Spirit Airlines, Inc. (NYSE:SAVE) Q1 2023 Earnings Call Transcript

Spirit Airlines, Inc. (NYSE:SAVE) Q1 2023 Earnings Call Transcript April 27, 2023

Spirit Airlines, Inc. beats earnings expectations. Reported EPS is $-0.82, expectations were $-0.85.

Operator: Thank you for standing by. My name is Bailey, and I will be your conference operator today. At this time, I would like to welcome everyone to the Spirit Airlines Q1 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. . I will now turn the conference over to . You may begin.

Unidentified Company Representative: Thank you, Bailey, and welcome, everyone to Spirit Airlines first quarter 2023 earnings conference call. This call is being recorded and simultaneously webcast. A replay of this call will be archived on our website for a minimum of 60 days. 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, there will be a question-and-answer session for analysts. Today’s discussion contains forward-looking statements that are based on the company’s current expectations and are not a guarantee of future performance.

There could be significant risk 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 related to the acquisition of Spirit, by JetBlue and other risk factors 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 2023 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 CEO.

Ted Christie:

Viv: Regarding our merger with JetBlue. As expected, in early March, the DOJ sued to block the transaction. The trial date has been set for October 16, 2023. The creation of a fifth challenger to the big four with both low cost and low fares seems to us to be 100% aligned with the government’s views on a competitive industry. So while we are disappointed with the DOJ’s decision, we are confident that we can successfully illustrate to the court the significant benefits to both consumers and employees of the JetBlue Spirit merger. Turning now to our first quarter 2023 performance. Our adjusted operating margin came in better than expected at negative 6.8%, helped by lower fuel on a strong total RASM performance. Operationally, numerous weather events during the first quarter made for a challenging operating environment and it was exacerbated by the continued understaffing at various air traffic control centers throughout the country.

Lately, we’ve seen Las Vegas, where we are now the number two carrier emerged as the newest hotspot as runway construction has driven unprecedented approach and departure configuration changes and ground delay programs, creating significant delays and cancellations. That said, our team has done an excellent job minimizing the impact to our network and solving for problems within our control. In our mid-March update, we shared that we pulled about 0.5 percentage point of capacity from the first quarter due to an increase in the number of unscheduled engine removals. Pratt is a long-term partner and is working closely with us to help solve these engine availability issues. Unfortunately, there is no quick fix, but we do expect to see some improvement as we move throughout the year.

Before I turn it over to Matt, I want to give some extra kudos to our entire Spirit team. In mid-April, the Fort Lauderdale area experienced severe flash flooding referred to by meteorologists as a 1,000 year event, requiring a 40-hour closure of the Fort Lauderdale airport, where we are the number one carrier. As a result of this weather event, Spirit canceled nearly 600 flights and diverted many others, disrupting travel plans for a substantial number of our guests and driving numerous complications for our crews. Despite the significant and outsized disruption to our network, our team was primed and ready to go on Friday morning once the airport reopened. The quick recovery is a testament to the diligent efforts of our entire team as well as the innovative changes we have put in place to help accelerate recovery operations.

I also want to thank the Broward County Aviation Department, and the FAA for their assistance in getting the airport up and running as quickly as possible. Matt, over to you.

Matthew Klein: Thanks, Ted. I also want to thank the Spirit team members for their contributions during the quarter. Load factors on the peak days were quite high, and our team did a terrific job caring for our guests. Turning now to our first quarter revenue performance. Compared to the first quarter last year, Total revenue was $1.35 billion, up 39.5% and total RASM was $10.22, up nearly 24% on a capacity increase of 13%. This was a great outcome and continues a trend of strong top-line revenue production. Load factor increased 3.6 percentage points versus the same period last year. As a reminder, in the first quarter of 2022, we were dealing with fallout from the Omicron variant, which had an adverse impact on flow and load factors.

So while load factor for the first quarter 2023 was up year-over-year, it was a bit lower than historic norms for the period. As noted previously, we have been flying more on off-peak days and we have had less variability in the number of flights operated by day of week since the summer last year. However, given the technology investments we have made together with network changes, and changing how we flow our aircraft as well as opening additional crew bases, we are comfortable that we can begin to have a more varied day a week schedule again, while maintaining good operational performance. Beginning in June, we will start to introduce a more varied day a week schedule again, which should fuel improve the load factors and benefit unit revenue as well.

On a per segment basis, total revenue per passenger increased to over $127, a 12% increase compared to the first quarter 2022. Passenger revenue per segment increased about 17% to over $57 and non-ticket per segment increased over 8% to a first quarter record of $70. Important to note for the second quarter of 2023 on a year-over-year basis, we will begin to compare our results to a period of unusually robust TRASM performance on a year-over-year basis. In other words, the comparison to last year is not a true reflection of the underlying demand strength we continue to see. It feels like we are returning to a more normalized seasonality period much like we saw prior to the COVID-19 pandemic. In terms of our network structure, we had reduced our Latin American and Caribbean footprint to under 20% of our capacity for an interim period of time, while we were dealing with a fluctuating fleet plan due to issues that Ted previously mentioned.

We are now ahead of that curve again from a planning perspective, and that has allowed us to resume our growth in this region. Starting next month, we are back to having at least 20% of our capacity in Latin America and the Caribbean on a monthly basis. Taking all this into account, we estimate total revenue for the second quarter 2023 will range between $1.46 billion and $1.48 billion, up about 6.5% to 8% on a capacity increase of 17.7% compared to the second quarter 2022. This equates to a total RASM estimate of down 8% to 9.3% year-over-year. As a reminder, second quarter last year benefited greatly from pent-up travel demand. So while total RASM is down year-over-year, the demand environment does remain very strong. If you were to compare this expectation to the second quarter of 2019, it equates to total RASM being up 11.5% to 13% on a capacity increase of nearly 30%, which is an excellent result.

And with that, I will now turn it over to Scott.

Scott Haralson: Thanks, Matt. I will start by covering our Q1 results and some Q2 guidance updates, and then I want to outline a few things happening in our business today. Our first quarter operating costs were $1.44 billion, with both fuel and non-fuel expenses coming in better than expected. Fuel price per gallon was still up significantly, up 16% year-over-year. The good news is that we have seen fuel prices decline over the past couple of months with correct spreads coming down over that period. The current curve implies that WTI will remain roughly flat, so a tote that crack spreads will continue its downward trend. Total non-operating expense came in higher than estimated due to the periodic valuation of the derivative liability associated with the 2026 convertible notes, driving about $2 million of additional non-cash expense in the quarter.

Liquidity at the end of the first quarter was $1.7 billion, which includes unrestricted cash and cash equivalents, short-term investments and the $300 million of undrawn capacity under our revolving credit facility. During the first quarter, we took delivery of five A320neo aircraft and retired four A319ceo aircraft, ending the period with 195 aircraft in the fleet. We are taking delivery of our first A321neo aircraft over the next week with seven more expected before year end. We are excited to be introducing this larger fuel efficient variant of the A320neo family of aircraft into our fleet. Our first A320neo aircraft and interservice scheduled service in June. We disclosed in our investor update last night that total capital expenditures would be about $360 million, with $75 million of that coming from net PDPs. We received updated delivery dates from Airbus recently, and that number is now reduced to $20 million.

We will modify the investor update today. So total capital expenditures will be approximately $305 million, of which $20 million of this is related to net predelivery deposits and about $150 million is related to our new headquarter facility in Dania Beach, with the remainder primarily related to engines and spare parts. We are on track to begin phasing in the occupancy of the new facilities in the first quarter of 2024. Looking ahead to the second quarter, there are a couple of items to highlight that are included in our second quarter 2023 guidance. We estimate the flood in Fort Lauderdale earlier this month cost us about $8.5 million of operating income or about 50 basis points on the margin, primarily from lost revenue. And in mid-April, we reached an amended collective bargaining agreement with our flight attendants represented by the AFA, which adds an estimated $9 million of cost to 2Q and $24 million for the full-year of 2023.

Taking these items into consideration, for the second quarter of 2023, we estimate our operating margin will range between 4.5% to 6.5%. And this, along with a few other guidance metrics are noted in the investor update furnished in our Form 8-K filing with the SEC, a copy of which can be found on our website at ir.spirit.com. I mentioned this specifically because we are now providing our guidance in a separate investor update rather than in the body of our earnings release. So with all that said, for clarity, I want to highlight five overall key takeaways. Number one, our utilization has been and will continue to be hampered by NEO engine availability and pilot attrition, both of which should gradually improve throughout the rest of the year.

We signed a new pilot contract at the end of last year that put our rates towards the top of the industry, but we have yet to see attrition rates improve to the levels we are expecting. We are disappointed, but we are assuming attrition levels will improve as the year progresses. Number two, growth during this period of inefficiency has not been as productive as it would be in a normal environment. It is a challenge to improve profitability and recover a lost utilization on simultaneously growing with more aircraft. We know that and it will remain true in the short run. However the growth opportunities are significant. And once our constraints are remedied, we expect to return to accretive and efficient growth. Number three, operations are solid and investments in the operation and changes in our infrastructure and network are paying off.

Our ability to handle disruptive activity is much improved as evidenced by our fast recovery after the sudden airport closure in early April. In the past, this would have been a much more impactful event. Number four, we estimate our full-year CASM ex-fuel will be about $0.07. CASM ex-fuel should decline throughout the year as NEO engine availability and pilot attrition improves and we estimate our CASM ex-fuel exit rate for the year will be in the high 6’s. And number five, we are still on track to be profitable in each of the remaining quarters this year and anticipate we will be profitable for the full-year. Given the external constraints on our business, our capacity is heading towards the lower end of our full-year 2023 guide of 18% to 20%.

Not being able to operate the airline we want to right now is obviously frustrating and this demand environment and with declining fuel prices, if we were operating at full utilization, the business should be producing double-digit operating margins for the second quarter. We are, however, running a great airline, and I’m proud of the way our team members are taking care of our guests and committed to handling all of the unique curve balls that are being thrown our way. So a big thank you to all of the hard-working Spirit team members. And with that, I’ll turn it back over to Ted.

Ted Christie: Thanks, Scott. The outlook for peak summer leisure demand remain strong, both domestically and internationally. Non-ticket revenue per passenger segment is robust. and we anticipate seeing a sequential improvement from the first quarter, and the setup is favorable to have a new record performance throughout the year. With our 235 seat A321neo deliveries beginning this month, and the A319 retirements well underway, we will be gradually increasing our average gauge, which will drive efficiencies that will benefit our unit cost and fuel burn. Pilot attrition is still too high, but our new deal coupled with the unique benefits to our team members associated with the combination with JetBlue and an improving pipeline in new certificated pilots will we expect, provide some relief in the coming years.

In conclusion, while we are facing several headwinds related to staffing and fleet and have continued to grow our business in what has proven to be a particularly challenging environment, our team is doing a great job managing the volatility and making tactical adjustments to our plan and although it may take as much as another year to get to normalize profitability, double-digit op margins are insight, which will provide a base from which we can continue to refine and improve. And with that, Bailey, back to you.

Unidentified Company Representative: Thank you, Ted. We are now ready to take questions from the analysts. We ask that you limit yourself to one question with one related follow-up. Bailey, we are ready to begin.

Q&A Session

Operator: . And we will take our first question from Duane Pfennigwerth. Duane your line is open.

Duane Pfennigwerth: Hey, thanks. Good morning. Just on the attrition, Ted, I wonder if you might put some numbers to it. I don’t know if you can talk about kind of a monthly attrition rate and what improvement you’ve seen and versus what improvement you were hoping for and what your line of sight is for stabilization there?

Ted Christie: Sure. Thanks, Duane. So when we signed our deal, we did anticipate that attrition would begin to mitigate, although we knew it would take some time. And we were pleasantly surprised with the results January, February and March. We saw sort of an anomaly in April, which put it back into the levels we saw last year. And that’s kind of made us be a little bit more conservative in our view, but we don’t know if that’s a one data point or not. So we’re certainly not, we’re still very optimistic that the results will come in the way we hope. And I think all you’re hearing from us is it’s still an issue. And over the course of this year, we expect it to continue to mitigate and go down. We haven’t disclosed the actual rates, but I can tell you, just like we said before, it’s definitely elevated.

We are successfully recruiting the number of pilots we need right now to make the airline run, but you can imagine there’s quite a bit of infrastructure and training involved in handling that that as this improves, will be a tailwind to costs.

Duane Pfennigwerth: Okay. And then maybe one for Matt. Just with respect to the trade-off between load factor and yield. I wonder if you could backtrack a little bit on the first quarter. Is this an outcome that you anticipated from a load factor perspective, maybe sitting in the beginning of March? Or did you see some resistance in the month of March to high fares. And then I guess the punchline is looking forward, I appreciate your comments about day a week getting more refined on the schedule out into June. But are we taking more of a kind of load factor active approach here into the second quarter given the experience of the first? Thanks for taking the questions.

Matthew Klein: Yes, sure, Duane. Thanks for the question. Let me just start off by saying just as a general statement, the demand remains strong out there. The off-peak period in Q1 performed as we had suggested on our last quarterly call, we talked about this. So this was not a surprise to us at all and what we saw in Q1. And I think it’s important to add the spring break was very strong. It’s continuing the trend of peak periods showing both load factor and yield strength. For the rest of Q2, we expect the next month here to be a relatively normal, what we would call shorter period, but then we’ll ramp up, which we expect will lead to a strong Memorial Day holiday and strong June in general. Just for some added detail on that, we are anticipating through normal seasonality, we could see around one week of shorter period demand in early June between the holiday ending and schools getting out for the summer across the system.

As we all know, schools getting out generally then kicks off the peak summer travel season. I would add though that by comparison in 2022, that early June shorter period that normally happens, it didn’t really happen last year. And summer really started a couple of weeks early last year from a realized results perspective, a little bit unusual last year, but everything was a little bit unusual probably last year. I’d say the takeaway with all that is that normal seasonality continues to return to the Americas, which is where we’re operating with one caveat. The off-peak periods we’re a little bit off normal trends and the peaks are performing so much stronger than normal trends. We expect that to continue the win through Q2 and Q3. And I give you all that detail because this is the level that we think about this.

When you talk about fare versus load factor trade-offs, we’re thinking about and targeting what we know to be shorter periods, you don’t really have a true off-peak per se in Q2. And as you know, Q3 doesn’t really hit anything like that until you get after Labor Day. So we are targeting periods that we think need more volume. We will target those with lower fares if we need to. The Tuesday and Wednesday situation for us even like post-Easter in May, we would normally have a little bit of Tuesday, Wednesday pull downs in those shorter periods. So a little bit of a headwind for us there. All of that will be tailwinds in the future, especially once we get past Labor Day, presuming that we’ll be able to hold up with these new operating trends that we like to see.

So long answer to your question, but the reality is we are still seeing some periods that need low fares. We’re doing that when we need to, but we expect the peaks to be very strong. We expect the yields there to be relatively healthy as well. Last year was very, very strong. So we’ll see if we can catch last year. But in general, the strength is still there. We expect to realize that.

Duane Pfennigwerth: Thanks. And then just maybe one minor follow-up there. I guess just on load specifically. Longer-term, to the extent there is a longer-term for Spirit, what is the target load factor that you’re driving towards or that you’re solving for? And again thanks to you both for taking the questions.

Matthew Klein: Yes, sure, Duane. I wouldn’t say there’s exactly a target load factor that we’re shooting for. Clearly, for us, volume because of our non-ticket and the model in general, with non-ticket revenue strength, higher loads does obviously help us to some extent. But what we’re not going to do is just sell low fares for the sake of selling low fares. We’re looking at total revenue production, and we always have that in our calculus. When we have off-peak periods, we will definitely drive more demand with low fares, but it can be very, very yield dilutive to try to get one more point of load factor in an already a peak period that can have pretty detrimental effect. So we’re thinking about all of that when we think about total revenue generation.

Duane Pfennigwerth: Thank you.

Matthew Klein: All right.

Operator: And your next question comes from Jamie Baker. Your line is open.

Jamie Baker: Hey, good morning everybody. Actually, just one for me today. So the takeaway feels like many of your current challenges are considered transitory. And I’m sure some of them are. I mean, globally, discount airlines still appear to have the upper hand. But the longer it takes for Spirit’s challenges to get sorted out, during that period, the more SkyMiles members get signed up, the more big three credit cards get issued, the stronger the big three international margins become. I’m confident, Spirit can do better and perhaps the merger solves for this, but simply doing better doesn’t mean that you restore the pre-COVID margin superiority that you used to enjoy. So I guess I can see a path towards improvement, but not a restoration of consistently superior margins to those of the industry. What am I missing?

Ted Christie: Thanks, Jamie. Plenty of loaded questions in there. Look, and thanks for your expression and confidence. We agree with you that while it is a challenging environment right now, we do have line of sight to addressing the issues that get us back to the margin production we expect. And it’s hard to say what the future will be from a normalized perspective when you compare a more legacy product against a low-cost product. You really don’t know right now what will happen with the macro economy? What will happen with capacity? What history has told us is that in times, a very strong premium demand out large legacy carriers do relatively outperform, and then in down cycles, low-cost carriers tend to outperform. But the good news is that low-cost carriers when they’re operating at peak efficiency are the most resilient models in the business.

And that’s really what we’re pushing towards. I mentioned that double-digit op margins are well within sight at this point. That’s still not where we would target ourselves, we’re usually looking at a number that’s more towards the mid-teens level on the upside. And so it’s incumbent upon the management team to start to refine the way we get there once we kind of cross the hurdle of getting into the double-digit territory. And I think we have ways to do that. I’ve mentioned a couple of them on this call and prior that as our airline matures through this phase, we’re going to start picking up real margin points in our fuel burn effectivity. We’re moving more and more towards NEO aircraft faster than any of the big four, which relatively will pick up absolute margin points, probably based on our calculation somewhere between one and two relative to where everyone else is today.

You couple that with the unit efficiency of the larger gauge airplane in this demand environment, where it is basically untapped demand. We should see relative efficiency in the way that our more fixed costs are spread the cost of the airplane, the cost of the crew on board the airplane, the way that our fixed costs at airports are charged. And all of those things create margin efficiency, which we expect we will claw back incremental points that way as well. And so we will be and are tackling those to get us back to the kind of target way we think about things. Will that be the best margin in the business? Don’t know. I think that, as I said earlier, I think it’s a pretty good season right now to be a legacy carrier, but that’s not always true.

And so we’ll just have to do what we do best, which we will do and see how the rest of the industry shakes out.

Jamie Baker: Okay. Thanks for that. I’ll yield the floor. Appreciate it.

Operator: And our next question comes from Savanthi Syth. Your line is open.

Unidentified Analyst: This is Matt on for Savi. First question, maybe if you could just talk about how you’re expecting utilization to trend throughout the year, particularly what rates are embedded into that 4Q exit rate in the high 6’s?

TedChristie: I can start. This is Ted. And Scott, feel free to jump in. So we’ve been saying all along, we’re on a steady march here to a more normalized fleet utilization, which would be total aircraft divided by block hours. And or excuse me, total block hours about a total aircraft. And right now, that fleet number is artificially penalized with the number of aircraft on ground we have in the NEO fleet, because of the engine issues, which we expect to start to move in the right direction, but won’t be fully remedied by the end of the year based on our current expectations from Pratt. So full utilization in the fourth quarter for Spirit, used to be lower than average utilization for the year. It’s a lower utilization quarter.

But it’s somewhere in — on a fleet basis in the high 11’s. So 11.6, 11.7, 11.8 hours per day, 11.8 hours per day. We’re still sort of moving in that direction and expect to get pretty close to that number by the end of this year. But that’s artificially limited by the number of aircraft we have on the ground right now. And we’re expecting in there to continue to see crew attrition mitigate that will help us catch back up. So next year, we’ll still have some recovery in it, but we’re definitely moving in the right direction. Scott, do you want to add anything?

Scott Haralson: Yes, that’s exactly right. Q4 is typically lower, just seasonality is the point there. But like that said, we won’t be back to full capacity in Q4. Even if we do reach historical Q4 levels, which are generally lower, we won’t be at — what we would call full capacity. So we would expect that to happen as we enter 2024, but Q4 will be close to historical utilization levels.

Unidentified Analyst: Okay. That’s very helpful. Thank you, both. And maybe if you could just on the operational front, maybe provide an update what you’re seeing in Florida in terms of ATC there. And then also, any additional color on Vegas, how long you expect that to persist? Thanks again.

Ted Christie: Sure. Thanks. So the good news is we are seeing some progress in Florida. And that’s excellent news for Spirit, given the exposure we have here and how important Florida is to us. In fact, based on the FAA’s own data, delay minutes in the first two months of this year versus the first two months of last year, actually down in both the Jacksonville Center and the Miami Center, the two most important routing centers in Florida, which is a positive trend. I suspect some of that is related to gently improving staffing, although not fully staffed in those centers, but also the airlines have reacted by having less capacity. So it’s beginning to have the effect. So that’s the good news. The bad news, however is that in the Northeast, we’re going to have a very challenging setup.

This summer, and we’ve seen the FAA voluntarily or asked the airlines to volunteer to not operate slot positions in the slot-controlled airports, and I know some of the larger airlines who operate there are partaking in that, we will have a very small presence of doing the same because we’re relatively small in that area. But that’s going to be a challenge. And I believe I heard JetBlue mention that staffing there is nearly half of what they expected to be or what it was even in 2015. So that’s not a good set up. And then in Las Vegas, when we look at the same data compared to the first two months of 2022 versus 2023, delay minutes are up 1,600%. That’s not 160%. That’s not 16%. That’s 1600% which is driving real problems for the larger airlines in and out of Vegas.

And while Vegas, we are the #2 airline in Vegas, it represents about 25% of our domestic capacity. So there’s runway construction there, which will move through the summer. And once that’s done, we hope that, that’s a step in the right direction, but we’re going to see challenges in and out of Vegas probably through the remainder of the summer. And that kind of leads me to a thought, which is over the last decade or so that I’ve been at Spirit, and I imagine even prior to that, and I know most airlines have been doing this, we have been actively lobbying the government for significant investment in the air traffic control system. To take the United States back into a premier position and increase efficiency across the network, which is good for the environment because it will reduce fuel burn, it will improve the utilization of slot-controlled airports today.

There is room at airports in the slot controlled areas. It’s just that they’re restricted because there’s not enough airspace, but an improved air traffic control system will improve that. And what that does is free up capacity for low-cost carriers, which will stimulate competition. All those things are very much aligned with what they say they’re doing, but they’re not doing that yet. And so we as a carrier, we’re advocating for that. And we said, well, if we can’t get better competitive hold on the industry that way, then help us in real estate constrained airports. These large legacy hub airports where the incumbent carrier is very inefficient in the use of their real estate, and we’re the opposite of that. And we’re saying to the Department of Justice and the Department of Transportation, hey, help us figure out a way to free up some of that real estate so we can enhance competition that way and we’ve routinely been told, no.

We can’t do anything there. So then we go to our third option, which is, well, I guess we need to get bigger because scale is the best way for us to compete with these dominant airlines that control 80% of the capacity in the United States. So we’ve been getting bigger over that decade, obviously, dramatically so, but it’s not having fast enough. They continue to use their — the power of their networks to stifle our growth and our effectivity and it’s something that we try to tackle every day. So instead, we did the next best thing, which was we decided we’re going to merge with another airline and they’re saying they’re going to object to that, too. It’s quite frustrating for us around here where we say, we’re trying to stimulate competition, and we’ve come up with real ideas and it’s not happening yet.

So as I said in my prepared comments, I think we have a really good path towards a stronger fifth competitor, which will still be half the size of the fourth competitor, but one that can actually start to create competitive balance in the industry. And I think we’ll lay out a very successful case. But in the meantime, we will be looking for the government to find ways to improve the air traffic control system and to provide more access for low-cost carriers in constrained airports.

Unidentified Analyst: Very valid points. Thank you, Ted.

Operator: And our next question comes from Stephen Trent. Your line is open.

Stephen Trent: Yes, good morning everybody and thanks very much for taking my questions. Just one or two for you, actually. So the first, you mentioned that 20-some-odd percent of your capacity should be back to Latin America and the Caribbean, I believe. And any high-level view on how the weighting of that deployment may have changed versus where you guys were in 2019?

Matthew Klein: Yes, Stephen, it’s Matt. Yes, so a lot of our growth from, say, ’18, ’19 into today, we had our very successful Fort Lauderdale franchise heading to South America, Latin America and the Caribbean out of Fort Lauderdale. Late ’18 into ’19, we started to grow Orlando South as well. So a lot of the growth initially started in Orlando and then throughout the last few years, we’ve really seen a relatively large increase for ourselves. And what you call — some of it’s sort of tourist leisure like Cancun and other growth has been in what we would call VFR traffic, which to some extent, you can call Puerto Rico, both tourist and VFR. So we’ve really grown a lot in Puerto Rico as well, and we’re continuing that growth with some new routes actually starting next month and into the summer as well.

So we’re excited about all that. The advanced bookings look strong there for us as well. And it really continues along where we do well, and our model works great. Low-cost lead the low fares and it’s great, especially for VFR traffic, so we can create travel opportunities for people that may otherwise not have them.

Stephen Trent: I appreciate that, Matt. And really also appreciate your guys’ comments on the regulatory situation. I’m just curious, in that regard, I know you reached an agreement with the pilots you’re still seeing some attrition. Do you think that it’s going to be necessary for regulatory-related steps to help use the situation. I know there was kind of a proposal out there to raise the retirement age of pilots and this kind of thing. And anything else you think that the regulatory side could help in terms of pilot supply? Thank you.

Ted Christie: Sure, Stephen. This is Ted. Yes. So on that front, obviously, the airlines have been advocating for some changes there. And I think you mentioned one of them, which is move in the retirement age, which would really act as a short-term buffer as retirements in the industry are going to be peaky here for the next two or three years. But the other has to do with the way the training and experience is gained for pilots. And there’s some discussion about the minimum of 1,500 hours, how you achieve those 1,500 hours, are certain hours’ worth more than other hours. So if you spend time in a dual engine airplane, for example, you spend time in a simulator or you’re doing things. Are those hours potentially worth more than if you’re flying a single engine airplane.

Those types of debates are out there and going on. And I think that we’re certainly supportive of that kind of thing because we see that there is tremendous demand for people who want to be professional pilots. I think that, that is absolutely happening. The career is a very attractive career and there are now considerably more avenues for private individuals, not members of the military because we are seeing considerably less pilots come out of the military than we used to have for private individuals to gain their certification and become a certificated commercial pilot, but it still takes a while and it’s expensive. And so there are ways for the government to ease that, either in the speed at which they gain their certification or allowing the application of 529 Programs for pilots who want to use that to gain their experience.

There’s a number of things that we believe and are being advanced at the government level will help the industry because, again, at the end of the day, what we’re really talking about is competitive fares for travelers. We, as an industry are limited today on how much capacity we’re deploying. You’re seeing it in small communities where regional providers are actively cutting capacity because there are no pilots to serve. And so getting more pilots will be good for the consumer, be good for fare levels. And it would be great for us because we can continue to expand and probably expand into those markets that are now vacated, which is a tremendous opportunity going forward.

Stephen Trent: That’s super helpful. Really appreciate that, Ted.

Operator: And our next question comes from Conor Cunningham. Your line is open.

Conor Cunningham: Everyone thank you for the time, just around your growth as we think about next year, a lot of these constraints feel a bit stickier. I know that some of them are a bit of a onetime item. But just maybe it would be helpful if you could provide some context on how fast you plan to be growing as you exit 2022. I mean, again, like when I think about your original capacity plan in August of last year, basically half the size of what you wanted to grow so you lost a fair bit. So just trying to understand your growth algorithm as we think about 2024 and beyond. Thank you.

Ted Christie: Sure, Conor. I’ll start. Scott, you can correct me where I’m wrong. So I disagree with you that the constraints are sticky. I think the horizon by which you consider them maybe the debate but over time, our fleet will get remedied. We will have a full utilization of the fleet, probably over the next year. And when we do, that fleet will be the most fuel-efficient and the youngest fleet in — amongst the youngest fleet in the world, which will provide us with a significant benefit on the maintenance side and the reliability side. So I do think that, that’s obviously an active constraint right now. It’s one that’s very frustrating for us, but I think that, that does get remedy because that’s purely engineering and throughput in that side of the business and those guys are experts in solving that problem.

The secondary constraint is labor. And clearly, we’ve all learned that the pandemic was a generational disruption in that regard. And I don’t think any of us did a good job at forecasting the impact of that. And we’re all reaping the benefits of choices that had to be made during to preserve the vast majority of jobs to keep the industry healthy to have capacity available for people who wanted to travel when there was limited or no demand. All of those things are now bearing fruit, and it’s working its way through the system. Supply and demand will eventually intersect. There is a considerable number of people who want to be professional pilots. We see it in the number of people who are filing for their licenses. They need to work their way through the system, which will take some time.

We have a lot of pilots retiring, they’re reaching the maximum age, which is a downward pressure on that. But again, that will rectify. And once it does, those two constraints are lifted. Don’t know exactly when they happen, but I don’t think they’re sticky.

Scott Haralson: Yes. Maybe a third component of that, Conor, is supply chain and really in regards to aircraft. Obviously, we’ve talked about delays in deliveries and they’ve been relatively small. I mean we’re talking over the ’22 to ’24 period, about 10 aircraft get moved out of that period. So it does help smooth deliveries a bit. I mean we’ll take 24 deliveries this year and plan for 37 deliveries next year, of which 23, 24 of those will be A321. So we’ll still see significant capacity growth next year in terms of fleet size and a return to utilization. So the numbers we haven’t given yet, but it will be considerable as we think about next year. But supply chain will help smooth deliveries and that will kind of give us a little bit of a reduction as we think about next year, smoothing into ’25 and ’26.

But all those three things together, a return to full utilization or whatever we call full utilization at that time and the return or at least a predictable supply chain of aircraft will be a component as well as we talked about the 319 retirements, those will also be in our calculus as we think about capacity growth. But all of that sort of yields a capacity growth of some significant number next year.

Conor Cunningham: Okay, that’s helpful. And then I’m still — this is to Matt. I’m still a little surprised on the implied unit revenue guide for the second quarter. I mean I totally get the comp this year. That makes a lot of sense. But relative to some of your peers, you’re underperforming a bit. So I was just curious if you could unpack that a little bit more, Duane talked about the load factor or seal. But is there anything else within the network that we should be aware of that is kind of impacting the second quarter specifically? Thank you.

Matthew Klein: Yes. I think — no, I think I touched on it earlier. Really, it’s — these shorter periods are a little bit weaker than we’ve seen in the past. The peaks have been very strong. So we’re comfortable with all that. We recognize that our guide is a little bit below what others are talking about. Some of that is still the way that we have the network set up by day of week. So there is still a little bit of a drag in there for that. Last quarter, for example, in the first quarter, some of the drags we had out there, we had predicted to be about 1.5 points of TRASM drag and it actually came out to be just about right on top of that number, we calculate. And that has to do with some of the things Ted mentioned too, with the Jacksonville center constraints that we’ve seen in there, day of week flying is still not exactly where we would like it to be.

These will all become tailwinds for us as we think they will be by the time we get to the end of this year into next year. So we’re still dealing with that a little bit, overall demand just remains strong. And really, last year, part of what we’re looking at here is we’re comping our own incredible strength last year as well. So we took a very large step-up in unit revenue production as well as capacity growth last year. So we are comping a period that is incredibly strong. I’m not 100% updated for other airlines that reported this morning, but our top line growth versus second quarter of ’19 is going to be up 45% versus second quarter ’19. So we are growing the revenues there. It looks — and there’s one metric, it looks like we’re behind the industry year-over-year.

But if you go back to pre-COVID to today, we’re performing very well.

Ted Christie: I think that last point — this is Ted. That last point that Matt made is one of the most important ones. It’s difficult to precisely calculate. But coming out of the Omicron variant which really depressed Q1 last year. Q2 screened and where did it screen Florida because nobody was going international yet? And where are we biggest, Florida, and I think we reaped the benefits of that, which we’re thrilled about, by the way. So New York, the Northeast, those things didn’t do very well last year in the second quarter, and they’re probably going to do better. So I think that what you’re seeing is the abnormalities of the exit of COVID starting to work its way into normal seasonality, which is why you got to smooth it a little more than just year-over-year.

Conor Cunningham: Okay, appreciate it. Thank you.

Operator: And your next question comes from Helane Becker. Your line is open.

Helane Becker: Thanks very much, operator. Hey everybody. Thanks for the time, team. Can you say how much of this is for Matt, how much of second quarter is already booked?

Matthew Klein: Helane, we don’t comment on that. We never have historically, and we’re not going to start today as well. Sorry about that.

Helane Becker: No, that’s quite all right. So my second question then is if you can talk about the number of aircraft that were grounded during the quarter because of engine issues. And if you get the sense that Pat says, we’ll just give you an engine this week and kind of to keep you quiet. And then when you complain loudly, again, they give you another one as opposed to really having a plan for delivering as they’re supposed to do.

Scott Haralson: Yes, Helane. Good question. So it’s been volatile through the quarter and to date in the second quarter. It’s bounced around from sort of three aircraft to six aircraft and we work with Pratt on forecasting the slide forward to see what engines we expect. Obviously, we have our own VOD issues occasionally that may drive something and turn times of engines that are in the shop, those are exiting. So all those variables create volatility in the number. But we’re probably going to be looking at five, six aircraft as we think about heading into the summer, we’ll see what happens after the second quarter. But it’s going to be something that’s not a quick fix, as we mentioned in the prepared comments. It’s going to continue through the summer into the Fall and the end of the year.

So we’ll probably be dealing with this for the next sort of seven, eight, nine, 10 months. And we’ll have to see where both throughput of shop visits and production from Pratt ends up, and we’ll have to see where we end up.

Helane Becker: Okay. Thank you very much. And since I got shut down to my first question, can I ask about the new corporate headquarters and how we should think about the spending for that, where that shows up? Is that included in the numbers you’ve already given us? And what percent is it is complete?

Scott Haralson: Yes. So Helane, from a CapEx perspective, we’ll spend about $150 million or so and we’re probably — sorry, this year in CapEx to clarify. And we’re probably 60% spent and developed on the property. We’ll spend in total, including what we’ve already spent, which is we bought land in 2019 of $40-something million and we’ll spend some this year as well. So we’re probably in the sort of $200 million-ish probably a little more than that actually, and we’ll spend some that will spill over into 2024. But the total cost is probably in the $275, $280 million range, and we spent 60%, 70% of that to date. And we’re probably on a completion of the facility in a similar number.

Helane Becker: Okay, that’s very helpful. Thank you.

Operator: Our next question comes from Mike Linenberg. Your line is open.

Michael Linenberg: Good morning everyone. Hey, Matt, I have a question just on distribution through Google Flights, the price guarantee program. I did see that you’re one of the few airlines that seems to be testing it out, I guess. Any early reads and I guess maybe just a bigger question here is that we are seeing a lot of different alternative forms of being able to sell tickets. And it’s — given your low cost, it does seem like these platforms that are out there maybe lower cost than anything except, I guess, other than direct. What are your thoughts on it and just maybe the evolution here, any color would be great?

Matthew Klein: Yes, sure, Mike. So just to be clear, the product you’re referring to on Google with their guarantee, that’s something that Google is doing on their own through their own algorithms and their own analytics. So we are not specifically participating in that guarantee. That is something that Google is doing on their own. But it leads into your second part of your question there, which is about having this NDC, new distribution capability, distribution of our product and our content, and partners like Google are very good partners in that, and then they’re ingesting our content, and they’re not the only ones. There’s a lot of progress that we’ve made on this topic. This has been something that’s been going on for seven, eight years of a journey and a lot of other airlines are starting to talk about this in terms of progress that they’ve made recently.

We made all this progress really before COVID and through COVID. So we’re very comfortable with understanding how this new distribution capability works. And it’s great for us because it gets more of our product out in front of our customers further in advance of travel. So whether the customer wants to say, for example, add that big front seat to their itinerary upfront, it’s not necessarily that they add it right away, but the fact that they’re introduced to it or that they see it more often leads to better take rates later on, better take rates will then lead to better blended rates as we call it, or the price of the service charge down the line. So more engagement leads to more volume, which should lead to better yields, which leads to overall better revenue production.

That’s the idea and we think it’s great that other airlines are starting to catch up on that because the more ubiquitous this becomes for the industry, just the better distribution is overall for customers.

Michael Linenberg: That it’s sort of along those lines, if I were to go back, I don’t know, 15, 20 years it would seem that the majority of what was purchased at the first point, 90%, 100%, maybe you bought a soda on an airplane and a bag of chips. For you guys today, like what percent of your revenue is actually purchased maybe in that second or third or fourth transaction. Is — that’s got to be moving away from that initial not just ancillary, but I’m thinking things like car rental, hotel, et cetera, that’s got to be shifting to the right, right?

Matthew Klein: Well, yes Mike, it is. We don’t talk about the metrics publicly that you just brought up, you bring up a great point and you’re following on to it perfectly. That’s exactly how we think about distribution and the more engagement — look, this is why we’re not the only ones. This is why apps are important. The more engagement you have with your airline specific app, just the more that you’re introducing product and to the customer. And that’s why we’ve spent a decent amount of investment in getting our technology up to speed and really improving from where we were, say, five, six years ago, to today from a technology perspective for guest-facing technology is night and day from where it was. And we do think it’s important and we do expect there to be a lot more improvement on that front as we move forward. We have — we still — as great as our progress has been, we still have a lot of opportunity to still capture there.

Michael Linenberg: Okay, thanks. Thanks for answering my questions.

Operator: And the final question will come from Dan McKenzie. Your line is open.

Daniel McKenzie: Hey, thanks for squeezing me in. My last two questions — my two questions really sort of put a fine point on some of the ones that were asked before. And just going back to the release and the outlook for improving margins throughout the year. Is it really just utilization and cost driven? Or is there some network normalization that can contribute to RASM and margin improvement as well. And I guess in the past, you shared that the network this summer was going to be suboptimal just given the air traffic control understaffing in Florida. You guys have addressed that. You talked about Latin America, but I guess just higher level. I’m wondering if the — where the overall network stands — what kind of revenue penalty, if any, is embedded in the second quarter outlook? And if the network evolves to get planes where you want them, if that’s going to help you drive better unit revenue later this year?

Ted Christie: Sure, Dan. This is Ted. I can kick off. Matt, you feel free to offer anything. But I think you’re right, we’re definitely seeing improvement in at least as it relates to Florida. And we’re getting closer on a percentage basis to pre-pandemic network percentages in and out of Florida. However, given the demand strength and forward, we probably want to do more. And so we still are artificially limiting ourselves in and out of floor. It’s probably another point on the margin right now, by the way. And so it won’t get better immediately because we’re going to watch how things operate throughout the course of the summer in the peak. And then we head into the Fall. And if we have good signs, that will allow the network team to start to relax a little bit more in and out of Florida.

So there’s definitely still room to go there. You heard Matt mention about Latin America. We are excited about opportunities that continue to evolve there and that will be a tailwind to us as well. So to the first part of your question, margins improving throughout the course of the year, which is our current view. It is a mix of utilization, improving the overall marginal throughput of the business because you’re getting just a better spread on unit cost and unit revenue. And that’s some of it. But the rest of it is continued optimization of all the things that kind of hammered us during COVID, which was throttling the network in certain geographies and inserting a lot of buffer in the system to make sure that we had the ability to recover while we were deploying new technology and new processes in our scheduled planning process.

So a lot of block pad and a lot of turn pad and a lot of buffer in and out of tougher geographies that, again, as we learn more and deploy the right systems and processes, which appear to be working, we can start to relax some of that and you gain more efficiency that way. So it’s sort of all in there. We think utilization is amongst the biggest lever, but those other things are meaningful, too.

Matthew Klein: And Dan, one thing I would add to that, too, is in order to try to run even more efficiently, especially maneuvering through some of the air traffic control issues this summer where we took an approach to extend our stage. Our stage had kind of shrunk in a little bit for about six months or so, and we’re pushing that stage back out so we can produce the capacity, produce the available seat miles unless departures should help us overall from navigating through air traffic control a little bit better. So that’s an example of something that we don’t talk about that much, but that’s an example of trying to find more creative solutions to some of the constraints that are hampering us and hampering the industry for that matter.

Daniel McKenzie: Yes. Very helpful. And staying on that point here of double-digit margins in the path back there, you guys have done a great job today detailing the transitory issues in a resolution. But yes, just going back to an earlier question, is it possible to put some loose brackets around how transitory they are three to six months transitory, one to two years, and are the pieces there to get you to your double-digit margins next year?

Ted Christie: So we don’t know for sure. And that’s part of the frustration because they are somewhat outside of our control, most notably on the fleet side. But we are encouraged by what our partners are doing to remedy the issue. Although as Scott mentioned earlier, we expect the fleet to continue to have penalty throughout the course of the summer at the levels we’re seeing right now, and it really won’t start to improve until probably the third or fourth quarter. But the reason for that delay is that we are seeing significantly more engines input into the shop. And those should start to spit out in the Fall and winter of this year, which assuming all of that executes well, then we can start to gain in some confidence and probably do a better job at bracketing it for you.

But based on the current plan, we should expect improvement through this year and into 2024 on that side. On the pilot side of things or the broader staffing side of things, we’re just going to have to digest a little bit more Intel before we can call it, for sure. We’ve only had our new deal in place here for about 3.5 months. And we do have a looming transaction with JetBlue, which we think will be highly accretive to all constituents, our team members, the consumer group and our shareholders. And when that actually that uncertainty is removed, I think that’s going to be a natural stimulus for any staffing challenges we face. And so there’s probably some of that in there as well. So I wish I could put exact terms to it, but it does feel like it’s over the next year or so as we call our way back.

Daniel McKenzie: Perfect, thanks so much for the time guys.

Operator: And there are no further questions at this time. I will hand the call back over to Ms. .

Unidentified Company Representative: Thanks, Bailey. And thank you everyone for joining the call today. Please contact Investor Relations at investor.relations@spirits.com if you have any further questions. And we look forward to talking to you next quarter.

Operator: This concludes today’s conference call. You may now disconnect.