Back when airline stocks were flying higher, Jim Cramer considered ultra-low cost carrier Spirit Airlines to be the hottest of the hot airline stocks. But lately the stock has been taken to the woodshed, down more than 50 percent year-to-date.
What the heck happened?
Spirit was slammed with a series of downgrades, but then on Tuesday morning it reported what appeared to Cramer to be a good quarter. The company beat Wall Street's earnings estimates by 3 cents, from a $1.32 basis, and delivered higher-than-expected revenues, up 10.6 percent year-over-year.
Cramer thinks the stock had a brutal decline on Tuesday partially because the company warned about a volatile pricing environment on the same day that competitor JetBlue raised its full-year-capacity-growth forecast.
"In other words, it seems like there is too much competition in the airline space, and that puts real pressure on pricing," the "Mad Money" host said.
Additionally, when Cramer dug a little deeper he found some not-so-pretty numbers under the surface, including a 13 percent decline in revenue-per-passenger-flight segment and a 17.5 percent decline in revenue-per-available-seat miles — two majorly important key metrics for the airline industry.
However, considering that the stock is only trading at eight times next year's earnings estimates, Cramer wonders if Spirit has taken enough of a beating already. To learn more, he spoke with Spirit Airlines CEO Ben Baldanza.
The CEO explained that not too long ago, the general consensus was that consolidation was good for the airline industry because it limited capacity increases and put capacity more in line with the industry's cost of capital. As a result, that kept pricing stable.
It turns out that logic was wrong.
"Since we have seen a big drop in fuel from late last year, it seems that consolidation didn't have much to do with the stability of the industry. It was really high fuel prices that kept people disciplined," Baldanza said.
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As a result of the lower fuel prices, Baldanza has seen the industry grow. In order to fill those seats that have been added, prices were lowered.
Additionally, Baldanza called the current revenue environment for the industry "very dilutive," with more seats chasing fewer passengers. The pressure on fares could translate into lower earnings next year than this year.
"And if something doesn't change with that, what we are saying is that the math could work out where that is true, but our crystal ball on the revenue environment for next year is just very cloudy right now. So, while that could happen, we don't know for sure if that's going to happen," Baldanza added.