Student’s Name
Institution Affiliation
 
Sky West Airline and Spirit Airline
Executive Summary and Synthesis
SkyWest incorporated is a holding company of an aircraft leasing company and two passenger airlines. SkyWest Airlines is based in St. George Utah. The company provides airline services to states in North America. It has nearly 3000 flights daily and carries about 56 million passengers annually. The company has various business partnerships with similar airline companies such as Delta Air Lines, American Airlines, United Airlines, and Alaska Airlines. Currently, the company has about 19000 employees (SkyWest, 2016). The company’s stock are publicly traded in various US stock exchange markets such as NASDAQ. Currently, the price of each ordinary share of the company is $30.25. The company’s revenues were $3,095,563 in 2015 and $3,237,447 in 2014. The company’s dividend payouts were $0.16 from 2011 to 2015. The company also reduced its aircraft from 717 in 2014 to 660 in 2015.
Spirit Airlines is a low-cost airplane company that transport passengers in more than 50 destinations in the US, Canada, Caribbean, and Latin America. The airline operates more than 400 flights daily. The company stocks are publicly traded in various US stock markets such as NASDAQ. The company’s head office is located in Miramar, Florida. The current price of the company’s ordinary shares is $47.1. The company’s revenue were $2,141.463 million in 2015 and $1,931.580 million in 2014. The company has not issued any dividends since 2010.
The main macroeconomic factors that affect this industry are the federal bank interest rates and the changes in oil prices. Simply a decrease in interest rates leads to a reduction in the cost of borrowing money, which results in increased investments. Accordingly, businesses such as airline businesses expand and grow when the interest rates are low. A decrease in oil prices leads to a reduction in the cost of transport, which in turn increases the profitability of airline businesses.
The main industrial factors in the airline transport are an increase in labor cost and a preference for large commercial airplanes over small sized jets by regional airlines. There has been a general increase in the labor cost, which has offset a substantial portion of the gains made by a reduction in the cost of fuel. On the other hand, there has been a general replacement of smaller airplanes with larger airplanes.
The fundamental analysis evaluates the performance of these two companies. On overall, both companies have enjoyed a positive performance, which is shown by their increase in revenue. SkyWest Airlines had earnings per share of $2.27 per share and Spirit Airlines had earnings per share of $4.48. Both companies have an open and transparent corporate governance. The executives of both companies were able to acquire and dispose stocks from their companies. Nonetheless, the level of insider trading in both companies was minimal (SkyWest Airlines, 2016).
The trend analysis of this industry showed a preference in the acquisition of larger airplanes. The technical analysis of both companies showed that the value of stock in both companies was growing steadily, largely buoyed by the decrease in oil prices. However, SkyWest Airlines stocks were growing faster than those of Spirit Airlines. The stocks of SkyWest Airlines started to rise early from 2014 to their present value. On the contrary, from mid-last year, until early this year, the stocks of Spirit Airlines had been declining. However, they have started to increase steadily to their current values. In summary, both SkyWest and Spirit airlines have been profitable and rewarding to their investors.
 
Macroeconomic Analysis
This analysis investigates the impact of macroeconomic factors on the stock performance of SkyWest Airline and Spirit Airline. Macroeconomic effects have the overall impact of influencing a company’s profitability, ease of doing business, and accordingly its stock performance. Therefore, macroeconomic factors like government regulations such as the Dodd-Frank Act of 2010, which was established after the 2007-2008 financial crisis, as well as interests rates, and oil prices play a great role in determining a company’s financial performance.
Federal Funds Rate
The federal fund’s rate both directly and indirectly affects the overall performance of the country’s economy. A low federal funds rate has the effect of leading to a reduction in prevailing banking interest rates. Simply, a reduction of the federal fund’s rates is an expansionary monetary policy, which has the overall effect of increasing the monetary supply in the country. Accordingly, most people and businesses borrow money for various investments projects due to the low-interest rates that are caused by the increased supply of money. On the same note, the low-interest rate reduces the incentive to save.
The effect of this move is that there is more economic activity in a country, which results in an increase in the value of shares, as well as a stability in the market performance of shares. As from 2009, the US government has maintained its interest rate at below two percent to revive its economy that was significantly affected by the 2007-2008 financial crisis. Currently, the country’s economy has started to grow, which is reflected in the growth in the country’s GDP. SkyWest Airline shares and Spirit Airline share have shown strong and positive performance during this period.
 
Federal Bank Interest Rates
Source: Economic Research, 2016.
Oil Prices
Oil prices have a tremendous effect on the performance of airline companies. A decrease in the price of oil leads to a decrease in operating costs, which results in higher profit margins for companies that highly depend on oil. Since airline industry is dependent on the price of oil, a decrease in oil prices has an overall effect of increasing the profitability of businesses in the airline industry. However, other factors such as where the airplane’s commercial route and operation center significantly indicate how the effect of oil prices will have on the airline’s performance.
For instance, if an airline main customers are from an oil-dependent economy, a decrease in oil prices may result in a decrease in the airline’s revenues and in turn profits. Generally, economies of oil producing economies mostly rely on oil revenue. Therefore, a decrease in oil prices leads to a decrease in these countries overall economic performance. Consequently, most individuals from these states do not have enough disposable income to use in transport when the oil prices fall. In addition, a slowdown in the economy results in an overall decrease in the need for air transport.
Save for the recent increase in shale oil production in the US, the country has never been highly reliant on oil. In fact, even at the moment, the US economy is very diversified and does not rely on oil. Consequently, a decrease in oil prices had an overall benefit to SkyWest Airlines and Spirit Airline, since these two airlines are regional airlines, therefore, they mostly operate in the US and not in oil exporting economies. To begin with, a decrease in oil prices led to an increase in disposable income among US consumers, which increased the demand for air transport. The fall in oil prices spurred economic growth in the US, which led to an increase in the need for transport. Finally, it reduced the cost of air transport, which led to higher profit margins.
Source: United States Department of Transportation, 2016.
 
Industry Analysis
In order to understand how SkyWest and Spirit airlines have been performing, it is important to examine their industry’s performance. The airline’s industry has been enjoying a great positive tide mainly due to low oil prices, robust demand in air transport, and industry consolidation. The decline in oil prices, in particular, has decreased the overall operating costs of airlines, which has resulted in companies in this industry having huge reserves for their shareholders.
The main sources of revenue for both SkyWest and Spirit airlines are passenger charges. These incomes have been increasing steadily for Spirit Airlines from $689.65 million in 2011 to $1,169.338 million in 2015. As for SkyWest airlines, the incomes have shown a slight but consistent decrease from $3,239.525 million in 2013 to $3,030.023 million in 2015. The other major contributors to revenue for both companies is non-ticket charges, which are referred to as “ground handling and others” in SkyWest financial statements. The income statements of these companies reflect their main operation and business area, which is the transportation of people and parcels. The increase in revenue in Spirit airlines is an indication of an increase in demand for short distance travel where the company normally operates. The growth in non-ticket revenue has shown a similar trend to the changes in passenger revenue since it complements the latter.
Revenue Sources for Spirit Airlines
Source: SEC, 2016c.
Although there has been an increase in demand for transport in the airline industry, in the last few years, SkyWest airlines reported a decrease in revenues from 2013. Primarily, the reduction in revenue is due to the restructuring process in the company. It is important to note that an increase in revenue does not necessarily translate to an increase in profits. Between 2014 and 2015, there was a 4.4% decrease in revenue that was occasioned by an 8.8% reduction in fleet size. SkyWest airline has been replacing most of its former airplanes with a new fixed-fee flying agreement, which is more economical. This new agreement requires the company to use more economical large airplanes. Consequently, although the company’s airplanes decreased from 717 in December 214 to 660 in December 2015; and accordingly there was a decrease in revenue, the company’s profits increased during this period.
 
 
 
Revenue Sources for SkyWest Airlines
Source: SEC, 2016a.
SkyWest Airplanes
Source: SEC, 2016a.
Capital Markets
SkyWest Performance
Source: NASDAQ, 2016.
Spirit Performance
Source: NASDAQ, 2016
The figures above show NASDAQ financial service index compared with Spirit and SkyWest performance in the past three years as well as the industries performance. Both Spirit and SkyWest airlines outperformed the industry during this period. Until match this year, NASDAQ outperformed SkyWest airline, however, the company is now performing much better. This change in market performance can be attributed to the cyclicality of the industry as well as the boom being witnessed in the airline industry. From January 2016, the company has been performing better than the industry’s index. As for Spirit airline, the company outperformed NASDAQ index until June 2015. However, it has since been performing less than the index. However, its performance is still better than that of the airline industry.
 
 
Industry Analysis
While the will to use airlines is now inextricably entwined with the current generation, still, there are many threats abound in this industry. Sadly, most of these threats are beyond the control of airline companies on their own. Chiefly, the threats of terrorism, fluctuation in oil prices, and the emergence of low costs carriers are the main challenges in this industry. While both Spirit and SkyWest airlines are low-cost carriers (LCCs) a factor that is attributed to their success so far, this characteristic is still a threat to the aviation industry. LCCs normally have low-profit margins, which results in them having small reserves and profits.
Fuel cost is another threat in the airline’s industry. Fuel is one of the major costs of the airline business, accounting for as high as 30% of the cost in most US airlines in 2006. Therefore, the sporadic rises in this cost can have detrimental effects in both Spirit and SkyWest airlines. For instance, fuel cost has been the largest single cost for Spirit airline since 2011. On the same note, fuel cost is still one of the largest expenditures for SkyWest airline.
Industry Income Distribution
Source: United States Department of Transportation, 2016
The threat of terrorism is one of the main challenges in the airline industry. Since the September 11th, 2000 bombing in the US, terrorism has greatly affected airline companies. In particular, some individuals have developed heightened fear on their safety when traveling. Accordingly, this fear has led to a decrease in demand for traveling from terrified individuals and an increase in the establishments of security checking facilities by airline companies.
International Markets
Both Spirit and SkyWest airlines do not operate in international airspace. These companies concentrate their operations in America, offering transport between various states. The recent increase in the demand for air transport, as well as an economic slowdown in the US since 2010, has made people be more sensitive to price. As a result, there has been a significant rise in the demand for LCCs such as SkyWest and Spirit airlines. In general, the increase in the demand for LCC can be witnessed in the increase in revenue for most LCCs such as Spirit Airlines during this period.
Growth in Air Transport
Market Structure
The airline transport business exists in a monopolistic market. A monopolistic competitive market is a type of market where there are no identical substitutes for goods offered by one service provider. Simply, this market is characterized by product differentiation, independent decision-making, freedom of entry or exit from the market, firms are price makers, and a large number if independent competing firms. In the airline industry, all companies have their own brand name and uniquely customized services to cater for their various customers. These features are what differentiate them from their competitors. Since each customer naturally prefers a given type of service, the overall effect is that companies are able of raise the price of their services without the fear of losing customers. In light of this, both Spirit and SkyWest airlines are able to make their own independent decisions and strategies without fearing a possible setback in their businesses.
Managerial Comparison
Revenue per Share
Revenue per share represents the rate of return in terms of revenue for its capital. In this case, it represents how much revenue the business earned for every share invested. Spirit had a revenue per share of $ 29.5676 while SkyWest airlines had $59,731.08. It is important to note that the number of shares that the company has issued also determines the revenue per share. In this case, the high revenue per share for SkyWest airlines is because the company had 51,825 issued shares (diluted). On the contrary, Spirit airlines had many issued shares 72,426,060 shares (diluted) in total.
Earnings per Share
Earnings per share are a representation of the income the business earned for its investment for every capital invested. Therefore, it represents how much income was generated by the business from its capital. Spirit airline had an EPS of $4.39 for basic shares and $4.38 for diluted shares. SkyWest had an EPS of $2.31 for basic shares and $2.27 for diluted shares.
Net Profit Margin
Net profit margin indicates whether the shareholders are earning any income from their investment. Spirit had a net income of $317.220 million while SkyWest had an income of $117.846 million in 2015. The above profits resulted in a net profit margin of 14.813% for Spirit airlines and 3.807% for SkyWest airlines. The profits in SkyWest were as a result of the restructuring process that the company has implemented of replacing non-economical contracts with more economical ones. Therefore, despite the low number of revenues for SkyWest when compared to Spirit airlines, the company was more efficient as shown by its higher net income margin in 2015. From an industry position, the airline’s industry had a net income margin of 15.2% in 2015 against a net income margin of 4.4% in 2014. Therefore, both of Spirit and SkyWest airline performed below the industry’s performance. The main cause for the airline’s industry increase in profits in 2015 was the reduction in fuel costs, which declined by $16, 454 million.
 
 
 
 
 
 
Incomes in Airline Industry
Source: United States Department of Transportation, 2016.
The running costs of airlines can affect their net profit margins. These are expenses such as salaries, aircraft maintenance, aircraft fuel, ground handling, and station rental and landing fees. Consequently, a reduction in any of these costs has the overall effect of reducing the airline’s operating costs and in effect increasing its profits. Chiefly, the airline’s attractive performance is because of reduction in fuel costs. Since June 2014, the prices of crude oil have fallen from a high of about $113 to the current price of $46.18 per barrel, which is the new high price.
Crude Oil Prices
Source: InvestMine (2016).
Salaries, Wages, and Benefits
The increased competition in the airline industry has resulted in an increase in the demand for airline service workers, especially pilots and engineers. Consequently, there has been a huge increase in the salaries, wages, and benefits for airline staff. Spirit airline had an expense of $378.21 million in 2015 up from an expense of $313 in 2014. On the contrary, SkyWest had a decline in salaries, wages, and benefits expense from $1285.155 million in 2014 to $1,203.312 million in 2015. However, this decline was due to the decrease in the company’s number of airplanes and trips and not due to the decrease in the per unit cost of this category of expense. On overall, the airline industry had an increase in labor expense of $ 4, 614 million.
 
 
Fundamental Analysis
Fundamental analysis is an important tool in identifying if shares of a company are attractive enough to induce stockholders to buy them. The required rate of return and the sensitivity analysis provide an important tool that financial analysts can use to evaluate these stocks. When analyzing the required rate of return, the company’s beta is used to calculate the minimum required rate of return. The decision on whether to buy or sell a stock is determined by whether the company’s current rate of return is greater than the minimum required rate of rate of return (Yahoo Finance, 2016a). The minimum required rate of return is calculated as shown below.
K= risk-free rate of return+ beta (market return- risk-free rate of return)
The risk-free rate is 0.5%, which is provided by US Federal Bank. The market rate is 7.6%, which is provided by IATA. The beta for Spirit airlines is 0.1, which is provided by (Yahoo Finance, 2016b). Spirit has a minimum required rate of return of 0.0101
Therefore
SkyWest airline has a minimum required rate of return of 8.86%.
Therefore,
Growth Model
Growth models analyze if a stock is overvalued or undervalued. If the stock is overvalued, investors do not buy it. If they already have the stock, they may decide to sell it at this time. A comparison is normally made between the future present value and the current present value. A future present value greater than the current present value means the stock is overvalued. Since Spirit airlines have not been offering dividends to its shareholders, the dividend growth model, and Gordon model cannot be used to determine whether it is overvalued. SkyWest airline offered dividends of $0.16
Gordon’s model determines the price of a share as follows:
Current P= D/(k-g)
Corporate Governance
Corporate governance refers to the administrative structure in an organization. It is a fundamental area of a business since it determines the ease with which various conflicts that may arise amongst employees, shareholders, and executives can be solved. In addition, it also indicates how the organization avoids various conflicts of interests among the executives. Finally, it indicates the decision-making process of the corporation. A sound corporate governance aims at creating efficiency in the organization and ensuring transparency in the corporation. Investors should have adequate information about the executive compensation, insider training, and institutional holdings.
Executive Compensation
In Spirit Airline, the total compensation ranged from $6,167,068 to the highest earner, who was the CEO in 2014 to $747,355 that was paid to James Lynde who was a member of the board. The compensations were mainly distributed in the form of either salary, stock awards, non-equity incentive plans, and miscellaneous compensation. SkyWest airline executive compensation plan was much lower than that of Spirit airlines. The largest earner was the CEO Jerry Atkin who has a salary of $1,777,388 in 2014. The lowest earner was Michael Kraupp, who was the vice president in 2014, earned $463,713. On overall, the compensation of the two companies did not change during these two periods.
 
 
 
 
 
 
Spirit Compensation
Source: SECc, 2016.
 
 
 
 
 
 
 
 
 
 
SkyWest Compensation
Source: SEC, 2016a.
Institution Holdings
An institution holding is an issue of main importance to the company since individuals that control a company’s shares have significant influence over its decisions. In a company, decisions are made based on the number of shares that an individual owns. In Spirit airlines, 290 institutions hold 99.52% of its shares. The top five shareholders control about 33% of the company. The company has experienced minimal insider trade in the last one year. There were only 6 cases of insider trades in the last three months and 53 in the last 12 months. These insider trade activities had a net activity of 108,993. For a company the size of Spirit, this level of activity is low and cannot affect the overall performance of the company.
 
Spirit Airline Institution Holders
Source: NASDAQ, 2016a.
Spirit Airline Top Holders
Source: NASDAQ, 2016a.
 
 
Spirit Airline Insider Trading
Source: NASDAQ, 2016a.
SkyWest airline has 222 holders. Institutions own 87.08% of the company. The top five holders control more than 33% of the company. The company’s level of insider trading is minimal, with only 9 insider trades in the last 3 months and 50 in the last one year. On overall, the company had a net activity of -270 in the last one year.
SkyWest Airlines Holders
Source: NASDAQ, 2016b.
 
 
SkyWest Top Institution Holders
Source: NASDAQ, 2016b
SkyWest Insider Trading
Source: NASDAQ, 2016b.
Next Product or Trend
            The main trend in the regional airline industry has been the replacement of small inefficient airplanes with larger and more fuel-efficient planes. This move aims at increasing the capacity as well as reducing the overall transport costs of these regional airline companies. Although success in regional air transport has mainly succeeded by companies having small 50-seat jets, the tide is now shifting to the preference in larger 100-seat planes. As from 2013, major airplane companies had begun to adopt to these changes. As early as 2013, Delta Airlines, United, and American Airlines had made an order for 151 76-seat Embraer 175 and Bombardier CRJ 900 airplanes. During the same period, Republic Airways ordered for six E-175s airplanes (IATA, 2015).
In 2013, Delta Air Line had planned to replace 125 of its small airplanes by the end of 2015. In 2013, SkyWest Airlines started its plans of replacing its small aircraft with larger ones. Specifically, this strategy aimed at minimizing its exposure from threats of inefficiency caused by operating small planes. As of 2016, the company expected to have acquired an additional 37 Embraer E175s. In 2017, it hoped to acquire 17 Embraer E175s . Already, it had acquired 45 brand new Embraer E175s planes in 2015. Delta Air Line is currently at the forefront in adapting to the market changes (Russel, 2013).
On a similar note, a Spirit Airline has also been on the forefront to increase the capacity of its planes to match the changes in the market. In 2013, the company placed an order for 20 A321 CEO Airbus plane, which have a capacity of 291 seats. Further, it also made arrangements for the conversion of 10 of its a320 planes to A321 type with Airbus, which has a higher capacity (Airbus, 2013). As from January 2016 until December 2021, the company plans to increase its fleet from 70 to 157, mainly by acquiring large capacity aircraft (Spirit).
Spirit Aircraft Acquisitions
Source: Spirit, 2016.
Technical Valuation
This section gives financial analysts the opportunity to compare the performance of Spirit Airlines against that of SkyWest Airline. Historical information is important in enabling investors to forecast on the possible future performance of a stock. These charts give investors the opportunity to have the relative strength indicator, the volume of stocks traded and the simple moving average. A stock that drops below its simple moving average (SMA) is bearish. On the contrary, one that is above this level is bullish. The relative strength indicator (RSI) is calculated by dividing the current price by the average price. Currently, the stock of Spirit airlines is trading above the SMA, therefore is is bullish. The stock is overbought if the RSI moves above 60.15 and oversold as the RSI moves below 14. The SMA is at 43.68, therefore, since the stock is trading at 47.63, the investor may consider selling this stock at the moment.
The stock of SkyWest Airline is trading above the SMA, therefore is is bullish. The stock is overbought if the RSI moves above 60.49 and oversold as the RSI  moves below 14. The SMA is at 23.90, therefore, since the stock is trading at 30.25, the investor may consider selling this stock at the moment. When considering to buy between SkyWest airlines stock or spirit airlines stock, an investor should examine the difference between the SMA and the selling price. The current price shows that SkyWest airline stocks perform better than those of Spirit Airline.
 
 
 
 
 
SkyWest Chart A
Source:  StockCharts.com. (2016d)
 
 
 
 
 
 
 
 
 
 
SkyWest Point and Figure
Source:  StockCharts.com. (2016c)
The point and figure chart was also used to assess the performance of Spirt and SkyWest airlines. SkyWest chart indicates that the volumes spiked from January 2016 until almost mid-year. The prices bottomed and have currently begun to rise. SMA (50) remained below SMA (200) as at June. The stock appears not to have reached its limit. The firm’s price increased to 30.25 from 25.5. This stock has enough demand and resistance and has broken the resistance line before; therefore, it is a strong a buy.
 
 
 
Spirit Airline A
Source: StockCharts.com. (2016b).
 
 
 
 
 
 
 
 
 
 
Spirit Point and Figure
Source: StockCharts.com. (2016a).
Spirit point and figure chart indicate that the volumes spiked from mid-2015 until early 2016. Since then, it has been increasing alternatingly; however, the general trend has been a decline. The prices dropped below SMA (200) in October and SMA (50) in August, which indicates a strong signal to sell. However, since October, the stock has been increasing which indicates a possible recovery. The firm’s price increased to 49.0 from 38.0
 
 
 
 
References
Airbus. (2013). U.S. low-cost carrier signs firm order for 20 A321ceo aircraft: 1st North American carrier to feature Space-Flex cabin option, room for more seats. Retrieved from http://www.airbus.com/presscentre/pressreleases/press-release-detail/detail/spirit-airlines-to-grow-fleet-with-largest-airbus-single-aisle-model/
Economic Research. (2016). Effective federal funds rate (FEDFUNDS). Retrieved from https://fred.stlouisfed.org/series/FEDFUNDS
IATA. (2015). Economic performance of the airline industry. 2015 Mid-Year Report.
InvestMine (2016). 5 Year crude oil prices and price charts. Retrieved from http://www.infomine.com/investment/metal-prices/crude-oil/5-year/
NASDAQ. (2016a). Spirit Airlines, Inc. Ownership Summary. Retrieved from http://www.nasdaq.com/symbol/save/ownership-summary
NASDAQ. (2016b). SkyWest, Inc. Ownership Summary. Retrieved from http://www.nasdaq.com/symbol/skyw/ownership-summary
Russel, E. (2013). Analysis: USA’s regional airlines adapt to market changes. Retrieved from https://www.flightglobal.com/news/articles/analysis-usas-regional-airlines-adapt-to-market-changes-390622/
SkyWest Airlines. (2016). Company profile. Retrieved from http://inc.skywest.com/
Spirit. (2016). Fleet plan. Retrieved from http://ir.spirit.com/fleetplan.cfm
StockCharts.com. (2016a). SAVE Spirit Airline, Inc. Nasdaq Global Select Market. P&F Pattern. Retrieved from http://stockcharts.com/freecharts/pnf.php?c=SAVE,P
StockCharts.com. (2016b). SAVE Spirit Airlines, Inc. Nasdaq GS. Retrieved from http://stockcharts.com/h-sc/ui?s=SAVE
StockCharts.com. (2016c). SKYW. SkyWest, Inc. Nasdaq global select market. P&F pattern. Retrieved from http://stockcharts.com/freecharts/pnf.php?c=SKYW,P
StockCharts.com. (2016d). SKYW. SkyWest, Inc. Nasdaq GS. Retrieved from http://stockcharts.com/h-sc/ui?s=SKYW
United States Department of Transportation. (2016). 4th Quarter 2015 airline financial data. Retrieved from http://www.rita.dot.gov/bts/press_releases/bts026_16
United States Securities and Exchange Commission (SEC). (2016a). SkyWest Inc. annual report on form 10-K: Commission file No. 0-14719
United States Securities and Exchange Commission (SEC). (2016b). SkyWest Inc. schedule 14A: Commission file No. 0-14719
United States Securities and Exchange Commission (SEC). (2016c). Spirit Airlines, Inc. annual report on form 10-K: Commission file No. 001-35186.
Yahoo Finance. (2016a). SkyWest Inc. (SKYW): NasdaqGS – NasdaqGS real time price. Currency in USD. Retrieved from https://finance.yahoo.com/quote/SKYW?p=SKYW
Yahoo Finance. (2016b). Spirit Airlines, Inc. (SAVE): NasdaqGS – NasdaqGS real time price. Currency in USD. Retrieved from https://finance.yahoo.com/quote/SAVE/?p=SAVE
 
 
 
 
 
 
 
Fundamental Valuation
            The required rate of return for SkyWest Airline is 0.886. It was calculated for five-year period and it had a historical risk-free rate of 0.025% and a market rate of $30.25. Spirit airline required rate of return is 0.0101. It was calculated for a five-year period and it had ahistorical risk-free rate of return of 0.025% and a market rate of $47.16.
Require Rate of Return
The beta for the air transport industry is 1.27. SkyWest airline has a beta of 1.64; therefore, it is more risky than the overall market. Spirit has a bet of 0.1, which shows that it is less risky than the market. Therefore, investors in these two companies will want to make sure that the returns from their investments in these stocks are sufficient to cover the amount of risks before they decide to take an additional stock.
Annualized Holding Period Return and Dividend Models
The annualized holding period return (HPR) is an important indicator of the stocks ability to earn the investor sufficient returns from his/ her investment. Simply, it tells the investors how much they will earn from a particular investment. It is calculated using the following formula:
Holding Period Return (HPR) = Income + (End of Period Value – Initial Value) / Initial Value
Annualized HPR = {[(Income + (End of Period Value – Initial Value)] / Initial Value+ 1}1/t – 1
Where t = number of years.
SkyWest Airline
{[2.601+ (34.7289- 30.25)]/30.25+1}1/5 – 1
HPR= 0.51873 This stock is undervalued
The alpha of this stock shows that it is undervalued. Thererfore, it is providing the shareholders with high returns.
Spirit Airline
{[5.5901+ (60.1894-47.16)]/47.16}1/5-1
HPR= -0.1696 This stock is over valued
The alpha values in this stock, which is negative, shows that it is overvalued and it is providing the stockholders with less returns than required to cover the risk. Therefore, they must wait for the EPS to raise so that they can cover the stock can be able to cover the risk associated by holding it.
The Gordon model for SkyWest is as below:
This analysis shows that in both the dividend growth model and Gordon’s model, the SkyWest Airline is undervalued. Consequently, it will provide investors with adequate returns, which will be able to cover the associated risks of holding this stock. This conclusion is supported by the results of HPR, which show that this stock is undervalued and the appreciation of its stock price and dividend payments are sufficient to cover all risk associated with holding this stock.
Since Spirit Airline does not pay dividends, investors will rely on the HPR, the EPS and the P/S to determine its value.
Sensitivity Analysis
Sensitivity analysis is an indication of the changes in the rate of return of various stocks depending with changes in P/E or EPS.
 
 
 
SkyWest Airline

Sensitivity
If P/E is If EPS is
20% less 10% less As expected 10% more 20% more
20% less 19.73% 20.847% 21.697% 22.523% 23.327%
10% less 20.847% 21.801% 22.726% 23.624% 24.496%
As expected 21.697% 22.726% 23.722% 24.686% 25.622%
10% more 22.523% 23.624% 24.686% 25.714% 26.710%
20% more 23.327% 24.496% 25.622% 26.710% 27.761%

 
SkyWest Airline is already undervalued; therefore, its EPS must be lower than 20% or more in order for it to become overvalued. Due to this high error margin, SkyWest Airlines is a viable investment option.
Spirit Airline

Sensitivity
If P/E is If EPS is
20% less 10% less As expected 10% more 20% more
20% less -3.966% -1.677% 0.417% 2.350% 4.146%
10% less -1.677% 0.667% 2.811% 4.789% 6.629%
As expected 0.417% 2.811% 5.000% 7.021% 8.899%
10% more 2.350% 4.789% 7.021% 9.080% 10.995%
20% more 4.146% 6.629% 8.899% 10.995% 12.944%

Spirit Airlines must at least have a P/E and EPS equal to its expected levels in order for it to become a viable investment. Since it is already an overvalued investment, an EPS and P/E of less value will make it not to be a viable investment.
 
 
 
 
 
 
 
Calculate, present value, and explain the five-year trend for each stock of sales, earnings, net profit margin,
Present Value for each stock

SkyWest Airline Spirit Airline
Present Value 30.25 47.16

 
Trend of Sales
The main sources of revenue for both SkyWest and Spirit airlines are passenger charges. These incomes have been increasing steadily for Spirit Airlines from $689.65 million in 2011 to $1,169.338 million in 2015. As for SkyWest airlines, the incomes have shown a slight but consistent decrease from $3,239.525 million in 2013 to $3,030.023 million in 2015. The other major contributors to revenue for both companies is non-ticket charges, which are referred to as “ground handling and others” in SkyWest financial statements. The income statements of these companies reflect their main operation and business area, which is the transportation of people and parcels. The increase in revenue in Spirit airlines is an indication of an increase in demand for short distance travel where the company normally operates. The growth in non-ticket revenue has shown a similar trend to the changes in passenger revenue since it complements the latter.
 
Trend for Stock
Both SkyWest and Spirit Airline stocks are performing properly. From the technical valuation section, both stocks are performing greatly at the moment.
Earnings per Share / Net Income
SkyWest Airline
Spirit Airlines (from 2014-2010)
 
Return on Total Capital
(Net income – Dividends) / (Debt + Equity)
SkyWest Airline

2015 2014 2013
Net Income 117,817 (24,154) 58,956
Dividends 8260 8195 8258
Net Income- Dividend (A) 109557 (32349)
Debt 3296453 3009582
Equity 1506435 1400,346
Debt+ Equity (B) 4,802,888 4409928
Return on Total Capital (A/B) 0.02281 -0.0073355

 
 
 
 
 
 
Spirit Airline

2015 2014 2013
Net Income 317,220 225,464 176,918
Dividends 0 0 0
Net Income- Dividend (A) 317,220 225,464
Debt 1305235 589,678
Equity 1,225,310 1,003,075
Debt+ Equity (B) 2,530,545 1,592,753
Return on Total Capital (A/B) 0.125356 0141556

 
Net Profit Margin
Net Income/ Sales (Revenue)
SkyWest Airline

2015 2014 2013
Net Income 117,817 (24,154) 58,956
Sales 3,095,563 3,237,447 3,297,725
Net Profit Margin 0.03806 -0.00746 0.01788

 
Spirit Airline

2015 2014 2013
Net Income 317,220 225,464 176,918
Sales 2141,463 1931,580 1,318,388
Net Profit Margin 0.148 0.11673 0.1342

 
 
 
 
 
 
 
 
Spirit Airline: Value Line Version of ROA
There has been a consistent increase in the revenue earnings per share for Spirit Airlines. The revenue per share increased from 14.77 in 2011, to 29.93 in 2015. Similarly, the cash flow per share increased from 1.16 in 2011 to 5.0 in 2015. The earnings per share increased from 1.43 to 3.8 in 2015. This shows that the company is making good profits. The company does not pay dividends. The company’s book value per share increased from 6.44 in 2011 to 17.13 in 2015. These figures indicate that Spirit airline has been profitable. Similarly, its revenues increased from 700 million in 2009 to 2141.5 million in 2015.
The capital spending per share increased from 0.93 in 2011 to 7.67 in 2015, which shows that company is investing. In particular, it is buying bigger planes to replace its small aircrafts.
The company’s net profits have been consistent at about 10%. They were 10.2% in 2009 and 14.8% in 2015. The company mostly relies on its own shareholders capital for investment. Therefore, it has high liquidity. The liquidity is also indicated by the consistent rise in its cash flow per share. Both return on capital and shareholders have been positive from 2011, which indicates that the company is performing properly.
Spirit does not issue shares. Nonetheless, the increase in value of shares provides a good reward to its shareholders.
The P/E ratio of the company decreased from 20.0 in 2014 to 13.7 in 2015, which showed a decrease in the company’s profits. At the same time, the company’s P/E ratio decreased from 1.08 to 0.69, which shows that the stock had been overvalued. Therefore, it is likely that there is now a decrease in the demand for this stock. However, since it has a positive P/E it is a good stock for shareholders.
 
 
SkyWest Airline: Value Line Version of ROA
 
The company’s revenue per share increased from 9.47 in 2000 to 20.69 in 2015, which indicates increase in sales. Its Cash flow also increased from 1.64 in 2000 to 7.5 in 2015, which shows that the company has more liquidity. The earning per share increased from 1.03 in 2011 to 2.27 in 2015, which indicates that shareholders are getting more profit from each share that the own in the company.
The company’s share book value has increased from 8.88 in 2000 to 29.54 in 2015, which is an indication of great performance of the company. On overall, its P/E ratio decreased from 22.1 in 2000 to 7.1 in 2015, which shows that customers are getting lower returns from their stocks than in the past. However, since it is positive, the company is still profitable.
The company’s revenues have stagnated at around 3000 million. They were 3114.7 in 2006 and 3096 million in 2015. The company has returned to profitability with an increase in net profits from 51.2 million in 2012 to 117.8 million in 2013. Its net profit margins are small, they were 3.8% in 2015. The company debt levels are high, almost equal to its equity. In 2015, debt was 1676.8 million while equity was 1506.4 million. Therefore, the company has liquidity problems since it relies a lot on debt. The relative P/E ratio of the company is 0.36, which shows that it is undervalued given that the company’s P/E has started to increase. Therefore, few people are demanding this stock currently. However, its demand may increase over time.
Trend Analysis
The five year trend of sales, earnings per share, net profit margin, payout, dividend yield, and P/E for both firms was extracted from the company’s value line. Spirit airline does not pay dividends, therefore, its there its payout and dividend yield will not be presented.
 
 
 
 
 

Dividend Yield SKYW SAVE P/E SAVE SKYW Payout SAVE SKY
2015 1.0 2015 0.69 0.36 2015 71.54% 51.01%
2014 1.4 2014 1.08 2014 72.78% 51.34%
2013 1.1 2013 0.74 13.0 2013 72.67% 51.38%
2012 1.6 2012 0.81 10.3 2012 72.67% 51.81%
2011 1.1 2011 0.60 2011 72.53% 50.61%

 
Dividend Yield
SKYW dividend yield has been fluctuating at the $1 level, depending on the current business performance of the company. Although the company has been more profitable in recent years it has not increased its dividends payout mainly due to its investment projects such aircraft acquisition.
Relative Price Earnings Ratio
The relative P/E ratio of the SKYW is 0.36, which shows that it is undervalued given that the company’s P/E has started to increase. Therefore, few people are demanding this stock currently. However, its demand may increase over time. The P/E ratio of Spirit decreased from 20.0 in 2014 to 13.7 in 2015, which showed a decrease in the company’s profits. At the same time, the company’s P/E ratio decreased from 1.08 to 0.69, which shows that the stock had been overvalued. Therefore, it is likely that there is now a decrease in the demand for this stock. However, since it has a positive P/E it is a good stock for shareholders.
 
 
 

SALE SKYW million SAVE million EPS SAVE SKYW NPM SAVE SKY
2015 3095.6 2141.5 2015 4.38 2.27 2015 14.8% 3.8%
2014 3237.4 1931.6 2014 3.08 0.47 2014 11.7% NMF
2013 3297.7 1654.4 2013 2.42 1.12 2013 10.7% 1.8%
2012 3534.9 1318.4 2012 1.49 0.99 2012 8.2% 1.4%
2011 2765.1 1071.2 2011 1.43 0.52 2011 7.1% NMF

 
 
 
Sale
As from 2011 to 2015, Spirit (SAVE) has almost doubled its revenues from $1071.2 million to $ 2141.5 million. In general, the sales for SkyWest (SKYW) have increased, albeit much slower from $2765.1 million in 2011 to $3095.6 million in 2015.
Earnings per Share
As from 2011 to 2015, SAVE has almost tripled its EPS from $1.43 to $ 4.38. In SKYW, EPS have increased, much faster from $0.52 in 2011 to $2.27 in 2015, a 4.36 times increase.
Net Profit Margin (NPM)
As from 2011 to 2015, SAVE has almost doubled its NPM from 7.1% to $ 14.8%. In SKYW, NPM was almost zero in 2011 but it has since then increased to 3.8%.
On overall, SAVE has been enjoying a steady growth rate in revenue, earnings per share and profitability. SKYW has been having a small marginal growth in sales. Recently, it has enjoyed a faster steady growth in EPS which shows that its restructuring measures of replacing its small planes with much bigger and economical crafts is improving its efficiency. Its NPM is much lower than that of SAVE, however; it is increasing, which is mainly attributable to improved operational efficiency.
 
 
 
 
 
 
 
 
 
Sky West Airline and Spirit Airline
Student’s Name
Institution Affiliation
 
 
 
 
 
 
 
 
 
 
 
Sky West Airline and Spirit Airline
Executive Summary and Synthesis
SkyWest incorporated is a holding company of an aircraft leasing company and two passenger airlines. SkyWest Airlines is based in St. George Utah. The company provides airline services to states in North America. It has nearly 3000 flights daily and carries about 56 million passengers annually. The company has various business partnerships with similar airline companies such as Delta Air Lines, American Airlines, United Airlines, and Alaska Airlines. Currently, the company has about 19000 employees (SkyWest, 2016). The company’s stock are publicly traded in various US stock exchange markets such as NASDAQ. Currently, the price of each ordinary share of the company is $30.25. The company’s revenues were $3,095,563 in 2015 and $3,237,447 in 2014. The company’s dividend payouts were $0.16 from 2011 to 2015. The company also reduced its aircraft from 717 in 2014 to 660 in 2015.
Spirit Airlines is a low-cost airplane company that transport passengers in more than 50 destinations in the US, Canada, Caribbean, and Latin America. The airline operates more than 400 flights daily. The company stocks are publicly traded in various US stock markets such as NASDAQ. The company’s head office is located in Miramar, Florida. The current price of the company’s ordinary shares is $47.1. The company’s revenue were $2,141.463 million in 2015 and $1,931.580 million in 2014. The company has not issued any dividends since 2010.
The main macroeconomic factors that affect this industry are the federal bank interest rates and the changes in oil prices. Simply a decrease in interest rates leads to a reduction in the cost of borrowing money, which results in increased investments. Accordingly, businesses such as airline businesses expand and grow when the interest rates are low. A decrease in oil prices leads to a reduction in the cost of transport, which in turn increases the profitability of airline businesses.
The main industrial factors in the airline transport are an increase in labor cost and a preference for large commercial airplanes over small sized jets by regional airlines. There has been a general increase in the labor cost, which has offset a substantial portion of the gains made by a reduction in the cost of fuel. On the other hand, there has been a general replacement of smaller airplanes with larger airplanes.
The fundamental analysis evaluates the performance of these two companies. On overall, both companies have enjoyed a positive performance, which is shown by their increase in revenue. SkyWest Airlines had earnings per share of $2.27 per share and Spirit Airlines had earnings per share of $4.48. Both companies have an open and transparent corporate governance. The executives of both companies were able to acquire and dispose stocks from their companies. Nonetheless, the level of insider trading in both companies was minimal (SkyWest Airlines, 2016).
The trend analysis of this industry showed a preference in the acquisition of larger airplanes. The technical analysis of both companies showed that the value of stock in both companies was growing steadily, largely buoyed by the decrease in oil prices. However, SkyWest Airlines stocks were growing faster than those of Spirit Airlines. The stocks of SkyWest Airlines started to rise early from 2014 to their present value. On the contrary, from mid-last year, until early this year, the stocks of Spirit Airlines had been declining. However, they have started to increase steadily to their current values. In summary, both SkyWest and Spirit airlines have been profitable and rewarding to their investors.
 
Macroeconomic Analysis
This analysis investigates the impact of macroeconomic factors on the stock performance of SkyWest Airline and Spirit Airline. Macroeconomic effects have the overall impact of influencing a company’s profitability, ease of doing business, and accordingly its stock performance. Therefore, macroeconomic factors like government regulations such as the Dodd-Frank Act of 2010, which was established after the 2007-2008 financial crisis, as well as interests rates, and oil prices play a great role in determining a company’s financial performance.
Federal Funds Rate
The federal fund’s rate both directly and indirectly affects the overall performance of the country’s economy. A low federal funds rate has the effect of leading to a reduction in prevailing banking interest rates. Simply, a reduction of the federal fund’s rates is an expansionary monetary policy, which has the overall effect of increasing the monetary supply in the country. Accordingly, most people and businesses borrow money for various investments projects due to the low-interest rates that are caused by the increased supply of money. On the same note, the low-interest rate reduces the incentive to save.
The effect of this move is that there is more economic activity in a country, which results in an increase in the value of shares, as well as a stability in the market performance of shares. As from 2009, the US government has maintained its interest rate at below two percent to revive its economy that was significantly affected by the 2007-2008 financial crisis. Currently, the country’s economy has started to grow, which is reflected in the growth in the country’s GDP. SkyWest Airline shares and Spirit Airline share have shown strong and positive performance during this period.
 
Federal Bank Interest Rates
Source: Economic Research, 2016.
Oil Prices
Oil prices have a tremendous effect on the performance of airline companies. A decrease in the price of oil leads to a decrease in operating costs, which results in higher profit margins for companies that highly depend on oil. Since airline industry is dependent on the price of oil, a decrease in oil prices has an overall effect of increasing the profitability of businesses in the airline industry. However, other factors such as where the airplane’s commercial route and operation center significantly indicate how the effect of oil prices will have on the airline’s performance.
For instance, if an airline main customers are from an oil-dependent economy, a decrease in oil prices may result in a decrease in the airline’s revenues and in turn profits. Generally, economies of oil producing economies mostly rely on oil revenue. Therefore, a decrease in oil prices leads to a decrease in these countries overall economic performance. Consequently, most individuals from these states do not have enough disposable income to use in transport when the oil prices fall. In addition, a slowdown in the economy results in an overall decrease in the need for air transport.
Save for the recent increase in shale oil production in the US, the country has never been highly reliant on oil. In fact, even at the moment, the US economy is very diversified and does not rely on oil. Consequently, a decrease in oil prices had an overall benefit to SkyWest Airlines and Spirit Airline, since these two airlines are regional airlines, therefore, they mostly operate in the US and not in oil exporting economies. To begin with, a decrease in oil prices led to an increase in disposable income among US consumers, which increased the demand for air transport. The fall in oil prices spurred economic growth in the US, which led to an increase in the need for transport. Finally, it reduced the cost of air transport, which led to higher profit margins.
Source: United States Department of Transportation, 2016.
 
Industry Analysis
In order to understand how SkyWest and Spirit airlines have been performing, it is important to examine their industry’s performance. The airline’s industry has been enjoying a great positive tide mainly due to low oil prices, robust demand in air transport, and industry consolidation. The decline in oil prices, in particular, has decreased the overall operating costs of airlines, which has resulted in companies in this industry having huge reserves for their shareholders.
The main sources of revenue for both SkyWest and Spirit airlines are passenger charges. These incomes have been increasing steadily for Spirit Airlines from $689.65 million in 2011 to $1,169.338 million in 2015. As for SkyWest airlines, the incomes have shown a slight but consistent decrease from $3,239.525 million in 2013 to $3,030.023 million in 2015. The other major contributors to revenue for both companies is non-ticket charges, which are referred to as “ground handling and others” in SkyWest financial statements. The income statements of these companies reflect their main operation and business area, which is the transportation of people and parcels. The increase in revenue in Spirit airlines is an indication of an increase in demand for short distance travel where the company normally operates. The growth in non-ticket revenue has shown a similar trend to the changes in passenger revenue since it complements the latter.
Revenue Sources for Spirit Airlines
Source: SEC, 2016c.
Although there has been an increase in demand for transport in the airline industry, in the last few years, SkyWest airlines reported a decrease in revenues from 2013. Primarily, the reduction in revenue is due to the restructuring process in the company. It is important to note that an increase in revenue does not necessarily translate to an increase in profits. Between 2014 and 2015, there was a 4.4% decrease in revenue that was occasioned by an 8.8% reduction in fleet size. SkyWest airline has been replacing most of its former airplanes with a new fixed-fee flying agreement, which is more economical. This new agreement requires the company to use more economical large airplanes. Consequently, although the company’s airplanes decreased from 717 in December 214 to 660 in December 2015; and accordingly there was a decrease in revenue, the company’s profits increased during this period.
 
 
 
Revenue Sources for SkyWest Airlines
Source: SEC, 2016a.
SkyWest Airplanes
Source: SEC, 2016a.
Capital Markets
SkyWest Performance
Source: NASDAQ, 2016.
Spirit Performance
Source: NASDAQ, 2016
The figures above show NASDAQ financial service index compared with Spirit and SkyWest performance in the past three years as well as the industries performance. Both Spirit and SkyWest airlines outperformed the industry during this period. Until match this year, NASDAQ outperformed SkyWest airline, however, the company is now performing much better. This change in market performance can be attributed to the cyclicality of the industry as well as the boom being witnessed in the airline industry. From January 2016, the company has been performing better than the industry’s index. As for Spirit airline, the company outperformed NASDAQ index until June 2015. However, it has since been performing less than the index. However, its performance is still better than that of the airline industry.
 
 
Industry Analysis
While the will to use airlines is now inextricably entwined with the current generation, still, there are many threats abound in this industry. Sadly, most of these threats are beyond the control of airline companies on their own. Chiefly, the threats of terrorism, fluctuation in oil prices, and the emergence of low costs carriers are the main challenges in this industry. While both Spirit and SkyWest airlines are low-cost carriers (LCCs) a factor that is attributed to their success so far, this characteristic is still a threat to the aviation industry. LCCs normally have low-profit margins, which results in them having small reserves and profits.
Fuel cost is another threat in the airline’s industry. Fuel is one of the major costs of the airline business, accounting for as high as 30% of the cost in most US airlines in 2006. Therefore, the sporadic rises in this cost can have detrimental effects in both Spirit and SkyWest airlines. For instance, fuel cost has been the largest single cost for Spirit airline since 2011. On the same note, fuel cost is still one of the largest expenditures for SkyWest airline.
Industry Income Distribution
Source: United States Department of Transportation, 2016
The threat of terrorism is one of the main challenges in the airline industry. Since the September 11th, 2000 bombing in the US, terrorism has greatly affected airline companies. In particular, some individuals have developed heightened fear on their safety when traveling. Accordingly, this fear has led to a decrease in demand for traveling from terrified individuals and an increase in the establishments of security checking facilities by airline companies.
International Markets
Both Spirit and SkyWest airlines do not operate in international airspace. These companies concentrate their operations in America, offering transport between various states. The recent increase in the demand for air transport, as well as an economic slowdown in the US since 2010, has made people be more sensitive to price. As a result, there has been a significant rise in the demand for LCCs such as SkyWest and Spirit airlines. In general, the increase in the demand for LCC can be witnessed in the increase in revenue for most LCCs such as Spirit Airlines during this period.
Growth in Air Transport
Market Structure
The airline transport business exists in a monopolistic market. A monopolistic competitive market is a type of market where there are no identical substitutes for goods offered by one service provider. Simply, this market is characterized by product differentiation, independent decision-making, freedom of entry or exit from the market, firms are price makers, and a large number if independent competing firms. In the airline industry, all companies have their own brand name and uniquely customized services to cater for their various customers. These features are what differentiate them from their competitors. Since each customer naturally prefers a given type of service, the overall effect is that companies are able of raise the price of their services without the fear of losing customers. In light of this, both Spirit and SkyWest airlines are able to make their own independent decisions and strategies without fearing a possible setback in their businesses.
Managerial Comparison
Revenue per Share
Revenue per share represents the rate of return in terms of revenue for its capital. In this case, it represents how much revenue the business earned for every share invested. Spirit had a revenue per share of $ 29.5676 while SkyWest airlines had $59,731.08. It is important to note that the number of shares that the company has issued also determines the revenue per share. In this case, the high revenue per share for SkyWest airlines is because the company had 51,825 issued shares (diluted). On the contrary, Spirit airlines had many issued shares 72,426,060 shares (diluted) in total.
Earnings per Share
Earnings per share are a representation of the income the business earned for its investment for every capital invested. Therefore, it represents how much income was generated by the business from its capital. Spirit airline had an EPS of $4.39 for basic shares and $4.38 for diluted shares. SkyWest had an EPS of $2.31 for basic shares and $2.27 for diluted shares.
Net Profit Margin
Net profit margin indicates whether the shareholders are earning any income from their investment. Spirit had a net income of $317.220 million while SkyWest had an income of $117.846 million in 2015. The above profits resulted in a net profit margin of 14.813% for Spirit airlines and 3.807% for SkyWest airlines. The profits in SkyWest were as a result of the restructuring process that the company has implemented of replacing non-economical contracts with more economical ones. Therefore, despite the low number of revenues for SkyWest when compared to Spirit airlines, the company was more efficient as shown by its higher net income margin in 2015. From an industry position, the airline’s industry had a net income margin of 15.2% in 2015 against a net income margin of 4.4% in 2014. Therefore, both of Spirit and SkyWest airline performed below the industry’s performance. The main cause for the airline’s industry increase in profits in 2015 was the reduction in fuel costs, which declined by $16, 454 million.
 
 
 
 
 
 
Incomes in Airline Industry
Source: United States Department of Transportation, 2016.
The running costs of airlines can affect their net profit margins. These are expenses such as salaries, aircraft maintenance, aircraft fuel, ground handling, and station rental and landing fees. Consequently, a reduction in any of these costs has the overall effect of reducing the airline’s operating costs and in effect increasing its profits. Chiefly, the airline’s attractive performance is because of reduction in fuel costs. Since June 2014, the prices of crude oil have fallen from a high of about $113 to the current price of $46.18 per barrel, which is the new high price.
Crude Oil Prices
Source: InvestMine (2016).
Salaries, Wages, and Benefits
The increased competition in the airline industry has resulted in an increase in the demand for airline service workers, especially pilots and engineers. Consequently, there has been a huge increase in the salaries, wages, and benefits for airline staff. Spirit airline had an expense of $378.21 million in 2015 up from an expense of $313 in 2014. On the contrary, SkyWest had a decline in salaries, wages, and benefits expense from $1285.155 million in 2014 to $1,203.312 million in 2015. However, this decline was due to the decrease in the company’s number of airplanes and trips and not due to the decrease in the per unit cost of this category of expense. On overall, the airline industry had an increase in labor expense of $ 4, 614 million.
 
 
Fundamental Analysis
Fundamental analysis is an important tool in identifying if shares of a company are attractive enough to induce stockholders to buy them. The required rate of return and the sensitivity analysis provide an important tool that financial analysts can use to evaluate these stocks. When analyzing the required rate of return, the company’s beta is used to calculate the minimum required rate of return. The decision on whether to buy or sell a stock is determined by whether the company’s current rate of return is greater than the minimum required rate of rate of return (Yahoo Finance, 2016a). The minimum required rate of return is calculated as shown below.
K= risk-free rate of return+ beta (market return- risk-free rate of return)
The risk-free rate is 0.5%, which is provided by US Federal Bank. The market rate is 7.6%, which is provided by IATA. The beta for Spirit airlines is 0.1, which is provided by (Yahoo Finance, 2016b). Spirit has a minimum required rate of return of 0.0101
Therefore
SkyWest airline has a minimum required rate of return of 8.86%.
Therefore,
Growth Model
Growth models analyze if a stock is overvalued or undervalued. If the stock is overvalued, investors do not buy it. If they already have the stock, they may decide to sell it at this time. A comparison is normally made between the future present value and the current present value. A future present value greater than the current present value means the stock is overvalued. Since Spirit airlines have not been offering dividends to its shareholders, the dividend growth model, and Gordon model cannot be used to determine whether it is overvalued. SkyWest airline offered dividends of $0.16
Gordon’s model determines the price of a share as follows:
Current P= D/(k-g)
Corporate Governance
Corporate governance refers to the administrative structure in an organization. It is a fundamental area of a business since it determines the ease with which various conflicts that may arise amongst employees, shareholders, and executives can be solved. In addition, it also indicates how the organization avoids various conflicts of interests among the executives. Finally, it indicates the decision-making process of the corporation. A sound corporate governance aims at creating efficiency in the organization and ensuring transparency in the corporation. Investors should have adequate information about the executive compensation, insider training, and institutional holdings.
Executive Compensation
In Spirit Airline, the total compensation ranged from $6,167,068 to the highest earner, who was the CEO in 2014 to $747,355 that was paid to James Lynde who was a member of the board. The compensations were mainly distributed in the form of either salary, stock awards, non-equity incentive plans, and miscellaneous compensation. SkyWest airline executive compensation plan was much lower than that of Spirit airlines. The largest earner was the CEO Jerry Atkin who has a salary of $1,777,388 in 2014. The lowest earner was Michael Kraupp, who was the vice president in 2014, earned $463,713. On overall, the compensation of the two companies did not change during these two periods.
 
 
 
 
 
 
Spirit Compensation
Source: SECc, 2016.
 
 
 
 
 
 
 
 
 
 
SkyWest Compensation
Source: SEC, 2016a.
Institution Holdings
An institution holding is an issue of main importance to the company since individuals that control a company’s shares have significant influence over its decisions. In a company, decisions are made based on the number of shares that an individual owns. In Spirit airlines, 290 institutions hold 99.52% of its shares. The top five shareholders control about 33% of the company. The company has experienced minimal insider trade in the last one year. There were only 6 cases of insider trades in the last three months and 53 in the last 12 months. These insider trade activities had a net activity of 108,993. For a company the size of Spirit, this level of activity is low and cannot affect the overall performance of the company.
 
Spirit Airline Institution Holders
Source: NASDAQ, 2016a.
Spirit Airline Top Holders
Source: NASDAQ, 2016a.
 
 
Spirit Airline Insider Trading
Source: NASDAQ, 2016a.
SkyWest airline has 222 holders. Institutions own 87.08% of the company. The top five holders control more than 33% of the company. The company’s level of insider trading is minimal, with only 9 insider trades in the last 3 months and 50 in the last one year. On overall, the company had a net activity of -270 in the last one year.
SkyWest Airlines Holders
Source: NASDAQ, 2016b.
 
 
SkyWest Top Institution Holders
Source: NASDAQ, 2016b
SkyWest Insider Trading
Source: NASDAQ, 2016b.
Next Product or Trend
            The main trend in the regional airline industry has been the replacement of small inefficient airplanes with larger and more fuel-efficient planes. This move aims at increasing the capacity as well as reducing the overall transport costs of these regional airline companies. Although success in regional air transport has mainly succeeded by companies having small 50-seat jets, the tide is now shifting to the preference in larger 100-seat planes. As from 2013, major airplane companies had begun to adopt to these changes. As early as 2013, Delta Airlines, United, and American Airlines had made an order for 151 76-seat Embraer 175 and Bombardier CRJ 900 airplanes. During the same period, Republic Airways ordered for six E-175s airplanes (IATA, 2015).
In 2013, Delta Air Line had planned to replace 125 of its small airplanes by the end of 2015. In 2013, SkyWest Airlines started its plans of replacing its small aircraft with larger ones. Specifically, this strategy aimed at minimizing its exposure from threats of inefficiency caused by operating small planes. As of 2016, the company expected to have acquired an additional 37 Embraer E175s. In 2017, it hoped to acquire 17 Embraer E175s . Already, it had acquired 45 brand new Embraer E175s planes in 2015. Delta Air Line is currently at the forefront in adapting to the market changes (Russel, 2013).
On a similar note, a Spirit Airline has also been on the forefront to increase the capacity of its planes to match the changes in the market. In 2013, the company placed an order for 20 A321 CEO Airbus plane, which have a capacity of 291 seats. Further, it also made arrangements for the conversion of 10 of its a320 planes to A321 type with Airbus, which has a higher capacity (Airbus, 2013). As from January 2016 until December 2021, the company plans to increase its fleet from 70 to 157, mainly by acquiring large capacity aircraft (Spirit).
Spirit Aircraft Acquisitions
Source: Spirit, 2016.
Technical Valuation
This section gives financial analysts the opportunity to compare the performance of Spirit Airlines against that of SkyWest Airline. Historical information is important in enabling investors to forecast on the possible future performance of a stock. These charts give investors the opportunity to have the relative strength indicator, the volume of stocks traded and the simple moving average. A stock that drops below its simple moving average (SMA) is bearish. On the contrary, one that is above this level is bullish. The relative strength indicator (RSI) is calculated by dividing the current price by the average price. Currently, the stock of Spirit airlines is trading above the SMA, therefore is is bullish. The stock is overbought if the RSI moves above 60.15 and oversold as the RSI moves below 14. The SMA is at 43.68, therefore, since the stock is trading at 47.63, the investor may consider selling this stock at the moment.
The stock of SkyWest Airline is trading above the SMA, therefore is is bullish. The stock is overbought if the RSI moves above 60.49 and oversold as the RSI  moves below 14. The SMA is at 23.90, therefore, since the stock is trading at 30.25, the investor may consider selling this stock at the moment. When considering to buy between SkyWest airlines stock or spirit airlines stock, an investor should examine the difference between the SMA and the selling price. The current price shows that SkyWest airline stocks perform better than those of Spirit Airline.
 
 
 
 
 
SkyWest Chart A
Source:  StockCharts.com. (2016d)
 
 
 
 
 
 
 
 
 
 
SkyWest Point and Figure
Source:  StockCharts.com. (2016c)
The point and figure chart was also used to assess the performance of Spirt and SkyWest airlines. SkyWest chart indicates that the volumes spiked from January 2016 until almost mid-year. The prices bottomed and have currently begun to rise. SMA (50) remained below SMA (200) as at June. The stock appears not to have reached its limit. The firm’s price increased to 30.25 from 25.5. This stock has enough demand and resistance and has broken the resistance line before; therefore, it is a strong a buy.
 
 
 
Spirit Airline A
Source: StockCharts.com. (2016b).
 
 
 
 
 
 
 
 
 
 
Spirit Point and Figure
Source: StockCharts.com. (2016a).
Spirit point and figure chart indicate that the volumes spiked from mid-2015 until early 2016. Since then, it has been increasing alternatingly; however, the general trend has been a decline. The prices dropped below SMA (200) in October and SMA (50) in August, which indicates a strong signal to sell. However, since October, the stock has been increasing which indicates a possible recovery. The firm’s price increased to 49.0 from 38.0
 
 
 
 
References
Airbus. (2013). U.S. low-cost carrier signs firm order for 20 A321ceo aircraft: 1st North American carrier to feature Space-Flex cabin option, room for more seats. Retrieved from http://www.airbus.com/presscentre/pressreleases/press-release-detail/detail/spirit-airlines-to-grow-fleet-with-largest-airbus-single-aisle-model/
Economic Research. (2016). Effective federal funds rate (FEDFUNDS). Retrieved from https://fred.stlouisfed.org/series/FEDFUNDS
IATA. (2015). Economic performance of the airline industry. 2015 Mid-Year Report.
InvestMine (2016). 5 Year crude oil prices and price charts. Retrieved from http://www.infomine.com/investment/metal-prices/crude-oil/5-year/
NASDAQ. (2016a). Spirit Airlines, Inc. Ownership Summary. Retrieved from http://www.nasdaq.com/symbol/save/ownership-summary
NASDAQ. (2016b). SkyWest, Inc. Ownership Summary. Retrieved from http://www.nasdaq.com/symbol/skyw/ownership-summary
Russel, E. (2013). Analysis: USA’s regional airlines adapt to market changes. Retrieved from https://www.flightglobal.com/news/articles/analysis-usas-regional-airlines-adapt-to-market-changes-390622/
SkyWest Airlines. (2016). Company profile. Retrieved from http://inc.skywest.com/
Spirit. (2016). Fleet plan. Retrieved from http://ir.spirit.com/fleetplan.cfm
StockCharts.com. (2016a). SAVE Spirit Airline, Inc. Nasdaq Global Select Market. P&F Pattern. Retrieved from http://stockcharts.com/freecharts/pnf.php?c=SAVE,P
StockCharts.com. (2016b). SAVE Spirit Airlines, Inc. Nasdaq GS. Retrieved from http://stockcharts.com/h-sc/ui?s=SAVE
StockCharts.com. (2016c). SKYW. SkyWest, Inc. Nasdaq global select market. P&F pattern. Retrieved from http://stockcharts.com/freecharts/pnf.php?c=SKYW,P
StockCharts.com. (2016d). SKYW. SkyWest, Inc. Nasdaq GS. Retrieved from http://stockcharts.com/h-sc/ui?s=SKYW
United States Department of Transportation. (2016). 4th Quarter 2015 airline financial data. Retrieved from http://www.rita.dot.gov/bts/press_releases/bts026_16
United States Securities and Exchange Commission (SEC). (2016a). SkyWest Inc. annual report on form 10-K: Commission file No. 0-14719
United States Securities and Exchange Commission (SEC). (2016b). SkyWest Inc. schedule 14A: Commission file No. 0-14719
United States Securities and Exchange Commission (SEC). (2016c). Spirit Airlines, Inc. annual report on form 10-K: Commission file No. 001-35186.
Yahoo Finance. (2016a). SkyWest Inc. (SKYW): NasdaqGS – NasdaqGS real time price. Currency in USD. Retrieved from https://finance.yahoo.com/quote/SKYW?p=SKYW
Yahoo Finance. (2016b). Spirit Airlines, Inc. (SAVE): NasdaqGS – NasdaqGS real time price. Currency in USD. Retrieved from https://finance.yahoo.com/quote/SAVE/?p=SAVE
 
 
 
 
 
 
 
Fundamental Valuation
            The required rate of return for SkyWest Airline is 0.886. It was calculated for five-year period and it had a historical risk-free rate of 0.025% and a market rate of $30.25. Spirit airline required rate of return is 0.0101. It was calculated for a five-year period and it had ahistorical risk-free rate of return of 0.025% and a market rate of $47.16.
Require Rate of Return
The beta for the air transport industry is 1.27. SkyWest airline has a beta of 1.64; therefore, it is more risky than the overall market. Spirit has a bet of 0.1, which shows that it is less risky than the market. Therefore, investors in these two companies will want to make sure that the returns from their investments in these stocks are sufficient to cover the amount of risks before they decide to take an additional stock.
Annualized Holding Period Return and Dividend Models
The annualized holding period return (HPR) is an important indicator of the stocks ability to earn the investor sufficient returns from his/ her investment. Simply, it tells the investors how much they will earn from a particular investment. It is calculated using the following formula:
Holding Period Return (HPR) = Income + (End of Period Value – Initial Value) / Initial Value
Annualized HPR = {[(Income + (End of Period Value – Initial Value)] / Initial Value+ 1}1/t – 1
Where t = number of years.
SkyWest Airline
{[2.601+ (34.7289- 30.25)]/30.25+1}1/5 – 1
HPR= 0.51873 This stock is undervalued
The alpha of this stock shows that it is undervalued. Thererfore, it is providing the shareholders with high returns.
Spirit Airline
{[5.5901+ (60.1894-47.16)]/47.16}1/5-1
HPR= -0.1696 This stock is over valued
The alpha values in this stock, which is negative, shows that it is overvalued and it is providing the stockholders with less returns than required to cover the risk. Therefore, they must wait for the EPS to raise so that they can cover the stock can be able to cover the risk associated by holding it.
The Gordon model for SkyWest is as below:
This analysis shows that in both the dividend growth model and Gordon’s model, the SkyWest Airline is undervalued. Consequently, it will provide investors with adequate returns, which will be able to cover the associated risks of holding this stock. This conclusion is supported by the results of HPR, which show that this stock is undervalued and the appreciation of its stock price and dividend payments are sufficient to cover all risk associated with holding this stock.
Since Spirit Airline does not pay dividends, investors will rely on the HPR, the EPS and the P/S to determine its value.
Sensitivity Analysis
Sensitivity analysis is an indication of the changes in the rate of return of various stocks depending with changes in P/E or EPS.
 
 
 
SkyWest Airline

Sensitivity
If P/E is If EPS is
20% less 10% less As expected 10% more 20% more
20% less 19.73% 20.847% 21.697% 22.523% 23.327%
10% less 20.847% 21.801% 22.726% 23.624% 24.496%
As expected 21.697% 22.726% 23.722% 24.686% 25.622%
10% more 22.523% 23.624% 24.686% 25.714% 26.710%
20% more 23.327% 24.496% 25.622% 26.710% 27.761%

 
SkyWest Airline is already undervalued; therefore, its EPS must be lower than 20% or more in order for it to become overvalued. Due to this high error margin, SkyWest Airlines is a viable investment option.
Spirit Airline

Sensitivity
If P/E is If EPS is
20% less 10% less As expected 10% more 20% more
20% less -3.966% -1.677% 0.417% 2.350% 4.146%
10% less -1.677% 0.667% 2.811% 4.789% 6.629%
As expected 0.417% 2.811% 5.000% 7.021% 8.899%
10% more 2.350% 4.789% 7.021% 9.080% 10.995%
20% more 4.146% 6.629% 8.899% 10.995% 12.944%

Spirit Airlines must at least have a P/E and EPS equal to its expected levels in order for it to become a viable investment. Since it is already an overvalued investment, an EPS and P/E of less value will make it not to be a viable investment.
 
 
 
 
 
 
 
Calculate, present value, and explain the five-year trend for each stock of sales, earnings, net profit margin,
Present Value for each stock

SkyWest Airline Spirit Airline
Present Value 30.25 47.16

 
Trend of Sales
The main sources of revenue for both SkyWest and Spirit airlines are passenger charges. These incomes have been increasing steadily for Spirit Airlines from $689.65 million in 2011 to $1,169.338 million in 2015. As for SkyWest airlines, the incomes have shown a slight but consistent decrease from $3,239.525 million in 2013 to $3,030.023 million in 2015. The other major contributors to revenue for both companies is non-ticket charges, which are referred to as “ground handling and others” in SkyWest financial statements. The income statements of these companies reflect their main operation and business area, which is the transportation of people and parcels. The increase in revenue in Spirit airlines is an indication of an increase in demand for short distance travel where the company normally operates. The growth in non-ticket revenue has shown a similar trend to the changes in passenger revenue since it complements the latter.
 
Trend for Stock
Both SkyWest and Spirit Airline stocks are performing properly. From the technical valuation section, both stocks are performing greatly at the moment.
Earnings per Share / Net Income
SkyWest Airline
Spirit Airlines (from 2014-2010)
 
Return on Total Capital
(Net income – Dividends) / (Debt + Equity)
SkyWest Airline

2015 2014 2013
Net Income 117,817 (24,154) 58,956
Dividends 8260 8195 8258
Net Income- Dividend (A) 109557 (32349)
Debt 3296453 3009582
Equity 1506435 1400,346
Debt+ Equity (B) 4,802,888 4409928
Return on Total Capital (A/B) 0.02281 -0.0073355

 
 
 
 
 
 
Spirit Airline

2015 2014 2013
Net Income 317,220 225,464 176,918
Dividends 0 0 0
Net Income- Dividend (A) 317,220 225,464
Debt 1305235 589,678
Equity 1,225,310 1,003,075
Debt+ Equity (B) 2,530,545 1,592,753
Return on Total Capital (A/B) 0.125356 0141556

 
Net Profit Margin
Net Income/ Sales (Revenue)
SkyWest Airline

2015 2014 2013
Net Income 117,817 (24,154) 58,956
Sales 3,095,563 3,237,447 3,297,725
Net Profit Margin 0.03806 -0.00746 0.01788

 
Spirit Airline

2015 2014 2013
Net Income 317,220 225,464 176,918
Sales 2141,463 1931,580 1,318,388
Net Profit Margin 0.148 0.11673 0.1342

 
 
 
 
 
 
 
 
Spirit Airline: Value Line Version of ROA
There has been a consistent increase in the revenue earnings per share for Spirit Airlines. The revenue per share increased from 14.77 in 2011, to 29.93 in 2015. Similarly, the cash flow per share increased from 1.16 in 2011 to 5.0 in 2015. The earnings per share increased from 1.43 to 3.8 in 2015. This shows that the company is making good profits. The company does not pay dividends. The company’s book value per share increased from 6.44 in 2011 to 17.13 in 2015. These figures indicate that Spirit airline has been profitable. Similarly, its revenues increased from 700 million in 2009 to 2141.5 million in 2015.
The capital spending per share increased from 0.93 in 2011 to 7.67 in 2015, which shows that company is investing. In particular, it is buying bigger planes to replace its small aircrafts.
The company’s net profits have been consistent at about 10%. They were 10.2% in 2009 and 14.8% in 2015. The company mostly relies on its own shareholders capital for investment. Therefore, it has high liquidity. The liquidity is also indicated by the consistent rise in its cash flow per share. Both return on capital and shareholders have been positive from 2011, which indicates that the company is performing properly.
Spirit does not issue shares. Nonetheless, the increase in value of shares provides a good reward to its shareholders.
The P/E ratio of the company decreased from 20.0 in 2014 to 13.7 in 2015, which showed a decrease in the company’s profits. At the same time, the company’s P/E ratio decreased from 1.08 to 0.69, which shows that the stock had been overvalued. Therefore, it is likely that there is now a decrease in the demand for this stock. However, since it has a positive P/E it is a good stock for shareholders.
 
 
SkyWest Airline: Value Line Version of ROA
 
The company’s revenue per share increased from 9.47 in 2000 to 20.69 in 2015, which indicates increase in sales. Its Cash flow also increased from 1.64 in 2000 to 7.5 in 2015, which shows that the company has more liquidity. The earning per share increased from 1.03 in 2011 to 2.27 in 2015, which indicates that shareholders are getting more profit from each share that the own in the company.
The company’s share book value has increased from 8.88 in 2000 to 29.54 in 2015, which is an indication of great performance of the company. On overall, its P/E ratio decreased from 22.1 in 2000 to 7.1 in 2015, which shows that customers are getting lower returns from their stocks than in the past. However, since it is positive, the company is still profitable.
The company’s revenues have stagnated at around 3000 million. They were 3114.7 in 2006 and 3096 million in 2015. The company has returned to profitability with an increase in net profits from 51.2 million in 2012 to 117.8 million in 2013. Its net profit margins are small, they were 3.8% in 2015. The company debt levels are high, almost equal to its equity. In 2015, debt was 1676.8 million while equity was 1506.4 million. Therefore, the company has liquidity problems since it relies a lot on debt. The relative P/E ratio of the company is 0.36, which shows that it is undervalued given that the company’s P/E has started to increase. Therefore, few people are demanding this stock currently. However, its demand may increase over time.
Trend Analysis
The five year trend of sales, earnings per share, net profit margin, payout, dividend yield, and P/E for both firms was extracted from the company’s value line. Spirit airline does not pay dividends, therefore, its there its payout and dividend yield will not be presented.
 
 
 
 
 

Dividend Yield SKYW SAVE P/E SAVE SKYW Payout SAVE SKY
2015 1.0 2015 0.69 0.36 2015 71.54% 51.01%
2014 1.4 2014 1.08 2014 72.78% 51.34%
2013 1.1 2013 0.74 13.0 2013 72.67% 51.38%
2012 1.6 2012 0.81 10.3 2012 72.67% 51.81%
2011 1.1 2011 0.60 2011 72.53% 50.61%

 
Dividend Yield
SKYW dividend yield has been fluctuating at the $1 level, depending on the current business performance of the company. Although the company has been more profitable in recent years it has not increased its dividends payout mainly due to its investment projects such aircraft acquisition.
Relative Price Earnings Ratio
The relative P/E ratio of the SKYW is 0.36, which shows that it is undervalued given that the company’s P/E has started to increase. Therefore, few people are demanding this stock currently. However, its demand may increase over time. The P/E ratio of Spirit decreased from 20.0 in 2014 to 13.7 in 2015, which showed a decrease in the company’s profits. At the same time, the company’s P/E ratio decreased from 1.08 to 0.69, which shows that the stock had been overvalued. Therefore, it is likely that there is now a decrease in the demand for this stock. However, since it has a positive P/E it is a good stock for shareholders.
 
 
 

SALE SKYW million SAVE million EPS SAVE SKYW NPM SAVE SKY
2015 3095.6 2141.5 2015 4.38 2.27 2015 14.8% 3.8%
2014 3237.4 1931.6 2014 3.08 0.47 2014 11.7% NMF
2013 3297.7 1654.4 2013 2.42 1.12 2013 10.7% 1.8%
2012 3534.9 1318.4 2012 1.49 0.99 2012 8.2% 1.4%
2011 2765.1 1071.2 2011 1.43 0.52 2011 7.1% NMF

 
 
 
Sale
As from 2011 to 2015, Spirit (SAVE) has almost doubled its revenues from $1071.2 million to $ 2141.5 million. In general, the sales for SkyWest (SKYW) have increased, albeit much slower from $2765.1 million in 2011 to $3095.6 million in 2015.
Earnings per Share
As from 2011 to 2015, SAVE has almost tripled its EPS from $1.43 to $ 4.38. In SKYW, EPS have increased, much faster from $0.52 in 2011 to $2.27 in 2015, a 4.36 times increase.
Net Profit Margin (NPM)
As from 2011 to 2015, SAVE has almost doubled its NPM from 7.1% to $ 14.8%. In SKYW, NPM was almost zero in 2011 but it has since then increased to 3.8%.
On overall, SAVE has been enjoying a steady growth rate in revenue, earnings per share and profitability. SKYW has been having a small marginal growth in sales. Recently, it has enjoyed a faster steady growth in EPS which shows that its restructuring measures of replacing its small planes with much bigger and economical crafts is improving its efficiency. Its NPM is much lower than that of SAVE, however; it is increasing, which is mainly attributable to improved operational efficiency.
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