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The airline business is competitive, and the history of the industry is littered with the names of those who just couldn't stay in the air, like Braniff, Pan Am and Eastern.
One the other hand, a number of carriers, such as Southwest (NYSE: LUV), JetBlue (NASDAQ: JBLU) and Allegiant (NASDAQ: ALGT) have sprung up since the late '70s, competing on low fares. One carrier, Spirit (NASDAQ: SAVE), in particular is growing rapidly.
Spirit is another bargain-basement carrier in the mold of the previously mentioned carriers. The company posted a profit of $34.59 million in the second quarter, and its revenue was $346.31 million. It's had solid earnings overall, but Spirit's are strongest June and September. This is attributable to people going on summer vacations. Spirit's revenues have grown 37 percent over the past year.
Spirit is doing well because it offers bargain-basement fares, the way other airlines in this segment do. But they also bring in money through the infamous fees that they charge. While Southwest still has free soft drinks, they'll cost you $3 each for soda and bottled water. Of course, if you want something stronger, you'll have to pay even more, but that's not unusual for domestic carriers.
If you think you can get away from baggage fees by taking the biggest carry-on you can get away with on the plane, come November you'll face a fee of $100 if you use the overhead bin. Spirit said in its annual report that travelers are less price sensitive for these fees than they are for fares. If you're stuck at 35,000 feet and you're parched, you're going to hand over that $3 no matter what.
Even if the fees are unpopular with travelers, it's hard to deny effect on the bottom line. The fees are an essential part of its business model, and have allowed it to consistently post a profit over the past few quarters. The airline also has a fleet of fuel-efficient Airbus A320s.
All of this relentless cost-savings allows Spirit to have a quick ratio of 1.50, which is outstanding in such a capital-intensive industry.
The reason they're able to offer rock-bottom prices is because the industry was deregulated in 1978, allowing carriers to compete on price rather than having fares and routes set by the Civil Aeronautics Board. (Deregulation was signed by Jimmy Carter, which should put to rest any claims that Democrats only want to regulate industries, but that's another argument.)
If these airlines have to compete on price rather than on amenities, they try to distinguish themselves by their corporate cultures.
Southwest likes to show off its sense of fun, with videos of flight attendants cracking jokes or rapping going viral on YouTube. JetBlue added a few more creature comforts, like improving customer service and in-seat satellite TV. Allegiant's advantage is its vertical integration as a travel company, offering flights, hotels, car rental and show tickets
Spirit's approach is brash and flamboyant, as evidenced by its ad campaigns which occasionally veer into bad taste. One ad campaign in 2010 invited potential customers to view the oil being spread in the Gulf of Mexico by the Deepwater Horizon spill. Other campaigns skirt the limits of what can be mentioned in a family blog.
With the fees and the questionable campaigns, what's undeniable is Spirit's, well, spirit and its financials. This is an airline stock definitely worth buying.
Fool blogger David Delony has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Southwest Airlines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.