huncowboy
Well-known member
- Joined
- Jun 11, 2003
- Posts
- 616
That article caught my eyes too. It does have one good point. Lease obligation is a form of debt. But it paints the picture way worse than it is.
For example the table in the middle of the article. It references our total lease obligation now, against our TTM revenue (which is basically the past 12 months' revenue). Than it compares it to airlines, most of which had no growth or negative growth for the past years, except Allegiant. All while we had some 20%-22% growth, and we are projecting that growth for years to come. Apples and oranges. Not to mention, it neglects higher fuel cost, and maintenance cost, that are all related to old equipment. If you multiply a cost like leasing expense on aircraft by 7, than you should multiply other obligations as well. But he does not.
There is a reason why we are making profit. It is not a coincidence that Delta reported $7 millions while we did $24 in the same Q. They did that with 720 or so airplanes, while we did that with 45? Allegiant reported $28 with 66 airplanes. So should I make a percentage out of that? How about net income per airplanes, or per capacity? Because it would look real bad on those companies. Not to mention Delta will be cutting another 4% of capacity. Again. Just like they have been doing for many years now.
Summing up the table he goes on and says:
"The surprising result is that while Spirit is the only company with no debt on its balance sheet, it has the heaviest adjusted net debt burden in this group, at 57% of revenue."
and
"Even the much-maligned legacy carriers Delta and United have significantly more manageable debt burdens."
Clearly a distorted and thus meaningless comparison.
The next thing that caught my eye was this statement:
"However, high aircraft rent raises Spirit's fixed cost base, reducing the company's flexibility. Competitors with lower aircraft expense can quickly reduce capacity if industry conditions deteriorate. Allegiant and Delta have used this strategy to great effect in recent years. By contrast, because Spirit must pay high aircraft rent costs regardless of whether its planes are flying, it cannot easily cut capacity. Not surprisingly, the company's aircraft utilization rate is the highest in the industry, at 12.8 hours per day."
This above is simply not accurate. We are very flexible. This is in part because our market share is tiny, and we are low frequency to most of our destinations. Yet we are still profitable often with only one flight a day per destination. That is the indicator of flexibility, not the other way around. We are not in a scenario where we constantly run into competition. And when we do, not surprisingly, often we chose to move one and leave the market rather than get into a costly fare war against a large competitor and hurt profits. I.e SJU vs JB. We left. And we can afford to do this. We are flexible to do this. Others can't. When they pull out, they pull a lot of flights because it only pays to enter the market with a high number of flights to begin with. Or not enter at all. This would be different if we had 400 airplanes. It would be much harder to find areas and reshuffle the operation in case of a recession. As it is now, we can pull out and try elsewhere in a moment's notice.
Then he goes on:
"While industry conditions remain favorable, high aircraft utilization is not a bad thing."
High a/c utilization is never a bad thing. Having assets, worth several million dollars, sitting on the ramp because you can't find market for them. That is a very bad thing.
"The danger for Spirit Airlines investors is that the company could not afford to cut back even if profitability deteriorated due to a fuel price spike or a sudden drop in demand. High fixed costs (i.e. aircraft rent) leave Spirit with much less flexibility than competitors like Delta and Allegiant, which have older, fully depreciated planes that can be mothballed if necessary."
Well that is just it. We might not have to cut back. We have plenty of places that we don't serve still that would love to have a ULCC. Not to mention, since our operating cost is one of the lowest already, and our fuel per passenger is one of the lowest if not the lowest, we will be the last one effected. Others will be pulling back much sooner, potentially leaving markets open for us. Also cash on hand is not mentioned here either. With $400 mill, and only 45 airplanes, we can go on for a while before we have to pull back. It is not 2008 when we had nothing in the bank. Delta had 2.2 bill cash in 2012 September while they are 15 times larger and they are way more than 15 times operating cost wise. They only have 5 times the cash we have. Does that not matter? Where is that factored into that table? It is not.
All that makes his conclusion, once again, very distorted. But here it is:
"Conclusion
Spirit's high profit margins and low valuation make the company a reasonable investment candidate. However, investors should be aware that the company has one of the heaviest adjusted net debt burdens in the industry, at 57% of TTM revenue, due to high aircraft rent costs. This diminishes Spirit's flexibility, and could prevent the company from cutting capacity to match demand in a future industry downturn."
I agree though, we are not debt free. As a private person, i.e. if you have a car lease, you will see that on your credit report all the remaining payments are totaled up and presented as obligation. So his concept is solid, it is just a technicality that companies treat this as an expense. Too bad he decided to make the arguments one sided and unbalanced. Perhaps a former passenger of ours...
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