The last time a U.S. airline went public was in 2014. That could soon change as Frontier Group Holdings Inc. filed paperwork for a public offering on March 31.
How Frontier Airlines Operates
There will be a lot of excitement on Wall Street for this IPO because it's the first U.S. airline IPO since Virgin America Inc. (Nasdaq: VA) in November 2014. But instead of buying into the hype, we're going to share with our readers the most important details from the Frontier Airlines IPO filing.
Here's everything you need to know...
Must-Have Information Before the Frontier Airlines IPO Date
When Frontier Airlines goes public, it will trade on the Nasdaq.
In its 10-K filing for the fiscal year ended March 31, Frontier listed its exact name as Frontier Airlines Holdings Inc.
On the official Frontier Airlines IPO date, the company should trade as Frontier Airlines Holdings Inc. (Nasdaq: FRNT).
We also learned that Frontier Airlines is profitable, which is surprising considering its history.
You see, Frontier filed for bankruptcy in 2008. It was bought by Republic Airways Holdings Inc. (OTCMKTS: RJETQ) in 2009, but Republic couldn't make Frontier profitable. In 2013, Indigo Partners LLC bought the airline.
Indigo Partners cut costs and increased profits by charging lower fares and adding fees for carry-on luggage and advanced seat assignments.
The strategy worked, netting the airline $146 million in profit in 2015. For 2016, Frontier brought in $200 million in profit on $1.7 billion in revenue.
That's a 36% increase in profits in one year.
The turnaround is impressive, but we recommend Money Morning readers avoid Frontier Airlines stock. As we saw with the Snap Inc. (NYSE: SNAP) IPO, a public offering can have volatile price swings after the hype dies down.
The SNAP stock price reached an all-time high on its second day of trading at $29.44 per share on March 3. But just two weeks later on March 14, SNAP stock traded for an all-time low of $18.90. That's a 35% drop in just 14 days.
Playing this particular airline IPO will be risky, but there's a signal the airline industry is a market to watch. And it's coming from one of the world's greatest investors...
Shocking: Is This Extremely Secretive $4.7 Billion Company About to Go Public?
Warren Buffett has been betting big on airline stocks over the last several months. In Q3 2016, Berkshire Hathaway Inc. (NYSE: BRK.A) bought shares of American Airlines Group Inc. (Nasdaq: AAL), Delta Air Lines Inc. (NYSE: DAL), and United Continental Holdings Inc. (NYSE: UAL).
During Q4 2016, Berkshire increased its shares in American Airlines, Delta, and United, and also invested in Southwest Airlines Co. (NYSE: LUV).
As of December 2016, Buffett owned 8.94% of American Airlines, 7.81% of Delta, 9.09% of United Continental, and 7.02% of Southwest Airlines.
And when we were researching Buffett's moves, we found two ways to play the airline industry that are less volatile than the Frontier Airlines IPO.
In fact, just one of these strategies could net you a 46% profit in the next year...
How to Make a 46% Profit Without Betting on the Frontier Airlines IPO
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For risk-averse investors who want to play the airline industry like Buffett, U.S. Global Jets ETF (NYSE Arca: JETS) holds the same stocks as Buffett's portfolio.
According to Morningstar, JETS' four largest holdings are:
- United Continental Holdings: 11.95%
- Southwest Airlines: 11.87%
- Delta Air Lines: 11.74%
- American Airlines Group: 11.66%
The diversification of JETS makes it less risky than owning one stock. If the stock price for one airline drops for any reason, the other holdings can offset those losses.
It also has 6.56% of its holdings in aerospace and defense, and 5.81% in airport services, to add more diversification. Over the last 12 months, the JETS stock price has climbed 10.22%.
The other airline investment opportunity on our radar is Frontier Airline's competitor Spirit Airlines Inc. (Nasdaq: SAVE).
Like Frontier Airlines, Spirit is a low-cost traveling option. But according to Market Realist, Spirit is generating more money than Frontier in terms of how much a passenger pays to fly one mile.
Spirit's average yield passenger mile (which represents the average amount a passenger pays to fly one mile) is $0.11. Frontier's yield was just $0.06.
The discount airline has also been on a mission to improve customer service. Under new CEO Bob Fornaro, who was appointed Jan. 5, 2016, customer complaints to the Department of Transportation have fallen dramatically. They've dipped from 11 for every 100,000 customers to four for every 100,000 customers.
Also, Spirit is increasing its fleet. Spirit had a fleet of 95 aircrafts at the end of 2016 and plans to expand that to 107 by the end of 2017.
According to FactSet, analysts who cover SAVE stock have an average one-year price target of $65.75. From today's opening price of $51.22, that's a potential profit of 28%.
And that profit potential may even be too conservative...
Analysts from brokerage Stifel Nicolaus have a one-year price target of $75 for the SAVE stock price. That's a potential profit of 46%.
The Bottom Line: The Frontier Airlines IPO date could be set for this quarter. However, IPOs are known for volatile price swings, and investors trying to time the market always lose the most. Two better ways to play the airline industry are through the U.S. Global Jets ETF and Spirit Airlines.
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