Spirit Airlines to do IPO

Spirit Airlines has decided to do an Initial Public Offering (IPO) of stock and thinks the value will be about $300 million. Spirit is currently privately owned by a number of high profile investors who, it has been said, are ready to cash out of their investment. 

Does this mean they don’t like it?  No.  Their investors are venture capitalists and by their nature, they look for an exit once an investment has been successful.  Spirit has enjoyed that success and according to this story in USA Today, they make a good case.

Their aircraft utilization has risen from an acceptable 9 hours per day in 2006  to 13 hours per day.  They are now earning over $30 per passenger in ancillary revenue vs just $5 in 2006.   They’ve also managed to earn a profit for each of the last 3 years in what has been arguably the worst climate possible for airlines.  While they have had an initial loss for this year, blaming it on higher wages and fuel costs, expect another profit for the full fiscal year. 

Spirit isn’t an airline I would typically fly but I will concede that they have found an untapped market following what is almost a Ryanair+ business model.  They’ve lowered base fares dramatically and earned good revenue from “unbundling” their services and while many don’t like what they’ve done, their relatively full aircraft and annual profits point to the fact that many are happy to take the deal.

Spirit outlines their intent to retire debt and fund growth from this IPO and to do that, Spirit is going to have to branch out from their Florida/Gulf/Caribbean marketplace and attempt operations in other parts of this country.  They’ve done well with their Caribbean focus and I expect they’ll look for other cities to take advantage of that strength.  Perhaps in Texas or California.  It is interesting to me that they’re about to start service from Chicago O’Hare to Las Vegas and that’s their market:  inexpensive fares to leisure destinations.

Whether you like their approach to airline service, you can’t argue against their success and they do have a solid business case going forward.  They also face some risks going forward like any airline.  As they age, their labor costs will go up, for instance.  As they succeed in their various “fees”, other airlines will likely adopt some of their practices.  But Ryanair has an aging labor force and they continue to do well.  Other airlines in Europe have adopted Ryanair-like strategies.  Ryanair is still succeeding because they’re still executing their strategy better than anyone else.  Spirit has that same potential.

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