Spirit Airlines, Inc. (NYSE:SAVE) Q1 2024 Earnings Call Transcript May 6, 2024
Spirit Airlines, Inc. misses on earnings expectations. Reported EPS is $ EPS, expectations were $-1.43. Spirit Airlines, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Thank you for standing by. My name is Pam, and I will be your conference operator today. At this time, I would like to welcome everyone to the Spirit Airlines First Quarter 2024 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to DeAnne Gabel, Senior Director for Investor Relations. You may begin.
DeAnne Gabel: Thank you, Pam. Presenting on today’s call are Ted Christie, Spirit’s Chief Executive Officer; Matt Klein, our Chief Commercial Officer; and Scott Haralson, our Chief Financial Officer. Also joining us are other members of our senior leadership team. Following our prepared remarks, we will take questions from the analysts. Today’s discussion contains forward-looking statements that are based on the company’s current expectations and not a guarantee of future performance. There could be significant risks and uncertainties that cause actual results to differ materially from those contained in our forward-looking statements, including, but not limited to, various risks and uncertainties discussed in our reports on file with the SEC.
We undertake no duty to update any forward-looking statements, and investors should not place undue reliance on these forward-looking statements. In comparing results today, we will be adjusting all periods to exclude special items unless otherwise noted. For an explanation and reconciliation of these non-GAAP measures to GAAP, please refer to the reconciliation tables provided in our first quarter 2024 earnings release, a copy of which is available on our website under the Investor Relations section at ir.spirit.com. I will now turn the call over to Ted Christie, Spirit’s President and Chief Executive Officer.
Ted Christie: Thanks, DeAnne, and thanks to everyone for joining us on the call today. We are coming to you this morning from our new Spirit Central Campus in Dania Beach. We celebrated our grand opening a couple of weeks ago, marking a major milestone and a new chapter in our more than 30-year history. In addition to allowing us to consolidate our corporate offices and all of our Fort Lauderdale based training facilities, the new campus is convenient to Fort Lauderdale Airport. It also provides access to the fabulous amenities at Dania Point for our support center team and our pilots and flight attendants when they are in town for training. Until recently, we thought the branding of the new facility might be blue but now we are proud to boldly display our signature Spirit yellow.
Looking back a couple of months, we still feel strongly, it was a serious misreading of both the evidence and the law for the Federal Court to enjoin our merger with JetBlue. And aside from the waste of taxpayer funds and the damage done to two proud companies through this process, the fact that the DOJ even brought a case to block a merger between two carriers with less than 8% combined market share, just shows how uninformed the government is about our dynamic airline business, particularly in the post-COVID era. Our industry has changed dramatically. Today, nearly all the profits of the entire U.S. airline industry are concentrated in just two companies, while the smaller non-legacy carriers scrambled to restore profitability in what seems ever more like a rig game.
The big four are the beneficiaries of this new normal, American consumers are the long-term losers. In the beginning of our consolidation process in 2022, we advocated strongly for a merger between the two largest ULCCs and tried to outline the challenges with the proposed JetBlue transaction, but our shareholders did not listen. While not our first choice, we believe the merger with JetBlue would as an alternative still be very positive for consumers and our other constituents. We were well aware of the regulatory risk that might prevent the merger from successfully closing. As such, over the last year, we have been simultaneously developing a stand-alone plan to de-risk the business and improve our financial performance. The JetBlue merger agreement had several operating restrictions that limited what we could do to rightsize the business address over staffing levels caused by the issues with GTF engines on our NEO aircraft and make the necessary changes to our product and strategy to adjust to the evolving industry environment.
We no longer have those restrictions and are swiftly taking numerous actions that we believe will lead to cash flow generation and profitability. I thank all our Spirit team members for their contributions to our first quarter results and their unwavering dedication and patience as we deploy our plan to return to sustained profitability. Moving on to our first quarter 2024 results. We reported an adjusted net loss of $160 million. During the quarter, we started to see benefits from the tactical and strategic network changes we have made over the last few months. We have a long way to go to margin health, but we are making steady progress. Operationally, we were negatively impacted by adverse weather and air traffic control-related delays, particularly along the Eastern Seaboard and in Florida.
We were also affected by the civil unrest in Haiti. However, our system-wide controllable completion factor for the quarter, that is excluding events outside our control, was 99.9%. Kudos the entire operational team for a job well done. With that, here’s Matt and Scott to share more details about our first quarter performance and the actions we have taken that set us up well to execute to our go-forward plan. Matt, over to you.
Matt Klein: Thanks, Ted. I, too, want to thank the entire Spirit team for their contributions. From the support center to the front line to the flight deck and everywhere along the way, our team does an exceptional job delivering great service and the best value in the sky to our guests. Now moving on to our first quarter revenue performance. Total revenue for the first quarter was approximately $1.3 billion, a decrease of 6.2% year-over-year. As we have previously noted, there has been a significant amount of industry capacity growth in the markets we serve and gaining deal traction and full loads in the non-peak periods has been difficult. Given this backdrop, we pulled down the schedule on the off-peak days of the week to a greater degree than usual in January and February.
And looking back, we believe that was the correct strategy for that time frame. From a yield perspective, the first half of March was also a bit choppier than we had anticipated due to some competitive fare activity, but demand was strong in the peak spring break period and total revenue results were in-line with our expectations. Total RASM for the first quarter was $0.0938, a decrease of 8.2% year-over-year. On a sequential basis, moving from Q4 2023 into Q1 2024, as we had anticipated, we achieved a substantial improvement in total unit revenue. On a per segment basis, fair revenue per segment declined 16.3% year-over-year to $48.8. Non-ticket revenue per segment declined slightly by 1.4% year-over-year to $68.95 for the full quarter. As we continue to see the demand and competitive environments develop, we know that we must also change with the times.
You have already seen us move our aircraft into different parts of our network and that will continue to happen as we look for the best places to maximize revenue. We will continue to test out new merchandising strategies, which we anticipate will change how we think about the components of total revenue generation. Ancillary revenue continues to be a critical part of our business, but we believe there are opportunities to maximize revenue that may involve shifts of revenue from the ancillary bucket into the ticket yield bucket. We will continue to iterate until we find the right balance and formula. Operationally, from a network design perspective, we are still being impacted by Jacksonville Center ATC issues. Given the length of time it takes to train controllers, it has been difficult for the center to keep pace with the large amount of industry capacity increases.
Therefore, to help with our operational performance, we are purposely limiting our growth into and out of Florida. Without these self-imposed limitations, we would likely be at least a few percentage points larger in Florida than we are today. Looking ahead to the second quarter, there remains an elevated amount of capacity chasing leisure demand. Several carriers have commented on the capacity increases in Latin American markets, but the situation remains quite pronounced in domestic markets as well. We have exited a few cities and suspended service to others, making adjustments to better align our capacity with markets where the supply and demand trends are more in balance as a continuous exercise. We are broadening our network in some cities where we’ve been relatively too small in the recent past.
We have added some new routes with less than daily flight schedules. We’re rethinking how we attempt to take advantage of seasonal changes in certain cities. And we’re also in a position where we now expect to introduce fewer new cities to our network in the immediate future. Given the dislocation in domestic demand trends last year, combined with our encouraging booking trends earlier this year, everything had pointed to an improving domestic demand environment, and we would believe we would see continuous improvement. And while the domestic environment does continue to improve, to date, it has done so at a slower rate than we had initially anticipated. We do expect to continue to see ongoing improvement through the summer with the peaks performing well.
In order for our forecast to materialize, we will need to see the off-peak and shoulder periods improve, but that is anticipated to be the case. In the meantime, we will make material modifications starting in June that will have a positive impact to the brand, the guest experience and ultimately to unit revenues. We are estimating second quarter 2024 TRASM will be down 8% to 9.5% compared to the second quarter last year on a capacity increase of about 2% year-over-year. We estimate that approximately 3 percentage points of this decline can be specifically attributed to the weakness in Caribbean and Latin American revenue trends. We estimate second quarter 2024 total revenue will range between $1.32 billion to $1.34 billion. Looking further out, the GTF engine availability issues and the phasing of AOG aircraft being taken out of service, together with limited visibility on when these aircraft will be returned to service, makes it difficult to accurately predict the number of assets we will have to produce capacity.
For the full year 2024, we estimate we will have an average of about 25 AOGs, finishing the year with about 40 AOGs. Based on this assumption, we anticipate year-over-year capacity for Q3 will be up high single digits and Q4 is expected to be down low single digits. For the full year 2024, capacity is now estimated to range between flat to up low single digits versus full year 2023. Again, this is a fluid situation. So this is just our baseline estimate for now and at this point, it does not include any potential mitigation efforts from Pratt & Whitney that could improve the forecast. We estimate we will start 2025 with over 40 AOG aircraft and that number will grow throughout 2025 and could end next year with somewhere around 70 aircraft on the ground from this issue.
Additionally, taking into account the aircraft deferrals we recently announced, our working assumption for 2025 is that capacity will be down high single digits versus full year 2024. Again, the situation is very fluid, we will do our best to update you as we gain further insight or if our working assumptions change. And with that, I will now turn it over to Scott.
Scott Haralson: Thanks, Matt. and thanks to the entire Spirit team. The first quarter was a bit of an emotional roller coaster, and I thank our team for staying focused on running the business and delivering the best value for our guests. There was a lot of activity in the first quarter. We terminated our merger with JetBlue, finalized the building of our new headquarters, executed on many of the items in the first phase of our go-forward stand-alone plan and began laying the framework for Phase 2 of the plan. This plan is the next evolution for Spirit, and I will cover some of the steps we’ve already taken, and Ted has a few tidbits to share in his closing remarks as well, where we are keeping most of the competitive details confidential for a bit longer.
I will wrap up with a brief overview of the quarterly results and then share some of the views on the second quarter. Regarding our stand-alone plan, it has been evolving over the past couple of years with more refinement happening over the past few months. While we were optimistic that the JetBlue transaction will be consummated, we were thoughtfully planning the airline in the event that was not allowed to proceed. Once the merger was terminated, we began executing on it. The first phase involves some updates to our financial and operational infrastructure. The first was to finalize the AOG compensation agreement with Pratt & Whitney for 2024, which we did in March. This agreement should add approximately $150 million to $200 million of liquidity benefit to the business in 2024.
Next, we completed a deferral agreement with Airbus to move deliveries from the second quarter of 2025 through the end of 2026, to delivery positions in 2030 and 2031. This will improve 2024 liquidity by about $230 million. Given the reduced capacity from the AOGs and the further reductions in capacity from the deferrals, we began actioning items to rightsize the rest of our business through our future capacity. This involves several initiatives, and it unfortunately means that we will need to furlough up to 260 pilots in September. We plan to action other rightsizing initiatives throughout the business as the year progresses to achieve our $100 million cost reduction goal. In addition, our advisers assisting us with addressing our loyalty bond and convertible notes due in September of ‘25 and May of 2026, respectively, began having initial discussions with our bondholders of both notes.
A large majority of the holders have organized and have hired advisers as well. The initial discussions have been constructive. Even though the discussions have been limited, the current plan is to have resolution with both noteholders this summer. One of the important gating items in this discussion is presenting the go-forward Spirit plan to the advisers and possibly some collection of bondholders in order to reach a resolution. Therefore, all of the actions to date going forward need to be done in a specific order and will require some patience to get to the finish line. Now for the results of the quarter. During the quarter, we managed costs well and ran a good airline, coming in fourth out of 10 major airlines and completion factor for the quarter.
Our financial results were at the good end of our original guidance. Our initial guidance included over $30 million of credits from AOG aircraft that we thought would be recognized during the quarter as an offset to other operating expense. Upon further review of the relevant accounting guidelines, the credits will be treated as vendor compensation for GAAP purposes and recognized as a reduction to the cost basis of goods and services purchased from Pratt & Whitney and primarily amortized over the life of the respective assets. While from a liquidity perspective, the credits will be applied in 2024. Most of the benefit of the credits will be recognized through earnings over future years. In the quarter, we earned $30.6 million of AOG credits.
Of this, only $1.6 million was recorded as a credit within maintenance materials and repairs on the income statement. Unfortunately, the accounting for these credits makes it difficult for the income statement to reflect the full economic impact and we will have a negative effect on our margin by around 2 full points for the year. We will do our best to help explain the accounting, but we may need to add some further guidance metrics to help lay out the economic and cash impact of the compensation. As I have mentioned on prior calls, while the credits do help mitigate the damage of AOGs, we still estimate that our margins were penalized by an additional 2 to 3 points. The impact on our business associated with these Pratt engine issues cannot be understated.
Despite the estimated amount of AOG credit recognized in the P&L during the quarter being significantly less than what was earned, total operating expenses were in-line with our initial guidance due to operational efficiencies that resulted in better-than-expected labor expense and passenger disruption expense as well as lower-than-expected airport rents and landing fees due to network changes and airport signatory rebates. On a year-over-year basis, first quarter operating costs were about flat. Operating margin was negative 13.9%. Had we been able to recognize all of the AOG credits earned during the quarter, our operating margin would have been negative 11.6%. We ended the first quarter with $1.2 billion of liquidity, which includes unrestricted cash and cash equivalents, short-term investments and the $300 million of available capacity under our revolving credit facility.
During the quarter, we took delivery of seven new A320neo aircraft and retired five A319ceo, ending the quarter with 207 aircraft in our fleet. We also finalized the sale-leaseback transactions for the remaining five aircraft from the ‘25 sale leasebacks, we announced in December. We completed 20 of the transactions in December of ‘23, and the remaining five were completed in early January, resulting in net cash proceeds of $99 million, bringing the total for all ‘25 aircraft to $419 million. For the second quarter, we estimate our operating margin will range between negative 11.0% to negative 9%, or between negative 8.5% and negative 6.5% when adjusting for the difference between AOG credits estimated to be earned and the estimated AOG credit to be recognized through earnings.
We estimate the credits earned in the second quarter will be about $42 million, of which we estimate will recognize about $7 million. We estimate fuel cost per gallon will average $2.80 with total operating expenses ranging between $1.460 billion and $1.465 billion. And with that, I’ll turn it back over to Ted for closing remarks.
Ted Christie: Thanks, Scott. It’s been only 2 months since our merger agreement with JetBlue was terminated, but we have already made significant progress on the first phase of our stand-alone plan. As we approach the summer, we plan to share more details on the status of negotiations with the public bondholders of our loyalty notes and our 2026 convertible notes. Once that is complete, we will take the time to clarify the strategy for the next phase of Spirit. We have work to do to improve the company’s revenue production and margin opportunity, and we intend to discuss the details of our go-forward business strategy at an Analyst Day in early August. Between now and then, we will be deploying some elements of the revised approach to the market.
We do not intend to discuss the details on a piecemeal basis, as it is competitively sensitive. But I can say that we have been listening to our guests and general airline passengers and have been reviewing the competitive set of products in the industry. The core components of our model work well: density and utilization to drive cost efficiency and product assortment to give consumers choice. However, it is clear that we need to introduce some changes to reflect the new dynamics in the industry and to make Spirit a more compelling option for the traveling public. Some of these changes to our merchandising and pricing strategy are already being tested in some of our markets, and the results appear to be in excess of our expectations from a volume and yield perspective.
It is early but very encouraging. These are challenging times for the smaller U.S. domestic airlines, but I have confidence in the Spirit team and the work that we have done to date to reestablish ourselves as a disruptive force in the market. And now back to DeAnne for Q&A.
DeAnne Gabel: Thank you, gentlemen. With that, Pam, we are ready to begin the question-and-answer session from the analysts.
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