Is This the Biggest Threat to the Major Airlines?

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All of the benefits of consolidation undertaken by the major airlines to create three behemoths could unravel if new competitive threats enter the market. After decades of losses, new airlines entering the industry don’t appear as likely a threat as some of the established, more regional players aggressively expanding to fill the voids created by the mergers.

Enter Spirit Airlines (NASDAQ: SAVE) as possibly the biggest threat to the new founded stability in the industry. Sure Alaska Air Group (NYSE: ALK), JetBlue Airways (NASDAQ: JBLU) and Southwest Airlines (NYSE: LUV) are larger players that could press the industry, but none of those companies appear destined to push the needle these days.

Remember that the new American Airlines, Delta Airlines, and United Continental Holdings have now consolidated all of the major airlines into those three companies each approaching $40 billion in revenue. Combined the three now amass a revenue base nearing $120 billion.

Spirit remains in growth mode

In general, the non-majors are not pushing growth at any cost models anymore with a general focus on profitable growth only. Spirit on the other hand is pushing the low-cost growth model and hence provides a formidable competitive threat to the majors.

For Q113, Spirit reported revenue growth of 23% and earnings per share increased 36%. The company grew principally from a 20.8% gain in available seat miles (ASMs). A number that the industry would prefer to not see as it could completely over ride the consolidation process.

Spirit recently added service to numerous locations from Dallas/Ft. Worth, Houston, Baltimore/Washington, and Philadelphia. No doubt numerous routes that the behemoths hoped wouldn’t face competition so quickly.

The company as well has no debt, placing it in rarified air in the sector. This gives the company plenty of leverage to be aggressive in gaining market share as new airplanes can be added without over leveraging the balance sheet.

Other potential market share gainers

The other two airlines likely to press forward in an aggressive manner are Alaska Air and JetBlue. Southwest Airlines will to a minor extent, but that airline is already at $17 billion a year in revenue or near being a major.

Alaska Air Group expects to grow revenue nearly 8% this year to just over $5 billion in revenue. The company operates primarily in Alaska, Hawaii, and extensive service within the western U.S., Canada, and Mexico. Analysts expect the company to earn $5.62 in 2013 so the stock trades at roughly 10x earnings expectations with earnings growing in the 15% range. The stock has a market cap of $4.2 billion.

JetBlue expects to grow 9.4% to a revenue base of around $5.5 billion. The company operates with a focus on East Coast traffic in the U.S. with headquarters in New York. Analysts expect the company to earn $0.60 this year making the stock worth about 11x earnings. The stock though only has a market cap of $1.9 billion.

Stock chart

As the two-year chart below shows, Spirit has been the highest gaining stock in the sector for a while now. The 139% gain in that time period could easily attract more aggressive startups much to the chagrin of the industry.

SAVE Total Return Price data by YCharts

Bottom line

Even though Spirit has an aggressive growth plan, that dynamic existed even before the US Airways and American Airlines merger. The regional players will all be opportunistic to help fill voids left by the mergers of the big airlines. Combined, these three regional players only generate $12 billion in annual revenue. That amount is a far cry from the $120 billion of the sector leaders. Even including Southwest Airlines and the group can’t reach $30 billion that leaves the group short of any behemoth alone.

The aggressive addition of Spirit Airlines makes it the biggest threat to the industry currently. A new entrant would be a major warning flag, but investors need to keep an eye on this firm. As long as Spirit remain somewhat in check investors should load up on the stocks.

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Mark Holder and Stone Fox Capital Advisors, LLC have no positions in any stocks mentioned. The Motley Fool recommends Southwest Airlines. The Motley Fool owns shares of Spirit 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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