Spirit celebrated the opening of its new central campus in Dania Beach, marking a significant milestone in the company’s history.
The company expressed disappointment with the Federal Court’s decision to block its merger with JetBlue, emphasizing the dynamic changes in the airline industry and the impact on competition.
Post-merger termination, Spirit focused on a standalone plan to improve financial performance, unrestricted by previous operational limitations from the merger agreement.
Financial Performance
Reported an adjusted net loss of $160 million for Q1 2024.
Total revenue for Q1 was $1.3 billion, a decrease of 6.2% year-over-year, with specific challenges in nonpeak periods and the impact of competitive fare activity.
Adjustments to network strategy and merchandising are underway to improve revenue and profitability.
Operational Updates
The airline faced operational challenges due to adverse weather, ATC delays, and civil unrest in Haiti but achieved a 99.9% controllable completion factor.
Plans to limit growth in Florida due to Jacksonville Center ATC issues. Several routes and cities have been adjusted to align better with market demand.
Future Outlook
Q2 2024 TRASM expected to decline by 8% to 9.5% year-over-year, with total revenue projections between $1.32 billion to $1.34 billion.
Anticipates continued challenges with GTF engine availability, affecting fleet capacity and planning for 2024 and beyond.
Cost Management and Liquidity
Spirit has initiated several measures to improve liquidity and cost management, including agreements with Pratt & Whitney and Airbus, and plans for workforce adjustments.
The company ended Q1 with $1.2 billion in liquidity and continues to navigate financial restructuring discussions with bondholders.
Strategic Initiatives
Despite the termination of the JetBlue merger, Spirit is focused on executing its standalone plan, including adjustments to its business strategy to improve revenue production and margins.
Closing Remarks
Spirit Airlines remains committed to overcoming industry challenges and improving its competitive position through strategic changes and operational efficiency.
Question and Answer
Factors Driving Industry Performance
Question
What are the underlying factors contributing to the performance disparity in the airline industry, with some carriers experiencing profitability while others, like low-cost carriers, are struggling?
Answer
Corporate travel demand has not fully recovered post-COVID, leading to excess seat capacity in the leisure travel segment and increased competition on price points.
While the normalization of demand is expected to improve the balance, there are also potential shifts in consumer behavior and preferences that have been observed, prompting the need for product and service adjustments.
Company’s Preparedness and Team Capabilities
Question
Does the company feel culturally prepared and have the necessary team in place to act with urgency and address the challenges in achieving operating profitability?
Answer
The company’s management team has a track record of being action-oriented and adapting to industry changes.
The team is well-prepared to capitalize on the opportunities presented by the post-merger environment and is moving with urgency to implement necessary changes.
Liquidity Position and Creditor Resolution
Question
What is the minimum liquidity target for the company, and are there additional sources of liquidity available, such as sale-leasebacks or PDPs, to address liquidity concerns? Can you provide an update on the creditor resolution process?
Answer
The company has not publicly disclosed a specific liquidity target but is well above the minimum requirements for its loyalty bond and revolver.
The creditor resolution process is progressing constructively, and the company expects it to be finalized by the summer.
The company has the ability to generate more liquidity through various avenues, including financeable assets and potential WTC monetization.
Q2 RASM Guidance and Off-Peak Performance
Question
Are there any indications of booking weakness or potential impact from recent noise surrounding the company? Can you elaborate on the comment that off-peak performance is expected to improve and provide reasons for this expectation?
Answer
The company is not currently seeing any specific impact on booking patterns from external noise.
Off-peak performance is expected to improve as the company implements changes to its product and service offerings, addressing customer preferences and enhancing its value proposition.
Deferred Heavy Maintenance and Other Liabilities
Question
What were the company’s original expectations for deferred heavy maintenance expenditures this year before any credits, and how should we consider this line item on a net basis after factoring in the $150-200 million in credits? Can you provide more details on the other liabilities line item that showed a $120 million use of cash in the March quarter?
Answer
The company was originally forecasting deferred heavy maintenance expenditures in the range of $175-200 million, with most of it related to Pratt & Whitney maintenance.
The company expects to use the credits to offset some of these costs but will likely still spend more than the credits this year on Pratt & Whitney maintenance and other expenses.
The specifics of the other liabilities line item are not readily available, and the company will follow up with more information.
$100 Million Cost Reduction Goal and Capacity Adjustments
Question
Does the $100 million cost reduction target align with the company’s cost structure for the end of this year, or is it also contemplating the right cost structure for next year? How does the company’s capacity adjustments for next year factor into this cost reduction goal?
Answer
The $100 million cost reduction target is primarily aimed at rightsizing the company’s cost structure for the end of this year based on the current capacity levels.
The company will reevaluate its cost structure for next year based on the number of AOGs and other factors.
The company has made capacity adjustments for next year, including potential reductions, and will continue to evaluate the optimal capacity mix to drive profitability.
Revenue Pressures and Network Adjustments
Question
Can you elaborate on the 3 points of revenue pressure mentioned and clarify whether they are primarily from international markets? How are you approaching network adjustments to address these challenges, and do you believe industry capacity in key markets like Florida and short-haul Latin America will eventually normalize?
Answer
The 3 points of revenue pressure are attributed to both domestic and international markets, with the Latin America and Caribbean network contributing to the system-wide average decline.
The company has made significant adjustments to its international and U.S. territory network, including suspending and exiting certain cities, to address capacity and demand imbalances.
The company expects industry capacity to eventually normalize in markets like Florida and short-haul Latin America, and its strong cost structure positions it well to compete effectively in these regions.
Competition and Market Dynamics
Question
Are there any indications of increased competition or specific airlines behaving more aggressively towards Spirit in response to its challenges? How is the overall competitive landscape evolving, and what are the key drivers of competition in the industry?
Answer
The industry has always been highly competitive, and the current environment is no exception.
The power in the industry is concentrated among a few key players, and some airlines are focusing on premium offerings while others are moving downmarket.
The company is actively pivoting its strategy to address the evolving competitive dynamics, focusing on its cost structure, product suite, and network positioning.
Sale-Leasebacks and CASM Relief
Question
Given the potential for a challenging aircraft market, could the company consider utilizing sale-leasebacks as a form of CASM relief in the future? How does this potential strategy align with the company’s focus on cost reduction and the possibility of double EETCs?
Answer
The company currently views sale-leasebacks as a form of financing rather than operating activity and does not recognize gains from sale-leasebacks as CASM relief.
The company will continue to evaluate sale-leasebacks as a financing option, and its strong order book and focus on fleet modernization remain key priorities.
Unit Revenue Potential and Cash Generation
Question
How is the company thinking about unit revenue potential in the back half of the year, considering easier comps and lower industry capacity? What level of RASM improvement is needed to begin generating positive operating cash flow?
Answer
The company expects the changes it is implementing to be accretive to profitability in the back half of the year, with some immediate benefits and others taking longer to materialize.
The company aims to improve its brand perception and widen its customer base, leading to higher yields and a more relationship-driven approach with guests.
In addition to revenue improvements, the company is focusing on cost efficiencies, including the retirement of A319s, increased fleet utilization, and network pivots, to drive cash generation and improve its financial performance.
Pratt & Whitney Credits and Off-Peak Performance
Question
Can you provide more details on the $50 million spread for Pratt & Whitney credits in 2024 and clarify the factors determining the outcomes? How much of this amount is for 2023 and how much is for 2024? Additionally, is the need for off-peak performance improvement specific to the second quarter or the full year, and what level of improvement is required to meet the company’s plan?
Answer
The $50 million spread for Pratt & Whitney credits is based on the number of AOG days, and the company expects to see reduced turn times and other mitigation efforts in the future.
Approximately $30 million of the spread is attributed to prior period credits accumulated in 2023, with the remaining amount applicable to 2024.
The need for off-peak performance improvement is relevant to the full year, and the company is actively working to enhance its product and service offerings to attract more customers during these periods.
New Market Development and Liquidity
Question
How much of the company’s current revenue challenges in the June quarter are related to new market development, considering the significant number of new city pairs being added? What is the typical ramp-up time for new markets, and how is the company managing the risk associated with these additions? Additionally, can you provide more clarity on the potential impact of seasonality and the timing of Easter on liquidity in the June quarter?
Answer
The exposure to new market development in the June quarter is relatively low, as many of the new routes are day-of-week operations.
The company is being cautious and strategic in its approach to new market additions, recognizing the associated risks and focusing on derisking these initiatives.
The timing of Easter and other factors may impact liquidity in the June quarter, but the company expects to be cash neutral or potentially generate cash in the remaining part of the year.
Capacity Guidance and Industry Dynamics
Question
Can you provide more details on the composition of the high single-digit capacity growth expected in the third quarter, specifically regarding departures and the allocation between peak and non-peak periods? How do you expect industry capacity in key markets like Florida and short-haul Latin America to evolve over time?
Answer
The capacity growth in the third quarter will be driven by increased utilization of the non-AOG fleet and deliveries, with a higher percentage of departures compared to ASM growth.
The company expects industry capacity in markets like Florida and short-haul Latin America to eventually normalize, and its strong cost structure positions it well to compete effectively in these regions.
2025 CASM Outlook
Question
Considering the rightsizing efforts and cost structure adjustments, as well as the potential for normalized demand in 2025, do you believe the company can maintain a CASM below 0.8 in that year?
Answer
While there are various initiatives and factors influencing the company’s cost structure, it is targeting a CASM level around 0.8 in 2025.
Profitability and DOT Rules
Question
Does the current plan contemplate achieving profitability in any quarters this year, or at least reaching a breakeven operating margin? Can you share your perspective on the potential cost implications of the new DOT rules and what would be required to mitigate any cost headwinds?
Answer
The company expects to achieve positive operating results in the third and fourth quarters of this year and breakeven or slightly positive net results.
The company is still evaluating the cost implications of the new DOT rules and their potential impact on operations.
