Why Lone Pine Capital discloses new position in Spirit Airlines

Overview: Lone Pine Capital's new position in Spirit Airlines (Part 1 of 7)

Lone Pine Capital and Spirit Airlines

Steve Mandel’s Lone Pine Capital disclosed a brand new position in Spirit Airlines (SAVE) through a 13G filing this week. According to the filing, the fund owns a 6% stake in the airline company with 4,373,632 shares.

According to its annual filing, Spirit Airlines is an ultra low-cost, low-fare airline based in Miramar, Florida that offers affordable travel to price-conscious customers. Its all-Airbus fleet currently operates more than 270 daily flights to more than 55 destinations in the United States, the Caribbean, and Latin America. The airline firm made its trading debut in the 2Q11.

The company, which has a $4.78 billion market cap, follows an ultra low-cost carrier (or ULCC) business model that provides customers lower base fares with a range of optional services. It allows them the freedom to choose only the extras they value. Spirit said in its filing that its principal competitors on domestic routes are American Airlines (or AAL), United Airlines (or UAL), and Delta Airlines (or DAL). Spirit also competes with budget carriers such as JetBlue (or JBLU) and Southwest Airlines (or LUV). Its ULCC model is also followed by Frontier Airlines and Allegiant Travel Company (ALGT).

According to an International Air Transport Association (or IATA) report, domestic air travel in the U.S. expanded 1.9% in 2013—more than double the rate of growth in 2012. The association said the improvement reflected sustained increases in consumer confidence throughout the year as well as rising employment activity, particularly over the last few months. A recent press release for the results in May noted that North American airline companies saw demand increase 4.4% in May over the same period last year. This implies positive underlying economic growth trends with easing pressure on employment levels. Capacity increased 4.8%, pushing down load factor 0.3% to 83%—still the highest among all regions.

Hedge funds had a bullish bias towards airline stocks, especially in the 1Q14 with American Airlines (or AAL) being a top buy of some hedge fund managers. The stocks in the space rallied earlier this year on the back of consolidation and stable energy prices. Since there are no airline-specific exchange-traded funds (or ETFs) currently, investors can gain exposure to the space through the iShares Dow Jones Transportation Average ETF (IYT) and the SPDR S&P Transportation ETF (XTN). The IYT tracks the performance of the transportation sector of the U.S. market , including airline, railroad, trucking, freight, and industrial companies. Many major airline companies, including Delta Air Lines (or DAL), United Continental Holdings (or UAL), Southwest Airlines (or LUV), and Jet Blue (or JBLU) are part of this index. A May report in etftrends.com noted that airline buyback and dividend announcements have been positive catalysts for the above-mentioned transportation ETFs.

Continue to Part 2

Browse this series on Market Realist:

• Part 2 - Spirit Airlines’ profits driven by a low-cost business model

• Part 3 - Why Spirit sees double digit revenue growth in 1Q14

• Part 4 - Why Spirit Airlines’ non-ticket revenue has been growing