Spirit Airlines Investors May Want to Brace for a Bumpy Landing for Earnings

Spirit Airlines may have sent it earnings soaring by charting everything from $5 for a boarding pass to $35 for the right to put your bag in an overhead compartment, but analysts are warning of turbulence ahead.

In spirit, at least, Spirit Airlines (SAVE.O) is North America’s answer to Ryanair (RYAAY.O), an ultra low-cost carrier (just look at the ticker symbol under which its stock is traded for evidence!) dedicated to getting North Americans from Point A to Point B for rock-bottom fares. Well, that is until you start adding up all the fees that Spirit levies on its travelers: $3 for a bottle of water on board, $2 for some animal crackers, and so on. Spirit, given its razor-thin business margins and low fares, has gone a step further than most airlines by charging customers a fee for stowing a carry-on bag in an overhead compartment. Until recently, that fee was $30 per bag, and then Spirit announced last October that, beginning last November, that would rise to $35 per bag. And for those travelers who don’t pay that fee before they check-in, the fee at the gate will soar to $100.

Ben Baldanza, president and CEO of Spirit, told an investor relations conference in Florida a month ago that fees like that help keep its ticket prices low and its seats full of fliers – and that “non-ticket sources” or revenue now amount to some 40% of the company’s total revenues. But given the still-uncertain employment market and concerns about higher income tax burdens hitting disposable incomes this year, these new fees may end up being more than just a public relations problem involving some disgruntled passengers. At some point, proliferating fees may alienate passengers.

Like all airlines, Spirit must grapple with big headwinds that are out of its control. The price of jet fuel is one of those, and another is the weather; in 2012, both offered little but downside. Spirit, a smaller airline that flies only about 200 flights a day to and from some 50 destinations that include the U.S. Northeast and the Bahamas had to cancel a total of 136 flights as a result of Hurricane Sandy, making it one of the airlines that took the hardest hit as a result of the storm. The new fees kicked in almost immediately after that, and whether it was because fewer travelers were taking to the skies in the wake of Sandy or because disgruntled travelers took exception to the new, higher fees, Spirit saw a downturn in bookings in November and December.

Unsurprisingly, therefore, analysts have been steadily cutting their outlook for the company’s fourth quarter earnings since the beginning of November, with every estimate revised being trimmed back. Over the course of the last 30 days, the I/B/E/S mean consensus forecast for the company’s earnings in the just-completed fourth quarter has tumbled to 20 cents a share from 25 cents a share, as reflected in the gold-colored line in the chart above.

The StarMine SmartEstimate, meanwhile, has tumbled still more significantly. Today, this forecast – derived from the most recent estimates and those published by analysts that StarMine believes have the greatest track record in terms of accuracy – stands at only 15 cents, giving Spirit a large negative Predicted Surprise of -28%. (The SmartEstimate’s decline is charted by the blue line, above.) That signals that it is likely that the consensus will fall still further between now and February 11, when the company expects to report its fourth quarter results, or that Spirit will announce earnings that fall short of that consensus.

Nor is this growing pessimism confined to earnings for the fourth quarter. When Baldanza – who likes to refer to his airline as the dollar store in the sky – has recently argued in media interviews that Spirit can continue to grow rapidly without compromising the margins that by some estimates have made it the most profitable airline (measured by the profit per airplane) in the United States, analysts appear to quibble with that rosy outlook. They have cut their earnings estimates for the full year 2013 by 10% in the last 90 days alone, from slightly more than $2.20 a share to today’s consensus of $1.93 a share. That indicates that analysts are worried about more than just the knock-on effects of a single storm – however serious – on Spirit’s ability to continue to deliver soaring profits, whether it is because of sustained higher fuel prices, a more challenging competitive environment in the wake of the merger of other low cost carriers like Southwest and AirTran. The new fees just add to the headwinds, as loyal customers ensure they avoid them, while disgruntled ones defect to the competition.

Indeed, if the trends in estimate revisions are any guide, investors may want to brace themselves for some turbulence ahead.

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