IPO of the Company 'Spirit Airlines, Inc.' Essay

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IPO of the company 'Spirit Airlines, Inc.'

Identify the company and its industry

The industry chosen for the analysis is the aviation industry, particularly a niche called the 'The ultra low fare air carrier'. This is a peculiar type of niche that other airlines especially the giants cannot enter into. From the time of it's founding the company under analysis -- Spirit Airlines has followed the principle of operating at low cost and keeping the passenger cost to the minimum which has been its major strategy. The company overview for Spirit Airlines, Inc. shows that by June 30, 2010, it operated a fleet of thirty one Airbus narrow-body aircrafts. The company was formerly known as Charter One and the new name Spirit Airlines, Inc. was assumed in 1992. It is based in Miramar, Florida. It has about two thousand employees and the CEO is Mr. B. Ben Baldanza. The company was added to the NASDAQ Composite Index on 28 May, 2011. (Business Week, 2011)

It serves the Eastern and Midwest cities of the U.S. And Caribbean and Latin America. The motto of the company can be stated as that the company does not require a passenger to pay for a service that he or she does not use. The customer can select the desired services and options and thus cut costs. This bold step was the pioneering strategy of the company that carved a niche in the low fare air carrier market. The other side is that Spirit charges customers for canceling tickets, extra luggage, and even small comfort like pillows and blankets. The revenues of the company are also generated from advertisement inside the flight. (Longenecker; Petty; Palich; Moore, 2009)

Let us now discuss about the niche and prospects. Spirit airlines carved a niche within the low cost niche by becoming the 'king of cheap' and transforming the company to fill a new slot that can be called the ultra low cost carrier and reversing the charges by charging almost nothing on the flight cost but charging for everything except the seat in the flight. (Shenkar, 2010) The uniqueness of the charges of the Spirit Airlines which insists that passengers must pay $45 for bags that do not fit under the seat is also likely to be challenged. This strategy was instrumental in the company being able to compete with other low cost operators and make a successful dent in the market and create a new undefined niche. Due to its novel operations the company gained a lot of market and also financial backing from investors and financiers and thus initially there was no need to go public and most equity was held by the financiers. (Snyder, 2010)

The company in 2004 gained $125 million in capital with new investment from partners. This began the ambitious plan of investing and going into international market with the company filing for permit to fly to eleven countries. The international services were designed to be out of Detroit and the countries that the airlines was intending to fly were Panama, Nicaragua, El-salvador, Guatemala, Honduras, Jamaica, and Nicaragua among others. The package was in competition to the 'no frills' service of Delta airlines but one step further. The airlines picked destinations that were near by to the main operating base and was of tourist interest. (Flouris; Oswald, 2006) Its low cost fare made it ideal for the short tour traffic. Thus when the company was flush with funds, in 2004 it began to carve a niche that other airlines was found to be impenetrable later on. In 2010, the ultra low-fare carrier -- ULCC that has flights between major U.S. cities and vacation spots "in South Florida, the Caribbean, and Latin America, serving more than 40 destinations. It operates an all Airbus fleet of about 30 single-aisle aircraft, including A319s, A320s, and A321s." (Hoovers Moneycentral, 2011)

It was at this time that the company had to go in for raising capital for keeping its liquidity. The actual intention of raising the capital was to clear claims and debts as the SEC filing would show. Thus while the operation of the airline was shifting to a situation where it had to be liquidated, it found it far better to raise further capital. The question is if the raising of public funds will solve the liquidity problem especially when a major portion of it was sought to be paid off to the major stake holders.

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Most of this information was agreed and published by the company in the filing before the SEC and also in the warning where it was clearly stated that the investor may have to contend with the 70% investment by the financiers.

2. Discuss important financial and other facts about the company from its SEC filings

A preliminary perusal of the prospectus reveals many things that show the nature of the IPO along with the intention of the company. Part of the prospectus reveals that the company is not going to use the capital for expanding the operations but to enlarge the liquidity of the company. This can be seen from the SEC application filed by Spirit Airlines, Inc. As per its registration statement with the Securities and Exchange Commission. The company announced that the common stock offered is 15,600,000 shares each priced at $12 per Share. The number of shares outstanding after the offering was 71,824,668 and the shares for the recapitalization agreement was 29,371,718 shares and what was allotted to Indigo was 7,629,573 shares and allotted to Oaktree was 19,860,138 shares. This resulted in the stake holding of the company by the earlier investors with the ownership of Indigo and Oaktree going up to 71.8% which gives the stake holders a major share of the company and its control. (Spirit.com, 2011)

The offering was expected to raise $171.0 million of which $150.0 million was proposed to be retained by the company as capital and the remaining was to be used for repaying debts to various creditors including the funds managed by Indigo and Oaktree, and for redeeming all outstanding shares and further payments to be made to Indigo to terminate their services. The prospectus stated that number of shares of common stock to be issued will be at $12.00 per share. On analyzing the financial statement it becomes clear that the IPO was firstly to get out of debt and clear outstanding with the interested investors in the Airline namely Indigo and Oaktree. (Spirit.com, 2011)

This is seen as an alternate to folding up and the issue therefore was more for raising capital for sustaining the company operation rather than the expansion and growth. In the year ended December 31, 2010, the EPS -- Earning per share shown to be at a cost of $1.49-0.24 only. It is not a bad mark and the EPS was encouraging. On the other hand the stakes for the investor who was to invest in the Nasdeq exchanges was fraught with danger because there were more clauses in the issue that related to the possible powerlessness of the investor against the bigger stake of the company's old investors. The statements on the risks were also alarmingly real- for example the relationships with Indigo and Oaktree, were declared to be the advisors and pilots for the company on account of their expertise with low-cost airline industry, and both the companies Indigo and Oaktree, will have 71.8% of the common stock. The warning stated that this could adversely affect all other stake holders. (Spirit.com, 2011)

This is true if it is considered that 'Indigo' itself has a lot of stake in the low cost flight industry and the control of the Spirit Airlines could only result in the latter being used in a way to support or at best operate out of the ambit of Indigo. This observation was also reported by the press. Thus the press reported that Spirit Airlines issued the IPO of $300 million just to repay debt. The debt comes to $263.7 million. In this regard too, Spirit was copying the way of 'Global Aviation Holdings' which issued IPO for $100 million. When the offering was made the Standard & Poor's 500 Index was down by 7.5%. In 2009 the company showed a total income of $83.7 million with gross $700 million in revenue. (Snyder, 2010)

There is a further statement that "controlled company" exception to the independence requirements of the NASDAQ Stock Market, we will be exempt from the rules of the NASDAQ Stock Market that require that our board of directors be comprised of a majority of independent directors," and this was claimed to have been adhered to and this may not prevent the company directors from overriding the wishes of the other stockholders. (Spirit.com, 2011) The investment funds were managed by Oaktree and Indigo. The IPO which was.....

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