Excerpted from Whitney Tilson’s latest email to investors.
1) The airline sector as a whole has fallen a bit, led by United (UAL) and Spirit Airlines (SAVE). I added to my Spirit position recently, for reasons I outlined in this post this in late July to the SAVE message board on ValueInvestorsClub.com, responding to some other comments:
I pitched this at $36.83 in Nov. 2015 (see: www.tilsonfunds.com/SAVE.pdf; after the slides are three articles I published) and was feeling pretty good about it until yesterday. I’m not worried about the pilot slowdown and negotiations – this will get resolved – nor about the terrible customer service ratings because: a) there’s lots of low-hanging fruit to improve in this area, which new management is making good progress on; and b) with the rise of basic economy among the majors, customers are increasingly accustomed to a la carte pricing (for more on this topic, see slides 39-42).
Rather, if you read the conference call (https://seekingalpha.com/article/4091473-spirit-airlines-save-q2-2017-results-earnings-call-transcript), what spooked investors is the concern that United is engaged in what I call a “spanking action” to punish Spirit for opening a gate with a handful of flights at Newark airport, one of United’s primary hubs. Here are some excerpts from CEO Robert Fornaro’s comments:
“Turning to our forward outlook, there has been a developing change in the pricing backdrop over the last few weeks. In late June, which started out as a slightly more competitive environment in just a few select markets has quickly spread to a larger number of markets at deeper discount levels than we have experienced yet this year.
…As we entered the second quarter, we were very encouraged by the advance booking trends we saw building from mid-April and into early May. Unfortunately, the recent pricing developments coupled with the lingering hangover associated with our poor second…