Spirit Airlines Inc., the U.S. carrier that charges for carry-on luggage, is seeking to sell shares today at a discount to bigger low-cost airlines as rising fuel prices crimp industry profits and force higher fares.
The airline is offering 20 million shares at $14 to $16 each to raise as much as $320 million, according to a regulatory filing. At the midpoint, Miramar, Florida-based Spirit would be valued at about $951.6 million, or 13 times 2010 earnings. That compares with 19 times for JetBlue Airways Corp. and 21 times for Southwest Airlines Co. Allegiant Travel Co., the closest to Spirit in size, trades at a multiple of 14.
“Most airlines would never even think about doing equity right now, with fuel at a three-year high and the outlook somewhat uncertain” for the economy, said Michael Derchin, a CRT Capital Group LLC analyst in Stamford, Connecticut. “This isn’t a traditional time to be doing an IPO.”
Spirit, which flies mostly between Florida and the Caribbean, is looking to raise funds for future plane purchases and to pay off debt as jet-fuel hovers at about $3.05 a gallon, near the highest levels since 2008. Gulfstream International Group Inc., the last passenger airline to hold an IPO, sold shares in 2007 and filed for bankruptcy last year.
Private equity firm Indigo Partners LLC bought a majority stake in Spirit in 2006. The firm also invests in airlines with similar models, including Mexico’s Volaris, Singapore’s Tiger Airways, Russia’s Avianova and Hungary-based Wizz Air. Oaktree Capital Management LP is the second-biggest investor. Neither firm plans to sell shares in the IPO, according to the prospectus.
Cancun, St. Thomas
Spirit operates a fleet of 35 Airbus SAS A320-family jets serving 40 cities, including Cancun, Mexico; San Juan, Puerto Rico; and St. Thomas. It also flies to cities where immigrants and their families often travel, such as Bogota.
The shares will trade on the Nasdaq Stock Market under the symbol SAVE.
The airline’s average base fare in the first quarter was $82, about 40 percent lower than Southwest’s. Spirit fills empty seats with fares as low as $9, then boosts revenue through fees of as much as $45 for carry-on bags that other U.S. airlines allow for free.
“Spirit has its own little niche,” said Bob McAdoo, an analyst at Avondale Partners LLC in Kansas City, Missouri, who previously helped found People Express, a now-defunct airline that mirrored Southwest’s model.
Spirit’s operating income as a percentage of sales was 15.9 in 2009, “among the highest in the U.S. airline industry,” according to the company’s prospectus. Last year, the margin dropped to 8.8 percent on fuel prices and a pilot strike. The airline’s cost for each seat flown a mile, an industry benchmark, was 8.77 cents last year, compared with 8.95 cents for Allegiant.
Spirit’s planes average about 5 years of age, while Las Vegas-based Allegiant operates a fleet of 52 Boeing Co. MD-80 aircraft that are 21 years old on average. Allegiant has a market value of about $900 million.
Spirit declined to comment because it is still in a quiet period, according to U.S. Security and Exchange Commission rules, said Misty Pinson, a spokeswoman.
Chief Executive Officer Ben Baldanza made Spirit the first U.S. airline to charge for carry-on luggage, adding fees last year ranging from $30 to $45 for bags that must go in the overhead bins.
Baldanza said the fee was to encourage passengers to check luggage instead, which would save 5 to 7 minutes between each flight as passengers tussle over storage space in the cabin.
Fuel, Labor Costs
The U.S. commercial aviation landscape is dotted with failures, with 100 carriers filing for bankruptcy or ceasing service since 1989, according to the Air Transport Association, a Washington-based trade group that represents U.S. airlines.
Fuel surpassed labor as most airlines’ biggest cost last year, and accounted for 35 percent of Spirit’s expenses in 2010. Spirit’s focus on leisure travelers means it can’t count on demand from higher-fare business passengers, whose trips are paid for by their employers, to blunt any loss of vacationers who might be deterred by higher fares, Avondale’s McAdoo said.
Six systemwide fare increases taken by the five biggest U.S. carriers in the first quarter didn’t overcome a 41 percent increase from a year earlier in the price of jet fuel for immediate delivery in New York harbor.
The combined net loss for United Continental Holdings Inc., Delta Air Lines Inc., AMR Corp., Southwest and US Airways Group Inc. widened to $1.08 billion in the period from $978 million a year earlier.
Labor accounted for 22 percent of Spirit’s costs in 2010, with about half of its 2,300 employees represented by unions. Spirit’s operations were crippled last year by a pilot strike for about a week, when members of the Air Line Pilots Association walked off the job after three years of negotiations failed to result in a contract. It was the first strike at a U.S. passenger airline since Northwest Corp. mechanics had a stoppage in 2005.
Citigroup Inc. and Morgan Stanley are leading the Spirit offering, the prospectus shows.