Ultra low-cost carrier Spirit Airlines is following suit with its full-service and hybrid peers in the US by predicting rising cost and capacity for 2014. But the ULCC assures that its business model remains sound, reflected in estimates of a 16% to 18% operating margin for FY2014.

capa-306x90Spirit has previously warned it could face some cost headwinds in 2014; but the carrier is continuing double-digit capacity expansion of nearly 17% (down from 22% in FY2013) driven by its belief that the cost inflation it is experiencing this year will be short lived, and over a 24-month cycle its cost advantage should remain intact.

At the same time Spirit is finding itself in the unusual position of defending its business model as executives field questions about the airline’s ability to balance out the peaks and troughs in demand that are a natural byproduct of its price-sensitive passenger segment. There are more than a few believers though, as a 160% increase in share price over the past 12 months can testify.

Spirit does not use rising industry costs as a benchmark in its own cost management. Company executives recently explained to analysts that there is cost pressure in the industry; but Spirit is “not okay with letting our cost move because everyone else is moving. We’re very focused on maintaining our cost structure.”

In the short term Spirit is experiencing similar cost creep to Delta (flat to 2% unit cost growth in FY2014) and United (a roughly 2% increase). The main drivers in Spirit’s cost increase in 2014 are depreciation and amortisation of heavy maintenance and an increase in pilot costs due to new flight and duty times that took effect in Jan-2014.

The carrier also states it has some cost advancement in 2014 related to its growth in 2015, when ASMs are expected to increase 29% year-on-year. Spirit’s hike in capacity growth for 2015 is fuelled by 11 Airbus narrowbody deliveries planned for 2014, seven of which are occurring in 4Q2014.

Spirit assures that the cost pressure in 2014 should give way to “a nice tailwind to cost in 2015”, declared carrier CFO Ted Christie. At the same time Spirit also cites initiatives it has undertaken to lower its cost structure that could produce some benefit in 2014, but is not sharing specifics about those plans.

Mr Christie stressed that Spirit’s costs should stabilise during the next two years, and believed the carrier could possibly even expand its cost advantage during that time, implying greater increases ahead for the majors.

For more on this story, read the full CAPA analysis here.

This story originally appeared on CAPA – Centre for Aviation, a Skift content partner.

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Tags: earnings, spirit airlines

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