Low-cost carrier, Spirit Airlines (SAVE), is navigating through rough waters as it faces increasing operating costs and declining liquid assets. The stability of the firm’s financial position has been subject to scrutiny amidst analysts’ and investors’ apprehension over its ability to withstand the current market challenges.
Spirit Airlines’ stock price has dropped 82.7 percent over the past year, in stark contrast to its peers’ collective gain of 7.3 percent in that period—a fact that speaks volumes about market sentiment. This sharp drop recalibrated many of the alarms among investors and industry watchdogs.
Meanwhile, financial analysts have significantly slashed earnings estimates of the airline. The Zacks Consensus Estimate for Spirit’s current-quarter earnings has been reduced by 510.3% in the last 90 days. Moreover, the consensus estimate for full-year earnings has declined 18% in the last 90 days. These downward estimate revisions categorically indicate that the company is losing momentum in terms of earnings estimations and that confidence in its near-term prospects is fading fast.
Spirit Airlines’ earnings history has done little to alleviate investors’ concerns. For two out of the last four quarters, the company posted less than what analysts expected, recording an average earnings miss of 3.86%. This may be because it shows how inconsistent the company is, further shaking confidence in its financial stability.
Ideally, one major influencing factor contributing to Spirit’s financial stress is the increase in operating expenses, particularly labor costs. In Q1 2024, the company reported that labor costs had reached $431.5 million. This cost category, which is made up essentially of salaries and benefits, accounts for 29.3% of total operating expenses at present.
Furthermore, liquidity issues have come to the fore, where Spirit Airlines reported a current ratio of 0.97 at the end of Q1 2024; this is less than the critical level of 1 and may indicate that the firm cannot pay all its short-term financial obligations. The situation has been compounded by Spirit’s high capital expenditures, which become even more worrying when placed against the fact that the revenue position for this particular firm has been drastically weakened.
In view of these issues, Zacks Investment Research assigned Spirit Airlines a Rank of 4, telling investors to take a step back.
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With factors piling up against Spirit Airlines, the forecast for some other stocks in the transportation sector is much more encouraging. SkyWest and Kirby Corporation have been spotlighted as potential winners. SkyWest, currently holding a Zacks Rank #1, or Strong Buy, has an anticipated earnings growth rate of for this year and has consistently beaten earnings estimates. Conversely, Kirby Corporation holds a Zacks Rank #2; it is expected to attain a 42.5% increase in earnings this year and has constantly beaten earnings expectations.
As it comes out of its financial difficulties, what can we expect from Spirit Airlines in terms of liquidity improvements, cost controls and a return to a path of sustainable growth in an increasingly competitive airline market?