Spirit Airlines(NYSE:SAVE) is a low-cost airline headquartered in Florida. The company is the seventh largest commercial air operator in the US. The aviation and travel sectors are facing the music of the coronavirus induced down-cycle that has virtually killed all demand.
The Spirit Airlines stock ended last week 67% down YTD and tanked another 2% on Monday as Warren Buffett owned Berkshire Hathaway declared it’s complete withdrawal from the aviation sector. At the Berkshire Hathaway earnings call, Warren stated that he expects that the sector will take a substantial amount of time to recover and will just “chew up money” in the mean-time. The analyst consensus for Spirit’s Q1 is a loss of -$0.6 per share and in Q2 of -$2.43, earnings are due after market tomorrow.(Nasdaq)
Like all other carriers, the company has decided to cut its capacity by 75% over the next 3 months. As the lockdowns really took effect quite late in the quarter around March, the real brunt of the pandemic is supposed to hit the sector in Q2. The TSA reported current traveler numbers to be 95% below averages.
With the aviation sector being extremely capital intensive, the government decided to step in with a fiscal stimulus package of $50 billion to be distributed amongst airlines so that they can continue to pay salaries and maintain coverage across the US. Of the $50 billion, 90% is going to go to the legacy airlines and bigger low-cost airlines, Spirit is estimated to have received $330 million.(Forbes)
The sector can only start recovering after a vaccine is made available, which is expected to be at least 12-18 months away. In the meantime, airlines are burning through cash in an unprecedented manner, legacy airlines such as American and Delta are burning between $30 million and $70 million a day.
Based on their calculations of cash burn, Spirit is expected to be burning about $4.1 million a day. Based on its financials post-government funding, Spirit has $1.2 billion of liquidity, hence it can survive about 10 months assuming a cash burn of $4.1 million. Spirit also has the lowest cost per mile for customers of all it’s competitors.
Given that a recovery of the travel sector is far and a looming recession significantly lowers consumer spending capacity. Spirit’s low-cost service puts it in prime position to capitalize on this opportunity. After Monday’s fall the company is trading at a P/E of less than 2, which is insanely cheap for the sector(based on 2019 earnings). Research firm Cowen has put a price target of $21 on the stock.