Spirit Airlines, a private U.S. carrier specializing in low-priced flights to Latin America and the Caribbean, the airline is offering 20 million shares at $14 to $16 each to raise as much as $320 million after it priced its initial public offering at $14-$16 a share on Wednesday, May 25, 2011. But before I continue I’d like to disclose just in the last hour as I write this article, the underwriters announced delaying plans of the IPO. It initially filed with U.S. regulators to raise up to $300 million in its IPO last September. Citigroup Global Markets and Morgan Stanley are lead underwriters for the offering, which will see Spirit list its shares on NASDAQ under the “SAVE” symbol. The airline, which calls itself an “ultra low-cost” carrier, keeps ticket prices low by unbundling items and services from its base fares. Spirit Airlines, sporting remarkably low unit costs as well as three consecutive years of profitability.

The company said it plans to use the IPO proceeds to repay debt and pay private equity firm Indigo. Major airlines have adopted similar structures in recent years and have managed to generate substantial ancillary revenue streams by unbundling services like bag checks. 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. They’re perhaps the most aggressive among U.S. carriers on ancillary fees, but at the same time in fairness, they have significantly reduced prices associated with removing services. Every airline is charging for baggage fee with the exception of Southwest Airlines (LUV)

Use of Proceeds – SAVE expects to net $276 million from the IPO and intentds to use $124mm to repay debt, $1.6 million for management termination fee and the balance of $150 million for general corporate purposes, including cash reserves, working capital (including termination of the letter of credit facility), sales and marketing activities, general and administrative matters and capital expenditures, including future flight equipment acquisitions.

The largest shareholder with 59% of Sprit is Indigo, a private equity fund headed by Bill Franke, who was chairman and CEO of America West Airlines between 1993 and 2001. Indigo has invested in half a dozen ultra-low cost carriers worldwide, includeVolaris in Mexico and Mandala in Indonesia.Another private equity fund, Oaktree Capital Management, owns 34% of Spirit. Spirit’s top officer, CEO Ben Baldanza, was paid $820,990 in 2009 including $46,750 in stock.

About Spirit Airlines

Website can be found here

Spirit began operations in 1980 as Charter One, a Detroit-based charter tour operator that provided travel packages to entertainment destinations. In 1992, Charter One changed its name to Spirit Airlines and began offering flights from Detroit to Atlantic City. The carrier added destinations throughout the 1990s and added Latin American cities starting in 2001. It now serves 40 destinations. Spirit employs 2,300 people to run its EADS Airbus fleet. Florida-based Spirit operates more than 150 flights a day, but carries less than 1 percent of U.S. air passenger traffic.

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.

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.

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.

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.

Non-Ticket Revenue – Non-ticket revenue is a critical part of SAVE’s business model. Non-ticket revenue per passenger flight segment has grown by 600% since 2006.

Products and Services — SAVE provides low-fare passenger airline service primarily to leisure and VFR travelers. SAVE offers basic passenger airline service for a low fare combined with other optional travel-related products or services for additional fees. Fares do not require a minimum stay (e.g., Saturday night stay). Low fares are designed to stimulate demand from price-sensitive leisure and VFR travelers who might not otherwise have flown to destinations, due to the expense or inconvenience involved in traveling there.

Financials/Valuations

The 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.

Spirit is a niche airline servicing customers who pay for their own travel. Comparing the March 2011 quarter with the 2010 quarter: Revenue was up 27% to $233 million; Profit was up 12% to $28 million. 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 reported net income of $84 million on revenue of $700 million in 2009. In the first half of 2010, revenue totaled $335 million as the carrier lost $2.8 million, apparently as the result of a five-day pilot strike in June. Spirit reported net income of $1.4 million in 2007 and $33 million in 2008.

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.

Annualizing the March quarter for price to earnings the ratios are: SAVE (8); ALGT (13). On a price to book basis SAVE is at a preimum to ALGT, the ratios are; SAVE (2.8); ALGT (2.4). On a price to sales basis the ratios are comparable: SAVE, (1.0), ALGT (1.1). Both SAVE and ALGT are priced at a premium compared to JetBlue (JBLU), Sky West (SKYW) and Southwest Airlines (LUV). The following ratios respectively are for price to sales, price to earnings, and price to book.

JetBlue Airways: 0.4, 152, 1.1
SkyWest: 0.2, -19, 0.6
Southwest Airlines: 0.8, 459, 1.4

In the past year ALGT’s stock peaked at $55.63 and is down 16% from the high to $46.79. SAVE is an interesting speculation on the IPO based on the P/E comparison and also on SAVE’s growth plan based below. BUT…..What about pressured margins which were shown in 2010 due to increased Fuel Costs.

Growth Plan — SAVE intends to add 33 new A320-family aircraft to a present fleet of 26 A319, seven A320 and two A321 aircraft. The new A320s are configured with 178 passenger seats as compared to 150 passenger seats per plane utilized by some of competitors, including JetBlue Airways.

Industry

Three main categories of passenger airlines operate in the markets in which SAVE competes: the traditional or legacy network airlines, domestic regional airlines and low-cost carriers.

(1) The passenger airline industry in the United States has been dominated historically by the traditional network carriers, which presently consist of American Airlines, Delta Air Lines, United Airlines and US Airways.

(2) Regional airlines, such as Air Wisconsin, American Eagle, Comair, Horizon, Mesa, Mesaba, Pinnacle, Republic and SkyWest, typically operate smaller aircraft on lower-volume routes than the network airlines and most low-cost airlines.

(3) Low-cost carriers largely developed in the wake of deregulation of the U.S. airline industry in 1978, which permitted competition on many routes for the first time and thereby introduced fare competition on those routes. The largest airlines based in the United States that define themselves as low-cost carriers include: Southwest Airlines, JetBlue Airways, AirTran Airways, Allegiant Travel Company, Frontier Airlines (now owned by Republic Airlines) and Virgin America. Southwest Airlines and AirTran Airways merged in May 2011, but continue to operate as separate carriers.

Dangers/Headwinds In Investing In Airlines – 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.

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. Spirit’s pilots, represented by the Air Line Pilots Association, staged a six-day strike in June after U.S.-mediated talks failed to bridge differences with management over pay, scheduling and benefits. The strike at Spirit was the first notable job action at a U.S. passenger airline since Northwest Airlines mechanics walked off the job in 2005. Delta Air Lines Inc (DAL) bought Northwest in 2008.

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.

A potential risk is that low-fare competitors such as AirTran and JetBlue continue to expand in the Caribbean and Latin America. One sign of their growth occurred last week, when both carriers announced nearly simultaneously that they would begin Tampa-San Juan, Puerto Rico service next year.

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. As I scavenged through countless reports and financial statements on Spirit Airlines, a news wire hit ironically about Spirit Airlines. It read Spirit has delayed plans to price its initial public offering, an underwriter told Reuters on Tuesday, May 24th, 2011. I think Goldman’s upgrade on Oil and Gold targets spooked them. It’s ashame, regardless I’ve provided my full unbiased analysis as for maybe that one day when they do plan to begin trading on the exchanges, investors will readily have this information.