Spirit Airlines shares fall after 4Q outlook, Morgan Stanley downgrade on price competition

NEW YORK, N.Y. – Shares of Spirit Airlines Inc. tumbled Friday after a disappointing fourth-quarter outlook and a downgrade by Morgan Stanley.

Late Thursday, the discount airline said that a key revenue measure would decline more sharply in the fourth quarter than in the third. Morgan Stanley downgraded the shares to “equal-weight” from “overweight,” saying that Spirit could struggle as other airlines add flights and cut fares.

In Friday afternoon trading, the shares were down $7.39, or 14.8 per cent, to $42.67. The shares were already down 34 per cent for the year when trading began and have lagged most other U.S. airline stocks.

Spirit has grown rapidly and thrived by offering low base fares while charging more fees than many of its competitors. The Miramar, Florida-based airline has had among the industry’s highest profit margins.

But recently bigger carriers such as American Airlines have become more aggressive about matching Spirit’s prices to compete for bargain-seeking travellers. At the same time, many airlines have taken advantage of cheaper jet fuel to add flights, which has driven down average fares this year.

In an investor update, Spirit said third-quarter operating margin would be better than previously forecast. But it added that a closely watched number, revenue for every seat flown one mile, would decline faster in the fourth quarter than in the third quarter. The figure, also called unit revenue, usually falls if average fares decline.

Morgan Stanley analyst Rajeev Lalwani said in a note to clients that Spirit is facing more pressure from falling fares than had been believed, and the trend isn’t likely to change because of forecasts for more flights and relatively cheap fuel. The analyst said Spirit’s business model is still attractive, but less so when the company has a smaller profit-margin advantage over other airlines.