Spirit Airlines Expands Again: Where Is It Going Next?

By Adam Levine-Weinberg Markets Fool.com

For the past few years, Spirit Airlines (NASDAQ: SAVE) has been growing rapidly, thanks to the steady expansion of its fleet. The ultra-low cost carrier ended 2016 with 95 aircraft in its fleet, up from just 45 at the end of 2012.

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Spirit Airlines plans to increase its capacity by another 18.5% in 2017, growing its fleet to 107 planes by year-end. Its plans for this extra capacity indicate that Spirit's strategy is evolving under new CEO Bob Fornaro.

Spirit Airlines plans to continue growing quickly in 2017. Image source: Spirit Airlines.

The carrier isn't abandoning growth at busy airports. In fact, it plans to face off against United Continental (NYSE: UAL) on one of United's key hub-hub routes starting in late April. At the same time, Spirit continues to build up its presence in midsize cities. It will also operate more seasonal service this year, in order to react more nimbly to demand patterns.

Spirit announces 10 new routes

Earlier this month, Spirit Airlines revealed its next group of new routes, which will start this spring. In late April, it will begin two new daily flights from Houston. Spirit will fly year-round to New York's Newark International Airport, and on a seasonal basis to Seattle-Tacoma International Airport.

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Another eight routes will start in late May, just in time for Memorial Day weekend. Spirit will launch year-round daily flights from New Orleans to Baltimore/Washington, Cleveland, and Orlando. It will also begin seasonal service from Baltimore-Washington International Airport to Oakland, San Diego, and Seattle and from Detroit to Oakland and Seattle.

Spirit Airlines tweaks its strategy

Over the past year, Spirit Airlines executives have indicated that they want to expand in midsize cities that have plenty of demand but less competition than big hub markets. Among Spirit's new year-round routes, flights from New Orleans to Baltimore, Cleveland, and Orlando all fit the bill.

On the other hand, New York-Houston is the epitome of a big hub-hub route. New York City and Houston anchor two of the five biggest U.S. metro areas. Moreover, United Continental has two of its biggest hubs in Houston and Newark and dominates traffic between those two cities. (In fact, United is the only airline flying nonstop to Newark Airport from Houston; its few competitors all serve other New York-area airports.)

This route selection shows that Spirit Airlines remains flexible in its route strategy. Newark Airport opened to new flights last fall after years of being slot-controlled. This unlocked an attractive new opportunity on the underserved Newark-Houston route.

Spirit will go head-to-head with United on the Newark-Houston route. Image source: The Motley Fool.

In the coming years, Spirit may continue its buildup at Newark Airport alongside its growth in midsize cities. This will provide some much-needed competition to United Airlines at one of the most expensive major airports in the country.

A focus on seasonal service

The other interesting aspect of Spirit's recent new service announcement is that six of the new flights will be seasonal. Spirit Airlines has always operated some seasonal routes, but this represents a substantial increase in the carrier's roster of seasonal flights.

Five of the six new routes are transcontinental flights from Baltimore and Detroit to the West Coast. East-west routes like these tend to see fairly strong demand over the busy summer travel period but traffic typically dries up during the fall and winter.

Last fall, Spirit Airlines began a slew of new routes to Florida -- particularly Orlando -- in order to take advantage of strong seasonal demand during the winter. In all likelihood, it will add even more routes to Florida this fall, using the new planes that will be operating Spirit's seasonal transcontinental routes during the warmer months.

Stabilizing unit revenue

During 2015 and 2016, Spirit Airlines suffered from steep unit revenue declines due to a big increase in fare competition from legacy carriers like United Airlines. Since then, it has worked hard to adapt its business model in order to stabilize its unit revenue performance and maintain its above-average profit margin.

Growth in New Orleans and the planned introduction of more seasonal routes both represent further progress in this direction. Spirit's unit revenue is already stabilizing and will probably return to growth in the first half of 2017. The carrier's upcoming new routes should help it maintain this momentum in the second half of the year and beyond.

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Adam Levine-Weinberg owns shares of Spirit Airlines. The Motley Fool recommends Spirit Airlines. The Motley Fool has a disclosure policy.