Savi Syth: Understood. And then maybe for Matt, just on the revenue side, you mentioned three points of the pressure. I think this RASM pressure this quarter is from international. Is that kind of alluding to the fact that kind of domestic is having just as much pressure? And I was just kind of curious, as you think to redo the schedule, and I realized it’s mostly in the off-peak, but does your overlap change? Is there any kind of patterns in how you are changing those schedules?
Matt Klein: Yes, sure. Thanks Savi. So, those additional points are out there because we would still be seeing some revenue weakness in the domestic network as well. So, the Latin American Caribbean network is sort of on top of that bringing down the system average a bit more. And this is, we have had geographic issues with this part of our network in the past, and it’s always come back around, and we expect it will again. In the interim, we have made some important moves in our international and U.S. territory network. We have suspended a significant number of cities for now. We have exited one city permanently in that network as well. So, we are just like everybody else, I guess kind of just digesting the capacity that’s put in place there.
They are during the early days of kind of coming out of COVID, so to speak, or even during COVID, a lot of traffic went to that region of the world of our network. And a lot of that demand is still shifted to other parts of the world. So, over time that will come back to Latin America and the Caribbean. And we were thinking there would be a little bit more of that happening right now than what we are seeing. Of course, there is capacity increases going on as well. So, it’s just a little bit of too much supply in that part of our network. Also, I would say that a lot of the moves that we are making are intended to find some opportunities where we can go – where we think there are underserved opportunities, and that’s a lot of the network additions that we put in place.
I think it’s important to also remember, and this is true for any airline, not just for us, is that anyone can add capacity in any route. This is a very dynamic industry and anyone can move capacity wherever they want, whenever they want. So, moving the network around is incredibly important. Of course, it is. But what’s also important is making sure that we have a product that we can present to our customers, to our guests that makes us top of mind for them again, like we used to be. And we are going to do that. And that’s also as important or possibly more important than thinking about just the network itself.
Savi Syth: That’s helpful. I will stay tuned. Thank you.
Scott Haralson: Thank you.
Operator: The next question comes from the line of Jamie Baker with JPMorgan. Please go ahead.
Jamie Baker: Hello. Hi. Good morning everybody. So, first question on competition, obviously, one would assume that markets with multiple competitors tend to be potentially less lucrative than markets with maybe just one competitor. My question really relates to the behavior of competition in those more competitive markets. What I am being asked is, whether any airlines, you don’t need to name names, but whether they are behaving more aggressively towards Spirit, given some of the challenges you have been discussing this morning, is there any truth to that, or is it just sort of plain vanilla competition as usual, too many seats to few people, that sort of thing?
Ted Christie: Thanks Jamie. It’s Ted. I will kick off, if Matt wants to add anything he can. Well, first of all, the industry has always been very competitive. So, I think that, that’s been the case. And the power is concentrated today. So, it does – if you strip away what appears to be a very lucrative Transatlantic market and the credit card-based revenue of the loyalty programs of the bigger airlines, if you take those things out, they Are losing money. And I think that speaks to how they are competing domestically. And so what we have to do is make sure we have the right product suite and to Matt’s point, we are positioning the airplanes in the right place. Now, there are definitely airlines that are focusing on different things.
I think you could see there is at least one or two airlines that are reaching for as much premium as they can get their hands on and thinking about their brand in a certain way. And there are a couple of others who are really just going down market. And we are going to compete around that as we always do. But I think there is a little bit of a dislocation in the way the market is showing the bigger airlines are competing, and we are just going to have to pivot, which is actively what we are doing right now, keeping our focus on the cost structure, but also getting ready to introduce some products that we think could really be competitive that can actually aid our unit revenue. So, what would you add to that?
Matt Klein: Yes. I would say from a tactical perspective, I think I would just call the competition that we are seeing quite normal. Airlines move around all the time in terms of how they compete and what’s important to them at that time. So, some airlines get a little more aggressive, some get a little less, and then it changes around. So, I understand your question, Jamie. I don’t know that there is anything specifically different that I would call sort of pattern emerging of any sort.
Jamie Baker: Okay. That’s helpful. And then second question, when we think about the order book and assuming that the aircraft market remains as it is for the foreseeable future, should we be thinking about sale leasebacks down the road being a form of CASM relief. I don’t recall this being a part of your DNA, but you are obviously talking today about making some brand changes, product changes, that sort of thing. So, I am just wondering if Spirit might kind of pivot towards that model, I am basically trying to square this with what you also said about potential double ETCs. So, any color there would help.
Ted Christie: Well, let me jump off and Scott, you can. I think what you may be referring to is sale leasebacks as form of CASM relief, meaning potentially using the financing to offset expense by recording gains, we wouldn’t do that. That’s not something that – we don’t view that as an operating activity. You could do it, by the way, and it could be an effective form of financing. But I don’t know that it’s an operating activity. So, we do sale leasebacks today, obviously. We just don’t – we strip it out when we talk about it. So, it may continue to be a form of financing going forward. We do have owned airplanes today. Scott alluded to the potential for incremental liquidity coming from EETC market because we have some outstanding EETCs today.
But I think we look at the value of the order book as an asset. And that’s why when we did our deferral program, we held on to the deliver slots because we think when the time is right down the road we want to modernize the fleet. When Pratt gets their RAC together, this will be a very powerful cost benefit versus a number of our peers domestically. The fuel burn advantage will translate into real margin points. And so it will get there, and we want to be a part of that. So, anything you want to add?
Scott Haralson: No, I think you hit it, head on.
Jamie Baker: Yes. Okay. Thank you both. Appreciate it.
Operator: Your next question comes from the line of Andrew Didora with Bank of America. Please go ahead.
Andrew Didora: Hey. Good morning everyone. Maybe first question for Matt or maybe Ted, I know it’s early, but Scott spoke to possibility of generating cash flow as we move through the year. So, how are you thinking about the unit revenue potential in the back half given both the easier comps and lower capacity across the industry, or maybe to ask another way, what kind of RASM do you need in the back half of the year to really begin generating positive operating cash flow?
Matt Klein: Andrew thanks. So, I am not going to speak specifically to what unit revenue we need to start generating the operating cash flow. But what I can talk to is we expect – fully expect that the changes we started implementing this summer, and then we will talk a lot more about other things that we would do come August at Analyst Day will be accretive to our profitability. So, that will take time to develop, and some things will be immediate benefits we expect and some things will take a little bit longer to roll out. I would tell you that what’s important here, too, and I neglected to say this earlier, is that in terms of the product itself, we have quite a difference in terms how guests think about Spirit and how they recommend Spirit to their friends and relatives, relative to people who have not tried the product or ever or have not tried the product in quite some time, it is a shocking difference between people that experience the product versus people that only hear what they hear in the news and the media and that has to change.
There is a significant number of people in this country who do not think about Spirit when they book their travel and that will change. And as that changes, that means we will be widening the funnel and that funnel will allow us to then push up yields and then over time, flow through to other parts of loyalty. So, instead of just being transactional with our guests, which largely we have done in the past, we will begin to become more relationship driven with our guests. And everything we are talking about doing and thinking about doing will lead there. And over time, and like I just said earlier, we expect some of this will be cash flow positive quickly and other things will take time to develop. So, I think that’s probably the best way for me to describe about what’s coming and how we think about the back half of the year.
Ted Christie: Yes. And I might add, as we head towards the back of the year, the road to cash generation and eventual profitability while it’s important that we get the product aligned, as Matt alluded to, and that will be, we think a near-term contributor could be notable, but not as significant as it will when it builds over time. But the rest of it has to also come from the airline’s cost structure and from its efficiency. If we look right now, today we have announced our cost target just to right-size, as Scott said, to get us into 2024. But most of that cost reduction hasn’t taken place yet. We are still burdened with incremental expenses that start to reach run rate in the third and fourth quarters. And that’s probably a point or two points of margin right there.
And then we look at the retirement of the 319s, and while we have challenges with aircraft on ground, on the NEO fleet, still an increasing percentage of the total fleet in NEO aircraft. The fuel burn advantage right there is probably as much as another point, which starts to really roll through in the back half of this year. And then we have been moving utilization on an AOG adjusted basis north, but we are still not all the way back, we are better, but not all the way back. And that’s probably another point of margin right there. So, we are talking about efficiencies that get us three points to four points of margin in the back half of the year, we are optimistically thinking. And then the last thing, besides the revenue improvements that Matt alluded to, is the network pivots that he and the network team have been going to really don’t show in force until month of May, like we are seeing them right now.
And so we will get some benefit out of that in the second quarter, but it’s really much better in the third quarter and fourth quarter. And that could be as much as a couple of points of margin, we think. So, those things, you start to add them up, get us right – probably right where we need to be from a cash generation perspective, not anywhere near where we need to be from a profitability perspective. And that’s where we have to make the rest of the pivots to push the airline even further forward. But we can’t just rely on the unit revenue side of things. We are a cost business. We recognize that and we think we have room to improve that to help cash flow in generation.
Andrew Didora: That’s great Ted. Thanks so much. I will leave it there. Thank you.
Operator: The next question comes from the line of Conor Cunningham with Melius Research. Please go ahead.
Conor Cunningham: Hi everyone. Thank you. Just on the Pratt credits, you have like a $50 million spread right now for 2024. Are the outcomes there just dependent on the days on the ground, and what maybe is turnaround times today? And then, maybe as a clarification, how much of that is for 2024 and how much is for 2023, just trying to get a clean number as we think about potential compensation in ‘25, given all the issues there? Thank you.
Scott Haralson: Yes. Hey Conor. So, the $50 million spread is obviously based on the number of AOG days. And the turn times we are seeing today are uppers [ph] over a year. So, there – this is kind of what Matt mentioned earlier, some of the mitigation efforts for the AOG, primarily for probably ‘25, will be reduced turn times as they get better, get more materials to help push those through. And to your latter question around how much is 2023, probably about $30 million of that is for prior period credits that have accumulated and so the remaining is going to be for 2024.
Conor Cunningham: Okay. That’s super helpful. And then you mentioned the need for off-peak to improve to hit your revenue assumption. I didn’t know if that was a second quarter comment or a full year? And just how much does it need to – does off-peak need to kind of perk up for you to hit your plan? Thank you.
Matt Klein: Yes, sure. So, in terms of second quarter, we are baking into second quarter what we expect to be happening now. So, we do need to see some slight improvements from what we saw, say, earlier in the first quarter. And we are seeing some of that happen. I wish it was faster. And it just speaks overall to what we were just talking about earlier about what we need to do in order to become more attractive again out there. So, all of the things that we are talking about doing, I don’t want to get this confused here, they will also help peak periods as well. It’s just that what we do see is that the off-peak and the shoulder periods is where we are having the most challenges, and that’s where we need the most self-help in order to bring those back up to what we used to see in off peaks.
We did a lot of cancels on Tuesdays and Wednesdays in the early part of this year. We do that every year. We generally do that in September and October. We will be finalizing how we think about that here shortly for the fall. And that’s fine, that helps unit revenue, but at the end of the day, we need to make sure that we can produce on those days of the week as well so that we can also contribute overall to the operating margin and the bottom line itself.
Conor Cunningham: Great. Thank you.
Operator: Next question comes from the line of Michael Linenberg with Deutsche Bank. Please go ahead.
