sales
growth
in
2014
and
2015
may
concern
some
investors
and
shareholders.
Spirit
is
younger
than
most
of
its
competitors,
meaning
the
airline
had
more
room
to
grow
within
its
target
market.
An
initial
public
offering
in
2011
allowed
the
company
to
raise
significant
cash
for
marketing
and
fleet
expansion,
resulting
in
the
high
growth
until
2015.
Unfortunately
for
Spirit,
its
successful
pricing
strategy
is
being
increasingly
mimicked
by
other
airlines
that
are
competing
for
frugal
flyers.
Price-­‐matching
by
competitors
has
eaten
into
the
ULCC’s
market
share,
slowing
the
growth
rate
of
sales.
Southwest’s
CEO
Gary
Kelley
believes
that
Spirit
will
struggle
to
keep
a
competitive
edge
in
the
future
despite
its
lower
cost
structure.98
98
https://skift.com/2015/12/11/southwest-­‐ceo-­‐on-­‐how-­‐a-­‐maturing-­‐airline-­‐can-­‐keep-­‐its-­‐competitive-­‐mojo/
23.1% 25.5%
16.8%
10.9%
9.1%
3.6% 5.1%
6.5%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
2011-­‐2012 2012-­‐2013 2013-­‐2014 2014-­‐2015
Net
Sale
Growth
Rate
Spirit
Airlines Southwest
Airlines

26.
26
4.2
Operating
Expenses
Total
Operating
Expenses
2015
% 2014
% 2013
% 2012
% 2011
%
Spirit
1,632,341
76.2% 1,576,317
81.6% 1,372,093
82.9% 1,144,398
86.8% 926,804
86.5%
Southwest
15,704,000
79.2% 16,380,000
88.0% 16,421,000
92.8% 1,646,5000
96.4% 14,965,000
95.6%
In
the
airline
industry,
operating
expenses
can
be
considered
to
constitute
the
cost
of
sales.
Spirit
has
managed
to
increase
its
profit
margins
by
decreasing
operating
expenses
each
year
since
2012.
The
airline
has
demonstrated
its
ability
to
operate
within
its
economies
of
scale
by
expanding
sales
revenue
while
simultaneously
lowering
its
cost
structure.
However,
Spirit’s
edge
over
Southwest
is
decreasing
regarding
its
lower
operating
expenses.
This
is
due
to
the
airline’s
expansion
into
less
profitable
flight
routes,
and
may
indicate
that
it
has
grown
too
rapidly.
4.2.1
Labor
and
Fuel
Costs
Labor
and
fuel
costs
are
the
two
major
operating
expenses
for
airlines.
Both
Spirit
and
Southwest
have
seen
a
slight
rise
in
labor
expenses
over
the
past
five
years
as
a
result
of
wage
increases
and
new
hires.
Spirit
facilitates
a
labor-­‐intensive
strategy
that
promotes
the
employee’s
overall
efficiency
and
reduces
the
department’s
redundancy
for
routine
tasks
like
trash
disposal.
This
strategy
may
explain
the
lower
satisfaction
among
Spirit
employees
compared
to
Southwest
employees,
according
to
Glassdoor.99
Companies
must
recognize
that
excessive
cost
cutting
may
deteriorate
the
overall
quality
of
the
business.
Salaries,
Wages,
and
Benefits
2015
% 2014
% 2013
% 2012
% 2011
%
Spirit
378,210
17.7% 313,988
16.3% 262,150
15.8% 218,919
16.6% 181,742
17.0%
Southwest
6,383,000
32.2% 5,434,000
29.2% 5,035,000
28.4% 4,749,000
27.8% 4,371,000
27.9%
99
https://www.glassdoor.com/Reviews/Spirit-­‐Airlines-­‐Reviews-­‐E13683.htm

27.
27
Aircraft
Fuel
Costs
2015
% 2014
% 2013
% 2012
% 2011
%
Spirit
461,447
21.5%
612,909
31.7% 551,746
33.4%
471,763
35.8% 388,046
36.2%
South
west
3,616,000
18.2% 5,293,000
28.4% 5,763,000
32.6% 6,120,000
35.8% 5,644,000
36.0%
Airlines
face
considerable
uncertainty
regarding
their
operating
costs
due
to
frequent
fluctuations
in
the
price
of
oil.
Before
2014,
Spirit’s
fuel
costs
remained
steady
at
around
35
percent
of
total
net
sales.
As
oil
prices
dramatically
declined
in
2014,
certain
airline
companies
(in
particular,
airlines
that
do
not
substantially
participate
in
oil
price
hedging)
were
able
to
immediately
reap
the
benefit
of
lower
fuel
costs.
Spirit
reduced
its
fuel
costs
by
24.7
percent
from
$613
million
in
2014
to
$461.4
million
in
2015,
when
it
equaled
only
21.5
percent
of
net
sales.
Southwest
participated
in
oil
price
hedging,
and
consequently
will
have
had
to
pay
$1.8
billion
in
additional
fees
by
2018.100
Interestingly,
Southwest’s
income
statement
shows
that
the
airline
still
benefitted
from
a
10.2
percent
decrease
in
fuel
costs
in
2015
–
the
exact
same
as
Spirit.
Spirit
maintains
the
lowest
cost
to
operate
per
seat
(CASM)
in
the
market.
This
is
achieved
through
maximizing
the
number
of
seats
in
each
plane
which
absorbs
the
already
minimized
operating
cost.
4.2.2
Operating
Profit
Margin
The
operating
profit
margin
measures
profit
generated
after
subtracting
operating
expenses,
and
is
calculated
as
follows:
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔
𝑃 𝑟𝑜𝑓𝑖𝑡
𝑀 𝑎𝑟𝑔𝑖𝑛 =
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔
𝐼 𝑛𝑐𝑜𝑚𝑒
𝑁𝑒𝑡
𝑆 𝑎𝑙𝑒𝑠
100
http://www.usatoday.com/story/money/cars/2016/01/25/airlines-­‐fuel-­‐price-­‐bets-­‐not-­‐always-­‐paying-­‐
off/79288102/

28.
28
Operating
Profit
Margin
2015
%
2014
%
2013
%
2012
%
2011
%
Spirit
509,122
23.8%
355,263
18.4%
282,292
17.1%
173,990
13.2%
144,382
13.5%
Southwest
4,116,000
20.8%
2,225,000
12.0%
1,278,000
7.2%
623,000
3.6%
693,000
4.4%
American
18.0%
JetBlue
20.0%
Industry
13.0%
To
varying
degrees,
most
airlines
have
benefitted
from
increased
operating
profit
margins
due
to
the
decline
in
oil
prices.
According
to
the
International
Air
Transport
Association,
fuel
use
has
increased
industry-­‐wide
while
overall
expenditures
have
decreased.101
Spirit
recorded
an
operating
margin
of
23.8
percent
in
2015,
the
highest
among
its
peers.
For
the
same
period,
Southwest
reported
an
operating
margin
of
20.8
percent,
followed
by
JetBlue
at
20
percent
and
American
Airlines
at
18
percent.
The
industry
benchmark
lagged
far
behind
at
13
percent.
A
major
reason
for
Spirit’s
consistent
growth
in
operating
profit
margin
over
the
past
five
years
is
its
ability
to
reduce
operating
expenses
via
the
strategy
of
high
daily
aircraft
utilization,
high-­‐seat-­‐density
configuration,
and
efficient
flight
scheduling.
The
airline
maintains
the
lowest
cost
to
operate
per
seat
(CASM)
in
the
industry,
achieved
through
maximizing
the
number
of
seats
in
each
plane
(Spirit
has
even
explored
the
possibility
of
stacking
seats
on
top
of
each
other).102
4.2.3
Return
on
Total
Assets
Returned
on
total
assets
(ROA)
measures
firm’s
efficiency
in
managing
its
total
investment
in
assets,
and
is
calculated
as
follows:
𝑅𝑒𝑡𝑢𝑟𝑛
𝑜 𝑛
𝑇 𝑜𝑡𝑎𝑙
𝐴 𝑠𝑠𝑒𝑡𝑠 =
𝑁𝑒𝑡
𝐼 𝑛𝑐𝑜𝑚𝑒
𝑇𝑜𝑡𝑎𝑙
𝐴 𝑠𝑠𝑒𝑡𝑠
101
http://www.iata.org/whatwedo/Documents/economics/IATA-­‐Economic-­‐Performance-­‐of-­‐the-­‐Industry-­‐
end-­‐year-­‐2014-­‐report.pdf
102
https://usattravel.wordpress.com/2015/10/06/airbus-­‐reveals-­‐idea-­‐to-­‐make-­‐airplane-­‐seating-­‐even-­‐worse-­‐
stack-­‐fliers-­‐on-­‐top-­‐of-­‐each-­‐other/

29.
29
Spirit’s
successfully
maintained
a
double
digit
return
on
assets
(ROA)
over
the
past
five
years.
Its
ROA
is
also
the
highest
among
its
peers.
Spirit’s
ROA
ratio
in
2015
shows
a
little
bit
of
decline
compared
to
previous
years
ROA
ratios.
This
subtle
decline
is
driven
by
Spirit’s
investment
in
more
total
assets
such
as
more
aircrafts
and
equipment.
Spirit’s
balance
sheet
shows
that
Flight
equipment
has
increased
by
a
magnitude
much
higher
than
the
rate
of
net
income;
therefore,
this
drives
down
the
ROA
ratio.
Analyst
should
not
be
concerned
about
this,
as
investing
in
PP&E
with
excess
cash
generated
by
CFFO
to
expand
the
company
can
benefit
the
company
in
long
term.
16.5%
11.8%
15.0% 14.2%
12.5%
1.0%
2.3%
3.9%
5.8%
10.2%
0.0%
5.0%
10.0%
15.0%
20.0%
2011 2012 2013 2014 2015
Return
on
Total
Asset
Spirit
Airlines Southwest
Airlines

30.
30
5.0
Balance
Sheet
The
balance
sheet,
also
known
as
the
statement
of
financial
position,
depicts
assets
a
company’s
assets,
liabilities,
and
stockholder’s
equity
at
a
particular
point
in
time.
Long-­‐
term
comparative
analysis
provides
a
comprehensive
insight
into
the
performance
of
a
firm.
This
section
will
evaluate
the
balance
sheets
of
Spirit
Airlines
and
competitor
Southwest
Airlines
over
the
last
five
years
using
horizontal,
vertical,
and
ratio
analysis.
Due
to
the
size
difference
between
the
two
airlines,
we
use
the
common-­‐sized
balance
sheets
for
a
more
accurate
comparison.
5.1
Assets
5.1.1
Cash
and
Cash
Equivalents
Cash
and
Cash
Equivalents
Growth
2014
–
2015
2013
–
2014
2012
–
2013
2011
-­‐
2012
Spirit
27%
19.25%
27.31%
21.4%
Southwest
23.48%
(5.39%)
21.74%
34.26%
Spirit
Airlines
has
maintained
relatively
consistent
growth
in
cash
and
cash
equivalents,
albeit
a
slight
decline
in
growth
between
2013
and
2014
due
to
a
$1.4
million
payment
towards
a
$7
million
settlement
noted
in
the
company’s
10-­‐K.
The
stable
growth
rate
is
especially
notable
considering
the
decrease
in
cash
and
cash
equivalents
as
a
percentage
of
total
assets
throughout
the
years,
a
result
of
heavy
investment
in
capital
equipment.
Southwest
Airlines
experienced
greater
volatility,
with
growth
shrinking
5.39
percent
between
2013
and
2014.
However,
Southwest’s
cash
and
cash
equivalents
only
make
up
about
7
percent
of
its
total
assets,
meaning
volatility
has
little
impact
(in
contrast,
Spirit
maintain
a
cash
account
between
30
to
50
percent
of
total
assets).

31.
31
5.1.2
Flight
Equipment
Flight
Equipment
(%
of
total
assets)
2015
2014
2013
2012
2011
Spirit
32.7%
12.8%
1.1%
.3%
.6%
Southwest
91.3%
93.7%
87.6%
88%
86%
Spirit’s
massive
investment
in
new
aircraft
in
recent
years
resulted
in
flight
equipment
growing
to
32.7
percent
of
total
assets
in
2015.
The
expansionary
behavior
explains
the
company’s
decreasing
growth
in
cash
and
cash
equivalents.
Spirit’s
10-­‐K
discloses
its
orders
of
nearly
200
new
aircraft
in
2014
and
2015
that
account
for
the
immense
increase
in
flight
equipment.
However,
Spirit’s
investment
in
flight
equipment
remains
considerably
smaller
than
that
of
competitor
Southwest,
which
has
a
considerably
larger
fleet
and
route
network.
Southwest
is
not
in
the
expansionary
stage
like
Spirit,
and
consequently
has
a
stable
fixed
assets.
Another
explanation
for
the
discrepancy
is
that
Spirit
leases
a
considerable
portion
of
its
aircraft
–
these
aircraft
are
not
reflected
in
the
flight
equipment
account.
5.1.3
Current
and
Quick
Ratios
The
current
and
quick
ratios
are
both
indicators
of
a
company’s
short-­‐term
solvency.
Since
Spirit
does
not
have
inventory,
its
quick
ratio
equals
its
current
ratio.
Southwest
includes
parts
and
supplies
at
cost
in
its
inventories.
For
this
reason,
the
quick
ratio
gives
a
more
accurate
analysis
of
each
company’s
ability
to
meet
its
short-­‐term
obligations
with
liquid
assets.
𝑄𝑢𝑖𝑐𝑘
𝑅 𝑎𝑡𝑖𝑜 =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡
𝐴 𝑠𝑠𝑒𝑡𝑠 −
𝐼 𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
𝐶𝑢𝑟𝑟𝑒𝑛𝑡
𝐿 𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑦