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.

Mike Linenberg: Okay. Great. Thanks, everyone.

Operator: And we will take our next question from Jamie Baker with JPMorgan. Your line is open.

Jamie Baker: Hey, good morning, everybody. Quick one on pilots. As I recall, the contract had richer increases for first officers than for captains, which kind of seems sensible given the industry challenges right now. I know it’s very early, but have you seen any changes yet in the cadence of applications? And is the tempered 2023 growth rate have any specific assumptions in this regard, like an uptick in applicants? Or is the tempered growth solely a function of the aircraft issues that you spoke about?

Ted Christie: Good morning, Jamie. So as to the first question, it is too early to call it one way or the other. I mean, our pilots ratified this contract less than a month ago. So I think initial signs are positive, however, both as it relates to attrition and our continued throughput on new hires. So we feel like that will produce the kind of results we see. To the second question, the more muted growth rate has almost entirely everything to do with the fleet moves that Scott and both the neo issue, the Airbus delivery delays. Admittedly, the 319 retirement was different than our planned assumption, but that was going to happen eventually. So I think it’s more of that. I think we have adequate staffing and throughput to staff a bigger airline, which is why I said in my comments that if we start to feel more comfortable that ATC problems are getting resolved quicker, that we’re not seeing as much as many issues with catering trucks and fueling trucks and stuff like that, we could probably tick the growth up a little bit more, but we will wait to see that first.

Jamie Baker: Got it. And second question, just because it’s generated some headlines, and I’m getting questions here. The estimate or your comment that you expect to hear from the DOJ in the next 30 days, is that a well-informed estimate on your part or something that specifically justice has guided you to?

Ted Christie: Not to guess on my part, just based on where we’ve seen the process goes. So I wouldn’t or so. I said or so because I mean it could be longer than that. But we’re into the process right now and have been working with the DOJ on making sure we satisfy the request and that sort of thing. So as we’ve laid out, I guess, JetBlue has been more specific in laying out the process. I think it’s consistent with their view on where things will go and still in line with what the timing estimates were that were given early on.

Jamie Baker: Okay. That’s really helpful. Look forward to seeing you next month at our conference. Take care.

Ted Christie: Thanks.

Operator: We will take our next question from Duane Pfennigwerth with Evercore ISI. Your line is open.

Duane Pfennigwerth: Hey, good morning.

Ted Christie: Hey, Duane, okay?

Duane Pfennigwerth: Yes. I am good. Thanks for the time. You talked about time on wing, lower time on wing, that is a phrase you used at least 2 or 3x on the call. Can you speak a little bit more specifically what was the expectation in your planning in terms of cycles or years? And what is it that you’re realizing and who bears the higher cost there?

Ted Christie: So I’ll do my best to summarize I don’t have the specific data at hand. But when we purchased this engine and went through the RFP process to determine what the power plant was going to be on the neo. We made assumptions about time on wing between major shop visits and reliability, generally speaking, for unscheduled removals that were consistent assumptions with what we’ve experienced with our CO power. So with the V2500, what has been experienced with the other engine manufacturers kind of legacy power, that sort of thing. It’s fair to say that the teething issues have gone longer and deeper than any operator anticipated. I think that’s fair for the two manufacturers as well. So rather than it being 6 or 7 or 8 years between removals and shop visits, we’re seeing a considerable higher uptick in frequency.

Just last year, I believe we removed 30-plus engines. And we’ve been operating this aircraft for about 6 years, of which the vast majority of them have delivered over the last two. So we’re still working through it. And obviously, there is warranty on the engines that’s part of our purchase agreement and that is €“ we’re satisfied with the cover there. And in constant discussions with proud on the best way to kind of like mitigate these problems and come up with a better solution. And they have been a willing partner. It’s just €“ I know it’s frustrating for both of us that we’re still here right now.

Duane Pfennigwerth: So it sounds more like an aircraft availability issue than a cost issue?

Ted Christie: That’s right. Right now, it is largely that. I mentioned that in a 2-week period, what happened to us right now, we just €“ we didn’t anticipate having that many aircraft without engines available, either spare engines or returns from the shop. And so we had to take utilization down as a result because those are impactful to fleet utilization.

Duane Pfennigwerth: Got it. Got it. And then just on the Airbus delivery delays, can you speak to any penalties or credits related to that?

Scott Haralson: Hey, Duane, this is Scott. So no, there are no penalties at this point. These are sort of excused delays with the supply chain issues that are happening around the world. Airbus is not immune. So at this point, no financial components associated.

Duane Pfennigwerth: Okay. Thank you. Look forward to speaking more soon.

Ted Christie: Thanks.

Operator: And we will take our next question from Dan McKenzie with Seaport Global. Your line is open.

Dan McKenzie: Hey, good morning, guys. Thanks. Going back to the script and the headwinds to normalized margins and the more conservative approach to schedules this year. With respect to the downward pressure on revenue that you referenced, how much downward pressure is reversed as you get back to normalized network planning and utilization? And I guess what’s the best way for investors to get comfortable with continued revenue execution?

Matt Klein: Hey, Dan, it’s Matt. I’ll take that. There is a couple of components that flow into that. One is, we continue to have on purpose. We’re still a little smaller fly into Florida than we would otherwise be. And then another thing, and this is the same trend that we saw in our schedule last quarter as well, which is just flying more off-peak days of week as well. And the reason why we’re doing that is largely to make sure we can maintain a reliable operation at our airports and for all of our crew and team members out there. So those two components combined add up to about 1.5 points in the first quarter is our expectation that we’re taking when we talk about unit revenue penalty. So last quarter, it was more than that.

So as we move through the spring towards the summer, we should start to see some of that relax naturally as we would fly more off-peak days of the week, normally as we head towards the peak. And then the question will be is, as we operate through the spring and the summer, then we will know how things are going towards the fall. So it’s a little early for us to talk about the fall post summer to think about these kinds of impacts to get revenue in the network. But we’re confident that we’re building up. Ted mentioned our operation last year was Mid-Pac in both on-time performance and completion factor. We’re good with that. And as long as we can continue to maintain that, we will be able to keep loosening up these restrictions as the year progresses.

Dan McKenzie: I see. And then second question here. The normalized operations in the fourth quarter later this year, does that assume that Pratt & Whitney issues are resolved by then? And I guess just more broadly, if you could address SAVE’s cost structure today and to what extent the cost structure is a margin headwind in the next cycle? And with that, if it is €“ if it’s not, can pre-tax margins get back to where they have been historically or at least how should investors think about what a normalized margin should look like for Spirit?

Ted Christie: Hey Dan. So, as for the first half €“ this is Ted. We do make an assumption that we are going to be collectively with Pratt resolving the availability issue on the neo throughout the remainder of this year, such that by the time we hit the fourth quarter, we are able to support full utilization, which would include aircraft that are currently unable to be operated. So, there is an assumption in there, which obviously could change if we don’t get the mitigation efforts and the improvement that we are hoping for. But we will keep you posted on that throughout the year. And maybe, Scott, do you want to comment on CASM and margins?

Scott Haralson: Yes. So, quickly on unit cost and maybe go forward views on unit cost margin, obviously the three components that we have talked about a lot and every airline has, which is aircraft €“ sorry, airport cost and labor costs, which make the majority of our move. And the biggest is obviously, labor. Labor accounts for probably north of 60% of our unit cost increase versus 2019. And the other is how we are sort of thinking about aircraft financing, which could be temporary or at least in this window has been primarily sale-leaseback financing and operating leases which is probably a 10-point to 15-point headwind on unit cost by itself. So, it’s aircraft rent, it’s labor, it’s airport costs, which has been the big mover for us.

And so going forward, it’s about getting efficiency in the other parts of the business, getting back to full utilization or very close to it. But there are going to be other operating parameters that are going to be difficult for the industry. And we have talked about it, every airline has talked about the parameters operating today are different than what they were pre-COVID. So, it’s going to take a little more infrastructure to do that than it did in 2029, but we have put those investments in place. So, we expect full utilization to be a product that we will get to by the end of the year and into 2024. But I think the fundamental component about our margin production is still sort of mid-teens margins. We think that as the supply/demand impact is back to an equilibrium, fuel goes back to where it’s sort of been as an average, we expect us to produce mid-teens margins.

So, I think that’s where we are thinking about the growth of the airline and all the components with it. So, I hope that helps.

Dan McKenzie: Yes. Thanks for the time. Appreciate it.

Operator: And we will take our next question from Helane Becker with Cowen. Your line is open.

Helane Becker: Thanks very much operator. Hi everybody. Thank you. So, my first question is with respect to your ancillaries. How are you thinking about I guess increasing them, I mean where do you €“ maybe that’s not the right question. Maybe it’s more like where do you think they can go? They seem pretty high now, but how high do you think they can go?

Matt Klein: Hey Helane, it’s Matt.

Helane Becker: Hello.

Matt Klein: Good morning. We €“ in terms of ancillaries, we are not going to plan to flag today and give a target as to where we think it can go specifically. I can tell you, as Ted mentioned, we expect to have another record this year. We continue to expect it to march upwards. We do continue to improve in terms of the way that we merchandise products, and making sure that everything continues to improve from a guest experience perspective in terms of getting through the purchase process. That’s not just on our website, but on our app as well. We also have what we believe to be, if not the largest, one of the largest reaches to third-parties in terms of selling our ancillary products now as well. So, that’s been beneficial from a distribution perspective.

And even if guests aren’t purchasing ancillaries on their first contact with us, we do know that the more often that they see the products, if they are not frequent Spirit travelers, it leads to better take rates down the line for them as well before they get to the airport or before they board the aircraft. So, it’s about merchandising, distribution and also just continuing our ongoing improvements in revenue management strategy and the technologies that we are building to put in place to help us manage the products. Similar to the traditional revenue management of just the ticket in general, we continue to make strides with revenue management of the ancillaries as well.

Helane Becker: Okay. That’s hugely helpful. And then just for my follow-up question, it’s really just a clarification. On ASMs, I think you said €“ I am not sure who you or Scott said that they were mostly second half, right, weighted. You are seeing capacity increases in the second half of the year. So, are you assuming that the engine relief will be there by the summer months, or how should we think about that?

Ted Christie: Helane, this is Ted. Yes, we do have a back-end SKU delivery schedule with Airbus, which I think is what you are referring to, which affects ASM production, but doesn’t affect utilization because the airplanes aren’t there. What’s more impactful utilization is that the aircraft that have already been delivered and are not being operated because they are sitting on ground. Those are the engine issues. We do expect that by the fourth quarter, that will have a resolution to it. And we are working with Pratt on ways to mitigate the impacts throughout the course of the year. Obviously, if we are right, then we should land exactly where we expect. If we are wrong, then there will be potential utilization penalty in the fourth quarter. But right now, that’s our base case.

Helane Becker: Okay. Alright. That’s hugely helpful. Thanks everybody.

Operator: And we will take our next question from Savi Syth with Raymond James. Your line is open.

Savi Syth: Hey. Good morning. A couple of follow-up questions actually on the capacity growth. Wondering if you could kind of talk about stage versus departure, it seems like your stage length has come down quite a bit. I am just curious what’s driving that and if we should see this as a new level or how you can expect that to progress in 2023?

Matt Klein: Hey Savi, it’s Matt. So, in terms of stage, our stage is coming in slightly from where it had been. And really, without getting into all of the technical reasons behind that, just to know that some of the delays that we have seen, as Ted and Scott has mentioned, with not just deliveries, but some of the on-wing €“ time on wing engine issues with the neo has caused us to make some very, I would call it, close-in network changes that we weren’t anticipating. And without getting into all of the specifics about it, what’s ended up happening is we have ended up pulling some of the longer haul, which is making the stage look shorter than really we had initially intended it to be. So, we are taking all this into account.

We now have a better view on what’s going on with the engine issues and the fleet plan overall, which has been moving a little bit over the last, say, six weeks to eight weeks or so. So, now they have a better handle on that. We will be able to think about the network more fully as we move through this year. All of that wrapped up to say we are aware of the stage number and where it’s at, and we anticipate it will lengthen out from here, but you will see that as we move through the year with the way that we think about the network. That will just get published as the schedules come out.

Savi Syth: That’s helpful. And if I might ask just on the peak versus off-peak demand trends, like €“ it seemed like in the fourth quarter, the off-peaks maybe were a bit stronger than you have seen in the past, and is that right? And are you seeing that trend continuing? And just as you kind of look at February, March, how does the off-peak and peak trends compared to what you saw in the fourth quarter?

Matt Klein: Yes. So, the off-peak in the fourth quarter was probably a little bit stronger than we are seeing here in the first quarter, but I am not talking that up to anything really other than some holiday shift things were dramatic. The Christmas and New Year’s period shifted by an entire week, which is not insignificant, and it just changes the way that everyone kind of thinks about off-peak travel after you come out of a peak. So, I am €“ definitely, the off-peaks are a little bit weaker right now than they were in the fourth quarter, but it’s not unexpected based on the holiday shifts, is the way I would say it. And the peaks that we are seeing as we move through the first quarter are strong. Every time we flowed out a little bit more inventory, if we see any kind of opportunity to drive some lower-yield demand, we are seeing that inventory gets snapped up right away.

So, demand is strong. We anticipate this will not just push through spring break, but really head through the shoulder period in Q2 and really move into the summer well. We are not seeing any indications of any kind of falloff of demand. And this a little bit of off-peak happening right now is really a blip and not anything that I am concerned about.

Savi Syth: That’s helpful. Thank you.

Matt Klein: You’re welcome.

Operator: And we will take our next question from Stephen Trent with Citi. Your line is open.

Stephen Trent: Hi. Good morning everybody and thanks for taking my question. Several of mine have been answered, but I did want to follow-up on the improvements you guys mentioned with extra crew and you mentioned you have got some infrastructure help those whether they are runway stuff is out of the way. And when I think about how well you guys handle the December storm. Could you kind of give us any color regarding what other strategies you may have employed such as maybe investments in flight op software or something along those lines?

Ted Christie: Sure, Stephen. So, over the course of last year, we did discuss a number of the initiatives that the company had launched since 2021 to improve reliability across the network. And obviously, some of those are notably our crew-related reliability items. We opened three new crew bases last year, which is a pretty significant move for us and has had the expected effect. We are more targeted with the buffers we use around the network, both crew-related buffers as well as aircraft time-related buffers. Matt mentioned that the network is more stable throughout the course of the week and throughout the course of the month. That is a reliability enhancer also. Most of our flying today comes from our lands and a crew base, which is a change in the network.

And then we have deployed a number of initiatives around crew services that help our crew scheduling team react to and deal with interruption when it happens and our crews have noticed. They are able to get their issues resolved much faster, and that helps our crew scheduling team repair the network faster. So, those are all kind of like the lessons €“ we are not done, by the way. There is still quite a bit of work to be done to finalize where we want to land. But I would tell you that it was not a seamless operating fourth quarter. We had the late hurricane activity, the Winter Storm Elliott, it was messy. And we saw that across the industry, but I am proud of the way our network responded and our group responded. And I think that just gets further enhanced from here.

Stephen Trent: Super. Appreciate that. And as my follow-up, just very quickly, when I think about you are soft on international flying, over the last 3 years to 4 years, Mexico’s practically hasn’t slowed down at all, never shutdown with the pandemic. Are you seeing any sort of shifts in terms of maybe one market growth moderating as it hits harder comps and other places starting to open up, or is it still about the same as it’s been in the last several quarters? Thank you.

Matt Klein: Yes. Stephen, it’s Matt. Our Latin America and Caribbean network continues to build well, continues to see strength. We have had €“ like any part of the network, there is always a route here or there that needs to be adjusted or re-timed. Generally speaking, I would tell you that some of the issues that we saw in the early part of last year, when it had to do with some of the international VFR routes. They have all recovered well. We had a strong holiday period. And we are anticipating, and expect to see a strong spring, spring break here as well as we head towards the summer. I don’t know specifically that I want to talk about headwinds that we may see on year-over-year comps. Right now, we are really focused on just the absolute and maximizing what we see out there.

And when we talk about ancillary products and services, the take rates and the rates that we are seeing are €“ continue to do well and perform there. So, nothing that I would say is slowing down at this point.

Stephen Trent: Okay. Very helpful Matt, and thanks for taking up the time.

Matt Klein: You’re welcome.

Operator: We will take our next question from Scott Group with Wolfe Research. Your line is open.

Scott Group: Hey. Thanks. Good morning. Your comment about being profitable for the year, can you just talk about the fuel and RASM assumptions you are assuming to get there?

Scott Haralson: Hey Scott, so this is Scott. I will start on the fuel side. So, obviously, we pulled the fuel curve generally about a week or so in advance of the call. And so that €“ at that point, fuel was sitting in around, it was obviously higher in January, but the first quarter will be around $3.20, and it will decline through the year. Probably for the full year, we will be around $3 based on the fuel curve. So, that’s the basic assumption. I don’t know, Matt, do you want to talk about unit revenue for the year, but not really given the guide full year

Matt Klein: Yes. We are not going to talk about the guide, Scott, for full year unit revenue or I am sure leave it at that.

Scott Group: Okay. And then just €“ I think you had a comment that you think CASM will be lower in €˜24 if we take a step back, right, capacity is up 40% versus €˜19, CASM is up 25% or so, like €“ so what changes in €˜24 to sort of get the model working better again the way you would expect where there should be some sort of unit cost operating leverage?

Scott Haralson: Yes. Scott, this is Scott again. So, I think the biggest lever is utilization. We are going to be increasing that through the year, and we will exit at about normal utilization levels, obviously, depending on where the engine reliability issue sets, but that’s the expectation. And if we do that for the full year, that alone mathematically will give us a push down. And we are obviously managing the P&L. So, we feel pretty optimistic about where sort of 2024 and beyond full run rate CASM ex will sit.

Scott Group: Okay. Alright. Thank you.

Operator: And we have no further questions at this time. I will now turn the call back to DeAnne Gabel for closing remarks.

DeAnne Gabel: No, Abby, I think we are done. But thank you so much everyone for joining us today and we will catch you all next time.

Operator: Ladies and gentlemen, this concludes today’s call, and we thank you for your participation. You may now disconnect.