Warren Buffett is one who doesn’t think highly of airline stocks, a view he surely would keep based on the lackluster trades of newly public Spirit Airlines. Joe Brancatelli shares secrets and proven tips for first- and business-class road warriors. Spirit has operated as the P.T. Barnum of airlines—management believes there’s a bargain-hunting sucker born every minute—but its reaction to a pilots’ strike appalls even the most cynical airline-industry observers. For better or worse, Southwest Airlines’ acquisition of AirTran will be the stuff of textbooks a decade from now. A look at the big questions ahead for the nation’s most successful airline. 
The much-discussed and oft-maligned Spirit Airlines trades as SAVE on Nasdaq now, and it closed at $12.02 on Tuesday, just two pennies more than its initial public offering price.
That is called victory in the business of investing in the nation’s shrinking corps of commercial airlines.
Say whatever else you will about airlines, but one fact is incontrovertible: They make lousy investments. For about 20 years, give or take a quarter or two, only the shorts have profited from airline stocks. Two decades of bad management, balky labor, low fares and lower yields, rising oil prices, natural disasters, mergers, bankruptcies, economic turmoil, and disruptive innovators like Southwest Airlines and JetBlue Airways has left airline bulls beaten, battered, and broken.
The float of Spirit Airlines, which fancies itself an “ultra-low-cost carrier,” is the latest object lesson in the masochist nature of airline economics. Everyone thinks they have a new angle on the capital-intensive, low-margin business of ferrying leisure and business travelers around the world. In the end, however, they run smack into the ugly social and economic realities of commercial aviation.
As originally envisioned late last summer, Spirit’s IPO was designed to sell 20 million shares for as much as $16 a unit. In other words, raise upwards of $320 million. By the time Spirit went public two weeks ago, the reality was somewhat different. The offering was cut to 15.6 million shares and they were priced at just $12 each. Only $187 million was raised.
The market’s hostility toward Spirit didn’t end with the lackluster IPO. It opened on May 26 at $11.35. In the seven trading days since the IPO, Spirit shares have sold for as low as $11.11, and until Tuesday’s two-cent gain, hadn’t closed as high at the initial float price.
The current conventional wisdom about Spirit’s stumble out of the gate is high oil prices. Energy is the largest cost at most airlines and, depending on prices, accounts for as much as 40 percent of operating expenses. At Tuesday morning’s opening bell, a barrel of oil was selling near $99 on New York markets and $115 in London. Oil was selling for “just” $67 a barrel back in September when Spirit announced its plan to go public.
But the gyrating price of crude—it hit $147 a barrel in the spring of 2008, when four airlines closed in a week, then plummeted to $33 a barrel in January 2009—is hardly Spirit’s only problem. Its business model—advertise unrealistic base fares as low as $9, then sock customers with ancillary fees for everything from booking at its proprietary website to carrying on bags—is untested. Spirit is repeatedly fined for its fare gimmicks by the Department of Transportation.
The airline relies on bargain-hunting, price-sensitive customers who are then shocked by the endless add-on fees and appalled by miserable in-flight conditions. (Coach seats on some Spirit jets do not recline and offer just 28 inches of legroom compared to the industry’s already knee-crunching standard of 31 inches.) Spirit’s top operating executives, including chief executive Ben Baldanza and executive vice president Barry Biffle, were notable failures at other carriers. Its chief moneyman, chairman William Franke, nearly destroyed America West Airlines, the last carrier he ran.
Still, Spirit’s unique woes are almost beside the point. Airlines, good or bad, small or large, profitable or not, just aren’t the savvy investor’s cup of tea.
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