Shares of Delta Air Lines (NYSE:DAL) moved higher last week after the airline reported that revenue per available seat mile (RASM) reached the high end of its guidance range last quarter. That will allow it to beat analysts’ estimates for Q2 earnings per share — and it also suggests that Delta is entering the third quarter with plenty of momentum.
However, Delta isn’t the only airline benefiting from favorable industry conditions right now…
Spirit Airlines (NYSE:SAVE) is arguably in even better position than its larger rival. And with the shares trading at an extremely low valuation, Spirit Airlines stock looks like a great buy for investors in July.
In position to capitalize on the 737 MAX grounding
The biggest development in the U.S. airline industry in recent months has been the grounding of the Boeing (NYSE:BA) 737 MAX. Several U.S. airlines — most notably, Southwest Airlines (NYSE:LUV) and American Airlines(NASDAQ:AAL) — have been forced to cancel lots of flights due to having dozens of planes out of service. Delta Air Lines’ strong investor update confirmed that this is creating substantial revenue opportunities for other airlines.
Spirit Airlines has much greater route network overlap with Southwest and American than Delta does. Spirit has major bases in Atlanta, Baltimore, Chicago, Dallas, Las Vegas, Los Angeles, and Orlando, all of which are among Southwest Airlines’ 10 busiest focus cities. American Airlines also has big hubs in Chicago and Dallas — and to a lesser extent, Los Angeles.
Furthermore, Spirit Airlines is one of American Airlines’ biggest competitors in South Florida. American Airlines has a hub in Miami — incidentally, its main base for the Boeing 737 MAX — while Fort Lauderdale is Spirit’s largest focus city.
With Southwest and American both forced to cancel more than 100 flights a day, it’s no surprise that other airlines are seeing higher load factors and have been able to charge higher fares. Back in April, Spirit Airlines projected that RASM would rise 5% in the second quarter. But Spirit has beaten its guidance by a wide margin at times in recent years. Given that most of its peers have raised their unit revenue forecasts over the past month, there’s a good chance that the second quarter was one of those times.
Other factors are improving
Strong unit revenue gains at Spirit Airlines would drive massive profit growth, due to the carrier’s relatively favorable cost outlook. Oil prices have moderated since May, so Spirit’s fuel costs per gallon will probably decline in the second quarter and could be down significantly year over year in the third quarter. That will help offset nonfuel unit cost increases.
Spirit Airlines also has a long track record of strong nonfuel cost performance. Despite facing substantial headwinds this year, the carrier is on track to limit its nonfuel unit cost growth to just 2% to 3%.
This isn’t just a one-quarter tailwind
A new issue with the 737 MAX’s handling discovered recently means that Boeing won’t be able to get the plane back into service until late October at best. A November or December return is probably more realistic, and it wouldn’t be shocking if the 737 MAX’s return to commercial service slips into early 2020.
As a result, Spirit Airlines will continue to benefit from capacity constraints impacting American Airlines and (especially) Southwest Airlines in the second half of 2019. That should enable continued solid RASM growth, even as Spirit faces tougher year-over-year comparisons…
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