Spirit Airlines, Inc. (NYSE:SAVE) Q4 2022 Earnings Call Transcript

Spirit Airlines, Inc. (NYSE:SAVE) Q4 2022 Earnings Call Transcript February 7, 2023

Operator: Ladies and gentlemen, good morning. My name is Abby and I will be your conference operator today. At this time, I would like to welcome everyone to the Spirit Airlines Fourth Quarter 2022 Earnings Conference Call. Today’s conference is being recorded. Thank you. And I will now turn the conference over to DeAnne Gabel, Senior Director of Investor Relations. You may begin.

DeAnne Gabel: Thank you, Abby and welcome, everyone to Spirit Airlines’ fourth quarter 2022 earnings 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 in the room are other members of our senior leadership team. 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 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 related to the acquisition of Spirit by JetBlue and other risk factors as 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. For an explanation and reconciliation of these non-GAAP measures to GAAP, please refer to the reconciliation tables provided in our fourth quarter 2022 earnings release, a copy of which is available on our website. And with that, I will now turn the call over to Ted Christie, Spirit’s Chief Executive Officer.

Ted Christie: Thanks, DeAnne and thanks to everyone for joining us on the call today and a special thanks to everyone on the Spirit team. Together, we overcame many challenges throughout the year and thanks to our team members’ dedication, we made excellent progress on the steps necessary to return Spirit to sustained profitability. Demand was robust during 2022 and our team did a great job maximizing revenue production, including achieving another record for non-ticket revenue per segment. Operationally, the team delivered solid results with an overall mid-pack performance from both DOT on-time performance and completion factor despite our network being impacted by multiple weather events and infrastructure bottlenecks. We are positioned well to build upon our 2022 successes and I will share more about our 2023 goals before we get to Q&A.

Before discussing our fourth quarter results just a quick update about the pending merger with JetBlue. We announced in December 2022 that Spirit and JetBlue had certified substantial compliance with the DOJ’s second request and are now waiting to see whether the DOJ filed suit to block the deal or allows us to proceed. We anticipate hearing from the DOJ in the next 30 days or so and that’s really all we have to say on that topic for now. Turning now to our fourth quarter 2022 performance, operationally, the quarter started off with the tail end of Hurricane Ian impacting our operations, followed by tropical storm Nicole and then by severe winter weather across the U.S. during the peak holidays. As a result of these weather events, we canceled over 1.5 percentage points of our anticipated fourth quarter capacity.

The good news is that our team did a great job mitigating the down-line impact from these events and took excellent care of our guests. I am grateful for their efforts and I am honored to be part of the team. The revenue environment in the fourth quarter remained strong and total RASM for the quarter was up 17% as compared to the fourth quarter of 2019 on 22.7% more capacity, this was even stronger than we had anticipated. In fact, adjusting for capacity increases, our unit revenue performance was amongst the best in the industry compared to 2019. Costs also came in better than expected. And as a result, our adjusted operating income for the fourth quarter was $57.6 million, resulting in an adjusted operating margin of 4.1%. While our fourth quarter results were better than expected, we continue to face headwinds in returning to normalized margins and full utilization.

As you may have seen in our release yesterday, we have once again trimmed our capacity expectations for 2023. Over the last 6 months, the GTF neo engine has experienced diminished service availability, an issue that has been steadily increasing over this period. This is not just a Spirit issue. Pratt & Whitney continues to struggle to support its worldwide fleet of neo aircraft as MRO capacity remains constrained and turnaround times for engines in the shop have been nearly 3x longer than the historical averages for CO engines. To put this in perspective, within a 2-week period, we went from having 2 A320neo aircraft parts without operable engines to having 7 A320neo aircraft sidelines due to these issues. When operating, the neo engine performance and fuel efficiency is great, but the engine’s time-on-wing performance has once again declined.

We are working with Pratt & Whitney on finding a solution that will increase time on wing performance, but it is frustrating that this has become an issue again. In addition, we have been notified by Airbus that a number of our expected 2023 deliveries will be delayed until 2024, which may cascade some aircraft into 2025, all reducing the number of aircraft delivered from Airbus and our lessor partners by 7 shelves in 2023. In the fourth quarter of 2022, we made the decision to accelerate the retirement of our A319 fleet, which Scott will share more details about. We have had some good news. Florida operational constraints have been gradually improving. However, we will remain methodical and deliberate in building back Florida and relaxing the crew buffers that we have been forced to add until we have more confidence in the infrastructure that supports the airline industry.

With that, I will hand it over to Matt and Scott to share additional details about our fourth quarter performance as well as some color around our first quarter outlook before I close with some thoughts on full year 2023. Matt, over to you.

Matt Klein: Thanks Ted. I also want to thank our Spirit family members for their contributions. Our Spirit family members are our greatest assets and thanks to their dedication and professionalism, Spirit is able to deliver the best value in the sky. For the fourth quarter of 2022, we will once again compare our results to 2019. But going forward into 2023, we will return to year-over-year comparisons. Turning now to our fourth quarter revenue performance, total revenue was $1.39 billion, up 43.5% compared to the fourth quarter 2019, the largest top line growth of the major U.S. carriers that have reported results thus far. Total RASM for the quarter was $0.1081, up 17% versus 2019, while we simultaneously increased our capacity nearly 23%.

Demand was strong throughout the quarter, especially over the peak Christmas and New Year’s Day holiday period, which helped mitigate the revenue impact from weather-related flight cancellations during that time. Load factor was down 3.8 percentage points versus the fourth quarter of 2019. But as we explained last quarter, this is primarily because we are flying more on off-peak days and have less variability in the number of flights day-to-day at any given airport. We believe this better supports our operational reliability and is more likely to maximize earnings in this environment. On a per segment basis, total revenue per passenger increased to $136, a 23% increase compared to the fourth quarter 2019. Passenger revenue per segment increased 22% to $64 and non-ticket revenue per segment increased 23% to over $71.

This was more than a $4 sequential increase in non-ticket revenue per passenger segment from the third quarter 2022 driven by strong take rates for ancillary services combined with the ongoing benefits of our revenue management initiatives. Looking ahead to first quarter 2023, January started off very strong due to the shift in peak holiday return traffic. However, demand over the Doctor Martin Luther King Jr. holiday weekend was a bit soft compared to historical periods. This softness was not surprising given that many schools had just gone back into session. President’s Day holiday weekend is shaping up very nicely and we are expecting to see continued strong demand trends over the spring break period. Our self-imposed constraints on Florida volume continue to carry a unit revenue penalty, but again, we are being purposely conservative when it comes to removing some buffers and restrictions that limit our level of operations there.

We acknowledge that this strategy may have a slight downward pressure on load factor and unit revenue, but we are comfortable it is the right earnings decision in current circumstances. Taking all of this into account, we estimate total RASM for the first quarter of 2023 will be up 23% to 24.5% compared to the first quarter of 2022 on a capacity increase of 13.2%. As Ted commented, we have reduced our 2023 capacity plan. We now expect 2023 capacity to be up 19% to 22% compared to the full year 2022. And with that, I will now turn it over to Scott.

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Scott Haralson: Thanks, Matt. I will start with a brief overview of our fourth quarter financial performance and then spend some time explaining how we are thinking about the outlook for 2023. Our fourth quarter non-fuel operating costs came in better than expected, primarily due to lower airport rents and landing fees driven by favorable signatory adjustments. We had anticipated that as volume at airport stabilized, we would see a reversal of this pandemic-related increases in airport rents and landing fees due to share shifts. This anticipated reversal came largely in the form of billing true-ups or adjustments as opposed to reduced future rates. Fuel costs were up more than 100% compared to the fourth quarter of 2019 on about 20% more volume due to a 69% increase in the average fuel price per gallon, fuel prices have remained stubbornly high driven in large part by historically high refining margins, but the current curve does suggest jet fuel prices will move lower as we progress through the year.

For the fourth quarter, we saw good improvement in adjusted operating income quarter-to-quarter, but operating margin was still well below what we believe our normalized operating margin will be once we reach full utilization. Total non-operating expense came in higher than previously estimated due to the periodic valuation of the derivative liability associated with the 2026 convertible notes being valued $4 million higher than it was on September 30, 2022. During the fourth quarter, we completed a private add-on offering of $600 million to the company’s 8% senior secured notes due 2025, bringing the aggregate principal amount of these senior secured notes outstanding to $1.1 billion. During the quarter, we also increased our commitment under our senior secured revolving credit facility by $60 million, bringing the total amount available under the facility to $300 million, none of which is drawn today.

Liquidity at the end of 2022 was $1.8 billion, which includes unrestricted cash and cash equivalents, short-term investments and the $300 million of undrawn capacity under the revolving credit facility. We took delivery of 10 A320neo aircraft during the quarter, ending the period with 194 aircraft in the fleet. As announced last month, we signed an agreement to sell 29 of our unencumbered A319ceo aircraft. We expect to remove 14 of these aircraft from our operating fleet in 2023, with the remainder expected to be removed in 2024. We took an impairment charge in the fourth quarter of $334 million and the expected proceeds of the transaction over the next 2 years will be between $150 million and $200 million. Over the last year or so, we have been assessing our long-term plans for this A319ceo fleet, our oldest, least-efficient vintage of our A320 family aircraft.

In the fourth quarter, we made the decision to accelerate the retirement of these aircraft. In our previous 2023 capacity guide, we had included some reduction in A319 flying so the impact of the 14 scheduled A319 removals in 2023 has a smaller impact than would otherwise be expected. We continue to view 2023 as a transition year. The objective of returning to full utilization is still primary. We have made the necessary internal investments to reach this objective. However, for all the reasons Ted listed, we are forced to be more conservative with our schedule planning than we otherwise would be. Given the modest buildup for the first half of 2023 will likely underutilize the fleet by about 10% that should improve to around 5% in Q3 and back to what we consider normal utilization levels in Q4.

Matt mentioned the capacity plan for 2023 being up 19% to 22% versus 2022. This is about a 450 to 550 basis point reduction versus our previous plan. We estimate about 40% of this reduction is related to the diminished neo engine performance coupled with no or limited spare engine availability. We estimate about 30% is related to the Airbus delivery delays and about 20% driven by the accelerated retirement of our A319 aircraft. The remaining reduction is related to the continued buffers we have in place to support the operation due to continued industry infrastructure constraints. For 2023, we estimate total capital expenditures will be about $360 million. For some highlights here, approximately $150 million of this is related to the building of our new headquarter facility in Dania Beach, which we will occupy in the first quarter of 2024.

$75 million is related to net pre-delivery deposits and about $30 million is related to the purchase of spare engines. Last month, our pilots ratified and amended collective bargaining agreement that provides significant pay increases and other enhanced benefits. We estimate the new rates and benefits drive an additional $180 million of wages, salaries and benefits expense for the full year of 2023 or about $40 million to $45 million a quarter with an additional onetime expense in the first quarter of about $10 million related to the revaluation of bank sick and vacation time. In total, we estimate the new contract adds about 4.5% increase to our 2023 CASM ex. For the first quarter 2023, we estimate our operating margin will range between negative 2% to negative 4%.

This assumes total operating expenses of $1.39 billion to $1.4 billion and a fuel price per gallon assumption of $3.20. For the full year 2023, given expected utilization levels and the new pilot contract, we now expect our CASM actual will be in the high 6s. We also do expect to be profitable in all of the first quarter and profitable for the full year. Before I close, I want to thank the entire Spirit team. 2022 was a challenging year on many fronts for our team persevered and continued to set us up well for 2023. With that, I’ll turn it back over to Ted for closing remarks.

Ted Christie: Okay, Scott. Thanks for that brief overview. Now that 2022 is wrapped, we are excited to turn our attention to leveraging our strengths to make marked financial improvement in 2023. We are in a strong liquidity position to have minimal non-aircraft CapEx. We expect to produce solid EBITDA for full year 2023. In addition, we have the option to finance our new headquarters campus in Dania Beach, should we decide to do so. We are steadily building back to full utilization. And despite some unexpected setbacks with engine availability issues, we are on track to reach normalized utilization by the end of the year. However, our progress will be measured and intentional so we don’t overstress the surrounding infrastructure.

As we move through the year, if we gain confidence in the surrounding infrastructure, we have the assets to move the needle on utilization a bit faster. While our new pilot contract does add unit cost and margin pressure, we do expect the new contract to have a favorable impact on our attrition rates. We take our first A321neo in the first quarter and a total of 10 in 2023, which over time will gradually increase our average gauge and naturally drive productivity. Adding A321neos and retiring the A319ceos will also improve fuel CASM, we estimate that, on average, an A321neo will produce 113 ASMs per gallon, while the retiring 319s on average produced 73 ASMs per gallon. We won’t get into the full benefit of these changes in 2023 as we are only retiring a portion of the 319 fleet in 2023 and are taking only a handful of A321neos this year, but fuel efficiency should steadily improve as we move through 2023.

With utilization levels returning and fleet-related benefits on unit cost and fuel burn, we expect CASM and CASM ex will be lower in 2024 and than it will be in 2023. Demand for our product has remained strong. Our team continues to explore new ancillary opportunities, and we anticipate we will set another non-ticket revenue per segment record in 2023. With that, back to DeAnne.

DeAnne Gabel: Thank you. We are now ready to take questions from the analysts. We ask you limit yourself to one question with one related follow-up. Abby, we are ready to begin.

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Q&A Session

Operator: Thank you. And we will take our first question from Mike Linenberg with Deutsche Bank. Your line is open.

Mike Linenberg: Hey, good morning, everyone. Hey, I guess a quick one and a quick follow-up here. I guess to Matt, as you think about retiring these A319s, does it preclude you €“ and I guess €“ I appreciate the fuel efficiency, Ted that you spelled out comparing the A319s versus the A320neos. But does it preclude you from flying certain markets, whether they are experimental or maybe smaller or medium-sized markets with the bigger shelves, are you sort of pigeon hold into flying some of the biggest routes? Like what’s the loss there from your ability to develop new markets with no longer having the A319s? And did you ever consider maybe an A319neo?

Matt Klein: Hey, Mike, good morning. Yes, in terms of where we deploy the aircraft. Having the 319ceos retire does not stop our ability to grow or expand in any given route, even experimentally if we choose to do that. Really, what’s become easier and better to do over time with larger aircraft. As you can go in sort of day of week to certain places and test things out that way and then continue to grow off of that. And that’s not really brand new for us. We have done that in the past, and we would continue to do that. If we thought there are opportunities out there, that maybe can’t support daily right out of the gate, we would go on with day a week and then develop out from there, making sure that we’re still right in that decision.

Mike Linenberg: Okay. That’s helpful.

Scott Haralson: Hey, Mike, I’ll add another pile on to Matt’s comment. As we’ve been playing the fleet over the last sort of 5 to 10 years, we knew that the A320neo and its range capabilities would replace a good bit of the need for the 19ceo, given that, that was our long-haul fleet. And so as we’ve gotten bigger and bigger in our A320neos, we knew that would be a long-haul replacement for us, and the operating costs are pretty similar. So that was always going to be the case. So I think that’s where Matt and the network guys utilizing the neo where it should be placed.

Mike Linenberg: Okay. And then just on sort of related, as we think about the 19% to 22% growth in 2023, how much of that is actually gauge related versus maybe new markets? Or are you just filling in the frequency to drive to that higher utilization to get back to normalcy by year-end?

Matt Klein: Yes, most of the growth there is going to be coming as we look to continue to add frequencies in places where we’re already strong, the makeup of that growth is going to be less so from new routes and more likely going to be really continuing to a trend that we’ve had for the last few years, which is where we’re strong. We’re going to continue to accentuate those strengths, and we will continue to test out new places for us moving forward. Gauge does continue to slightly increase, as I think Ted said in his remarks. So we will see a little bit of gauge increase throughout the year. And then in terms of a lot of when the deliveries are coming, they are coming throughout the year. There are a bunch using that technical term, a bunch are coming near the end of the year. So a lot of deliveries come in the fourth quarter, and you’ll see a lot of that deployed into 2024, more so than 2023. So that’s a bit of the change in the capacity profile as well.

Ted Christie: I’d say €“ this is Ted and the last add-on to that is, obviously, utilization is increasing throughout the year. So that’s adding to the 19% to 22%. I would agree with Matt, gauge is the smallest component of it. I think it’s more of the aircraft deliveries and the utilization improvement that’s driving the capacity move.