Passenger Pain vs. Profit at Spirit Airlines

Spirit Airlines (Nasdaq: SAVE) -- better known to anyone who has ever flown it as a bus with wings -- doesn't go out of its way to impress its customers. The airline has taken the concept of nickel and diming passengers to death to a whole new level with fees for just about everything beyond a seat, from carry-on luggage to boarding passes to a cup of water during a flight.

You have to pony up $3 if you want the flight attendant to hand you a drink, and I'm not talking Coke, Pepsi, or even coffee. Spirit charges for basic H2O, unless you're willing to pour it yourself from the tap in the aircraft bathroom, or you have the patience to accept a free cup of ice and wait for it to melt.

Spirit is such an uncomfortable, unfriendly, and regimented airline that it is the only one from which I ever came close to being tossed -- just because I said aloud as I was boarding that the airline is uncomfortable, unfriendly, and over regimented, with a fleet likely held together with paper clips, duct tape, and dirt. (At least, that was the case when I was flying a few years ago. The airline claims it upgraded its fleet in 2010.)

Thanks to my husband, much better behaved after a preboarding incident that left me infuriated, I was allowed to stay aboard. But I never flew Spirit again -- and, as much as I understand the quest for a bargain, I can't understand why anyone still flies the ultra-low-cost carrier.

So imagine my dismay when I read this weekend that the stingy, surly, insufferable Spirit is the most profitable airline in the US. It received this distinction just five years after being on the cusp of bankruptcy -– and less than a year after going public.

Spirit, a 40-jet airline that seriously considers Greyhound a competitor, is profiting from fliers who seek to reach their destinations as cheaply as possible. Last year, the Miramar, Fla., carrier earned $2.06 million per plane, or 40% more than any other US airline. By comparison, Delta (NYSE: DAL) earned $1.21 million per plane last year. United (NYSE: UAL) earned $1.19 million. JetBlue (Nasdaq: JBLU) earned $0.51 million. Southwest (NYSE: LUV) earned $0.32 million, and US Airways (NYSE: LCC) earned $0.21 million. The bankrupt American Airlines lost $2.32 million per plane.

Apparently, all those $5 charges Spirit collects from passengers who dare to ask for a boarding pass at the airport (yes, you have to pay for those, too) add up. Looking ahead, the potential profit is even brighter. Spirit said this month that it plans to raise its fee for carry-on bags to $100, becoming the first US airline to charge so much for a service most airlines offer for free.

On its Website, Spirit says the higher fees will take effect Nov. 6 and will apply to carry-on bags registered at the gate. Until then, passengers will have to pay only $45 to carry a bag on board. Just to be clear, any bag that needs to go in the overhead bin is considered a carry-on. A bag that fits under the seat is free. But passengers still don't like it. You can find plenty of hate posts about the new $100 fee, including one that calls Spirit "the rudest, dirtiest, cheapest airline since Aeroflot. Take out the 'ri' and just call it 'Spit Airlines' -- the airline that hates you as much as you hate it."

Here's my dilemma with Spirit. As a consumer, I feel deceived by the allegedly low prices. CEO Ben Baldanza says the pricing structure lets purchasers pick and choose the extras they want. The way I see it, it's just an illusion. By the time you add up all the various and sundry charges -- for boarding passes, cups of water, checked luggage, carry-on bags, for just about everything, really -- it seems clear you could get a better deal just flying another airline. By then, it's too late, because you can't return your ticket without an even more exorbitant fee.

But looking at the airline from an investor perspective, it's hard to be so judgmental. Sure, Spirit leaves passengers wondering if they inadvertently boarded a poorly funded charter from an emerging country, where every dollar really counts. However, like a rich person who drives a 20-year-old car and lives well below his means, Spirit proves that what you see is not always what you get.

Since a lackluster initial public offering late last May that raised $187.2 million (versus the $320 million it projected), Spirit shares have soared more than 95% in less than a year, jumping from less than $12 to more than $22.50 recently. It has a forward P/E ratio of 9.39, a trailing P/E of 16.03, and a PEG of 1.16.

For the first quarter of 2012, Spirit's total operating revenue was $301.5 million -- an increase of $68.8 million, or 29.6 percent, from a year earlier. It posted net income of $23.4 million, for a net margin of 7.8 percent. Its operating margin was 12.4 percent.

The airline brought in $128.33 of revenue per passenger per flight segment -- an increase of 2.7 percent from a year earlier. But you need to dig deeper. Ticket revenue declined 6.9% to $76.65 per passenger flight segment, but nonticket revenue per passenger flight segment rose 21.3% to $51.68. In other words, more than 40% of its passenger revenue per flight segment came from fees and related nonticket revenue, versus 34.1% in the first quarter of 2011.

Passengers may complain about the unending fees, but analysts like Maxim Group's Ray Neidl say the Spirit business model is "brilliant." In a Bloomberg Businessweek interview, Neidl compared the "unbundled pricing" to a trip to a grocery store. "For the economical traveler, it’s an open market. A cheap ticket, and if they want services, then they have to pay for them."

The unanswered question: How long will these people pay? There is a big difference between paying $45 for a carry-on bag and paying $100 for the same bag. Spirit is profitable now, but its strategy makes me wonder -- both as a consumer and as a potential investor -- whether this business model is really sustainable. Or even worse, could it create a ripple effect in the industry?

Bob Payne, a contributing editor at Conde Nast Traveler, told us there are broader implications from Spirit's actions.

"The troubling thing is not that Spirit is getting away with charging unreasonable fees, but that the other airlines are seeing them get away with it. And much of the blame lies with the flying public," he said. "Right now, passengers can still register their dissatisfaction by going to an airline with more reasonable fees. But unless they do, they may soon not have that option."