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

Spirit Airlines, Inc. (NYSE:SAVE) Q4 2023 Earnings Call Transcript February 8, 2024

Spirit Airlines, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing by. My name is Greg, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Spirit Airlines’ Fourth Quarter 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. [Operator Instructions] Thank you. I would now like to turn the call over to DeAnne Gabel, Senior Director, Investor Relations. DeAnne, please go ahead.

DeAnne Gabel: Thank you, Greg, and welcome, everyone, to Spirit Airlines’ fourth quarter 2023 earnings conference call. This call is being recorded and simultaneously webcast. As soon as it is available, we will archive a replay of this call 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 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 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 fourth 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.

Ted Christie: Thanks, DeAnne and thanks to everyone for joining us on the call today. As we look back on 2023, while our financial results for the full year were unsatisfactory, I am proud of what our team accomplished and we are well on our way to make the necessary strategic shifts that will enable Spirit to compete effectively in the current demand environment. First of all, I thank all our Spirit team members for their dedication and commitment in caring for our guests and each other while overcoming the operational and financial challenges we faced in 2023. We and a special thank you to all who carry the extra burden of preparing for the court case and working on merger integration planning while attending to their regular full-time duties.

The professionalism and enthusiasm of the Spirit team is unmatched, and I’m honored to work alongside such remarkable people as we deploy our plan to return to sustained profitability. Regarding the merger, when JetBlue first may be offered to us in 2022, and we subsequently signed a merger agreement, which had overwhelming support from our stockholders. Our Board of Directors anticipated it would be a long litigious road to obtaining regulatory approval. To compensate for that, we negotiated meaningful protections for the company and our constituents against an adverse regulatory outcome. Nonetheless, we believe and we continue to believe a merger between JetBlue and Spirit is a compelling combination, not only for our business but also for the American consumers.

As such, we strongly disagree with the court’s ruling to grant an injunction against the merger. Together with JetBlue, we filed a notice of appeal and our request for an expedited review has been granted. We will not be commenting further or entering questions about the merger on today’s call. Moving on to a recap of 2023. At the beginning of the year, we made the decision to allocate resources and go full trail on hiring the necessary number of pilots and building the infrastructure to support getting back to full fleet utilization by year-end 2023. We also recognized that we needed to derisk the business and give ourselves the means to digest the high growth rate we had coming out of the pandemic. However, due to contractual obligations, the first practical opportunity to slow our pace of forward deliveries was in 2024.

Therefore, in the summer of 2023, we negotiated deferral of 11 aircraft originally slated for delivery in 2024 and smooths out the remaining deliveries between 2025 and 2029 to slow the pace of our growth over the next few years. At the time, together with achieving full fleet utilization, we believe this would be enough to set us up for a return to profitability in 2024. Things, of course, changed as the year progressed. We did not foresee the number of parked NEO aircraft in 2024 and beyond due to GTF NEO engine availability, further complicating and delaying our ability to achieve full fleet utilization. In addition, shifts in the balance of supply and demand for domestic air travel in leisure markets during last summer and fall had a very profound negative impact on revenue trends for the second half of 2023.

In October, we stated we were prepared to make the necessary strategic shifts to enable Spirit to compete effectively, and we began to do just that and are executing on a plan that we believe will provide us a platform for margin health. We are making changes to network construction, peak versus off-peak flying and geographic and market concentration, and we’ll assess the success of various components and make some inevitable adjustments. We are not prepared to share all the details of our plan with you today as we await some clarity on our appeal. However, Matt and Scott will share some of the actions in progress that are already having the desired impact. Before I hand it over to them to provide details on our fourth quarter financial performance and first quarter 2024 outlook, I want to comment on the recent speculation about Spirit’s ability to make it as a stand-alone carrier should the merger not close.

This misguided narrative has been advanced by an assortment of pundits. However, back in the real world, we are focused on facts, liquidity is always king, and we have enhanced our levels to give us the necessary flexibility to successfully close with JetBlue or to pursue our standalone plans. Above all else, margin repair is the key, and we have been making network adjustments and cost decisions to recover our margin production. First, Matt, over to you.

Matthew Klein: Thanks, Ted. I want to start by commending our team for delivering excellent operating results throughout the fourth quarter. And during the busy peak holiday period, we achieved a near perfect completion factor, running a great operation is a key focus at all times. However, high load factors like we had over the peak holiday period and winter weather disruptions add extra complexities and running a lot of reliable operation and our team did a fantastic job managing both. Moving on to our fourth quarter revenue performance. Total revenue for the fourth quarter was $1.32 billion, a decrease of 5% year-over-year, which was better than the high end of our initial guidance. Total RASM was $0.0894, a decrease of 17.3% on a capacity increase of about 15%.

The load factor was 80.1%, down around 1 point year-over-year. On a per segment basis, passenger revenue per segment decreased 25% year-over-year to $48.24. Our non-ticket results were quite as strong as they were in the fourth quarter last year, declining 6.6% year-over-year to $66.6, but I would call the non-ticket trend from an exit rate perspective, strong as we head into Q1. I’ll add some more color on this non-ticket topic further down in my prepared remarks. It is not apparent by looking only at the quarterly averages, but leisure demand in the peak holiday period was very strong. However, with the return of corporate business traffic still lagging that of leisure, it feels like there is still a bit too much capacity chasing leisure demand to gain yield traction and drive historical load factors during the off-peak periods.

In the immediate term, primarily January through the first half of February, we felt the best way to address this continuing issue was to reduce flights on off-peak days to a greater degree than we typically do. We also made other network changes, including suspending a few of our recently launched markets and slowing our overall pace of introducing new markets to our network. We are also continuing to make other adjustments to the network to better align our capacity towards markets where the supply/demand trends are more in balance. We started to get more aggressive in this process in Q4, and we will continue to refine the network throughout the balance of the first half of the year. For the first quarter, we estimate our capacity will be up approximately 1.5% year-over-year, which is about 5.5 percentage points lower than we projected back in October.

About half of this variance is related to the reduction of scheduled flights and off-peak that I just spoke about. The other half is a combination of having to pull NEO aircraft service to position them for engine removals due to the powdered metal disc inspections and some impact still remains related to ongoing ATC issues. ATC issues are improving. They just have not improved to the degree we thought they would. Therefore, to help support operational reliability, we have not yet been able to reduce scheduled block times as much as we had originally anticipated. We’ll get there, but it’s taking longer than any of us would like. For the remainder of the year, based on our current assumptions regarding engine removals, we anticipate year-over-year capacity for Q2 to be up low single-digits, Q3, up high single-digits, Q4 expected to be about flat, which leads to full year 2024 capacity ranging between flat to up mid-single-digits versus full year 2023.

The timing of engine removals and aircraft being pulled through service is fluid. So, this is just our baseline estimate for now. Please note that our published schedules for the second quarter and beyond do not yet reflect the estimates I just provided. I’ll now turn to how we’re thinking about the demand environment and what we think the trajectory will be headed into the summer. There is a material amount of industry capacity coming online in some of the markets we serve. However, we have also seen some cuts in projected industry capacity growth rates for 2024, which should be constructive for yield production as we move through the year. Domestic demand over the peak holiday period and early trends we are seeing for Spring break give us confidence that we will see more normalized demand trends for domestic travel this summer.

In regard to non-ticket trends throughout Q4, we saw core ancillary products improved in each month on a year-over-year basis. This trend is continuing into Q1 as well. Some network shifts as well as some adjustments to our revenue management strategies has non-ticket back on track. Additionally, some new merchandising techniques are going into production this month, which we anticipate will continue to push non-ticket higher as we exit the off-peak and head into spring break in Q2. As a reminder, we are lapping what was a very strong first quarter last year. So on a -over-year basis, we are estimating first quarter 2024 TRASM will be down compared to the first quarter last year. However, our network and schedule changes, together with non-ticket revenue trends should provide a nice tailwind to our sequential unit revenue performance from Q4 into Q1, and that sets us up well to continue this positive trend into Q2.

We estimate the first quarter 2024 total revenue will range between $1.25 billion and $1.28 billion. And with that, I will now turn it over to Scott.

Scott Haralson: Thanks, Matt. 2023 was a year of many distractions and unpredicted events. Our team did a great job preparing for and reacting to all the issues we face with professionalism and a positive attitude. For that, I want to give thanks to everyone on the Spirit team. Turning to our fourth quarter results. Our fourth quarter operating costs were $1.49 billion, an increase of 11.3% compared to the fourth quarter of 2022. On a capacity increase of 14.8%. Non-fuel operating expenses were $998 million, much better than our initial expectations, driven largely by lower airports rents, lower cost resulting from our reliable operational performance and various cost savings initiatives. Also, better fuel efficiency drove lower-than-expected fuel expense despite fuel price per gallon coming in higher.

Together with the better than expected revenue results [indiscernible]. Operating margin for the fourth quarter of 2023 was negative 12.4%, about 2.5 points better than the high end of our initial guidance. While I applaud our team for beating expectations, these are clearly unsustainable results overall, and we remain determined to return to profitability and have been adjusting our strategy accordingly. There is considerable economic power in the Spirit business model, but we do understand some of the limitations and issues with it as well. We believe we have some things in the works that will address these issues while maintaining the power of the model. We look forward to the initiation enhancements as the year unfolds. Total non-operating expense came in about $5 million higher than our initial guide, in part due to lower interest income, higher interest expense, and mark-to-market valuation of the derivative liability associated with the 2026 convertible notes.

We ended 2023 with $1.3 billion of liquidity, which includes unrestricted cash and cash equivalents, short-term investments, and the $300 million of available capacity under our revolving credit facility. During the fourth quarter of 2023, we modified our credit facility extending the final maturity to September 30th of 2025. We recently completed sell leaseback transactions for aircraft we previously owned and operated. We completed 20 of these transactions in December and five more in early January. In total, these transactions resulted in net cash proceeds of approximately $420 million. We retired one A319 aircraft and took delivery of two new A320neos and two new A321neos during the fourth quarter, ending the year with 205 aircraft in our fleet.

Before I move on to the first quarter outlook and plans for 2024 and just a quick update on our GTF engine availability issues. In January, we averaged 13 grounded NEO aircraft and continue to estimate this number will climb steadily to an average of about 40 in December. Averaging about 25 AOGs for the full year 2024. The situation remains very fluid, so we’ll keep you updated as things develop. While we are working closely with Pratt & Whitney to predictively manage the engine removals and finalize a compensation arrangement that will partially cover the cost of the AOGs we won’t be able to achieve what we would consider an optimized cost structure until we get past the engine availability issues. Net of expected reimbursements, we expect this current AOG issue to cost us a few margin points in 2020.

Looking ahead to the first quarter and full year of 2024, we continue to face cost pressures from carrying costs related to the NEO engine availability issues, inflationary pressures on wages and we will also see increases in aircraft rent due to the higher mix of leased versus debt-financed aircraft. On the positive side, we continued to improve fuel efficiency, driven by the increase in the number of NEO aircraft in our fleet particularly the eight A321neos added in 2023. In 2024, we are scheduled to take 20 more A321neos, which will drive further fuel efficiency. We are also making progress in improving utilization of our non-AOG aircraft, which we define as total fleet minus any aircraft underground due to engine availability issues and this is a better comparable metric to historical fleet utilization numbers.

We expect the benefits from better fuel efficiency, improved utilization of our non-AOG fleet and the rightsizing of our labor cost to be the platform for our ongoing unit cost repair. Regarding liquidity, we believe over $1.3 billion of total liquidity at the end of 2023 should be more than adequate to sustain us until the business is back to generating cash. This is a milestone we think we will cross as we enter March of this year and then begin building cash in the second quarter and beyond. And while we have confidence in our ability to return a positive cash generation, we will continue to look at other opportunities to further shore up liquidity as we progress through the year. Also, while Spirit remains focused on consummating the merger with JetBlue and is looking forward to prosecuting the expedited appeal of the US District Court order, the company is aware of its 2025 and 2026 debt maturities and is assessing options to address those maturities when the time is appropriate.

We anticipate capital expenditures, including net predelivery deposits for the full year 2024 to be about $235 million. For the first quarter of 2024, we estimate our operating margin will range between negative 15% to negative 12% with a fuel cost per gallon averaging $2.90. So now I’ll turn it back to Ted for closing remarks.

Ted Christie: Thanks, Scott. As we enter 2024, we are beginning to see the benefits from the tactical and strategic changes we implemented in 2023, including day of week schedule adjustments eliminating a number of underperforming cities, refocusing our network on areas of obvious strength like Fort Lauderdale and directing more discretionary airplanes to markets with better supply/demand characteristics. In addition, current booking trends support our view that the domestic environment has begun to rebound. Together with the changes we have made, we estimate this will result in an unprecedented sequential improvement in TRASM from fourth quarter 2023 to first quarter 2024, which supports our view of a domestic recovery in 2024.

After 20-plus years of working for lower-cost carriers, it has become ever more clear to me that we exist in an uneven playing field. To quote, Judge William Young and his decision to enjoin the merger between Spirit and JetBlue, “The airline industry is an oligopoly that has become more concentrated due to a series of mergers in the first decade of the 21st century, with a small group of firms in control of the vast majority of the market”. No true awards were stated in the entire opinion. Despite that explicit acknowledgment, the government continues to do nothing to address the anticompetitive structure of our industry. Instead, they have just engaged in an expensive and long litigation process to block the merger of the sixth and seventh largest airlines that when combined would still be half the size of the force.

This case should never have been brought. It’s beyond absurd for the government to claim a victory for the American consumer. In fact, it’s ridiculous. As kind as I can be on the matter would be to confirm that the law of unintended consequences is in full effect. Either through direct government intervention or lack, thereof, the end result has been to perpetuate a small group of haves that control the market at the expense of the have-nots and the American consumer. Nonetheless, you can rest assured that the Spirit team is 100% clear and focused on the adjustments we are currently deploying and will continue to make throughout 2024 to drive us back to cash flow generation and profitability. And now back to DeAnne.

DeAnne Gabel: Thank you, Ted, Scott and Matt. And I also want to apologize the background noise you may have heard, I’m not sure where it was coming from, but it does seem to have resolved itself. And with that, Greg, we are now ready to take questions from the analysts. We do ask you to limit yourself to one question and one related follow-up.

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Q&A Session

Operator: Great. Thanks so much. [Operator Instructions] First question is from the line of Christopher Stathoulopoulos with Susquehanna. Christopher. please go ahead.

Christopher Stathoulopoulos: Good morning. Thanks for taking my question. With regards to network optimization, could you talk a little bit in perhaps some more detail around the changes with your crew scheduling, placement? And then also how you’re thinking about your seat distribution by market. It sounds like perhaps something similar to what we heard from Frontier this week, but any additional color here as we think about the composition or distribution of your capacity as well as some of the tactical changes you made around scheduling in the crew as we look at 2024? Thank you.

Scott Haralson: Sure. Let me make a couple of comments specifically on how we’ve designed, how the airplane network interfaces with the crew and then I’ll let Matt also opine on how he feels like seats and capacity are being deployed into markets. So, over the last 2.5 years, we’ve made a number of structural improvements to the core network and how it enhances our reliability. And one of the biggest changes we made at the early part of — the later part of 2021 and into early 2022 was restructuring, how many crews originate and come back to their base, and what percentage of the flying origination comes back to its space, and how long those crews are away from their base. Those changes were made back then. And if you follow our reliability since then, while on-time performance ebbs and flows, depending on how our utilization is doing throughout the year.

And of course, depending on air traffic control and weather, completion factor has been excellent. And that’s really what’s key to us is to see that signal first, then we can start tweaking further in ways that we think can drive even better on-time performance. And if you look at the peak part of the holiday period at the end of last year, we were in the top three. And for the month of January, we were in the top three and then the top two in completion factor. So I think as far as structural enhancements go, we’re getting wiser and wiser about how we can enhance further reliability. If we think about how the network has been deployed from a seat perspective, maybe, Matt, you want to give some perspective on that.

Matthew Klein: Yes, sure. So Chris, we — when you look at first quarter, this year versus sort of the last 12 months rolling into the quarter, we have added on a year-over-year basis, 55 new routes, and we suspended or exited 37 routes and part of those suspensions includes nine city exits or suspensions, where we think we’ll be back into those cities. So, those are some material moves for us and I think Ted mentioned his prepared remarks, the shift in the ASMs, some of it has gone to Fort Lauderdale where we continue to see very good strength and we’ve also seen a good bit of growth for Spirit in the New York Metro area as well. Again, a great source of strength for us and what we’re seeing is some shift away from some other leisure destinations.

Orlando is a little smaller for us. Vegas is also smaller for us. So really just surveying the landscape, which we do all the time. And those are the actions that we’ve been taking. And I think for now, we’re really happy with what we’re seeing as the returns on that. And we’ll just continue to accentuate our strengths and look for opportunities where we think the supply-demand balance favors us a little bit more.

Christopher Stathoulopoulos: Okay. Thank you. And as my follow-up, Matt, or Scott, maybe if you could walk us through the cadence of how we should think about the GTF aircraft grounding, you did give your capacity guide by quarter here for 2024. So thank you. But as we start to or rework, if you will, our bottoms-up models for next year, any detail you could give us so far as the cadence of GTF groundings through 2024 and how we should think about 2025? Thank you.

Scott Haralson: Yes. Hey Chris, this is Scott. I’ll start. For 2024, I think I mentioned a little bit in the prepared remarks, we will have an AOG number in the first quarter in the high-teens. And that will steadily climb through the year and probably end up in the fourth quarter, averaging about 40 AOGs and that would translate to an annual number for 2024 to about 25 AOGs for the year. For 2025, it’s going to be difficult to estimate today. I mean — and in actuality, really looking out into the third and fourth quarter had some bit of volatility. So looking into 2025 is going to be tough to estimate. There’s a lot of things that we’re doing in Pratt is doing to help manage the number. So we really only have a good bit of visibility into 2024 at this point.

Matthew Klein: And I would just — this is Matt. I would just add to that to Scott’s point, there is still some volatility in the number. And we’ll just continue to adjust the fleet and the network will move around some of that. We feel pretty good that we have a better number now than we had even a few months ago. So that’s good. And – but, we’ll just continue to move as necessary.

Christopher Stathoulopoulos: Okay. Thank you.

Operator: Great. Thanks, Christopher. And our next question comes from the line of Mike Linenberg with Deutsche Bank. Mike, please go ahead.

Mike Linenberg: Yes. Hey, good morning. I apologize if I missed this, Scott, but when we think about the airplanes coming in for the year, I think, what is it, 26 or 27 new Airbuses? How are those being financed? And as each airplane comes in, should we think of that as a cash-accretive transaction as you bring in each airplane with all the puts and takes?

Scott Haralson: Yes, Mike, thanks for the question. Yes, the number of deliveries for 2024 will be 27 aircraft. And they are all fully financed with either the ones coming from Airbus or sell leaseback transactions, and we also have deliveries that are coming from lessors as direct operating leases. So those are all fully financed. And in fact, we’re fully financed through the second quarter minus one second quarter of 25 airplanes. So that’s the delivery stream. And in regards to the financing, we typically will finance the cost of the airplane. So we’re usually plus or minus the cost of the airplane. We don’t typically over finance and also maybe it’s a good time to form out maybe some clarification too on how that stuff works.

Because we’ve had some questions from analysts around what do we do with gains and losses. So they’ve asked whether or not we include the gains or losses in our operating expense. And to be clear, we do not. We actually calculate the gains or loss in account for them at the non-operating expense and they are excluded from our non-GAAP metrics. So we know some airlines do account for gains and losses on credits to operating expense, but we don’t do that.

Mike Linenberg: I would say, actually, the airlines that — most of our lines that with respect to sale leaseback gains actually follow what you do. Southwest excludes them as well when they take them. So no, I think that that’s sort of what it’s been historically. My second question is just related on cash. You mentioned that you anticipate getting into positive operating cash in March and then beyond June quarter and beyond, clearly, there is a seasonal tailwind that will start kicking in probably if it’s not now, it’s within the next week or two. And so we know that, that carries you to a part of the year. But as we think through the full year, are you implicitly telling us that the operating performance or I should say, the financial performance of the airline is expected to get a lot better in the back half of the year and/or will that be supplemented by other things like whether it’s deferred maintenance or other levers that you can pull to generate additional cash on the operating side?

Thanks for taking my question.

Scott Haralson: Yes, Mike, I’ll start, and I am sure Ted and Matt want to jump in here, too. I’ll just at the high level, sort of, sort of financial forecast for the business. And yes, we’ll likely burn some operating cash in the beginning of the first quarter, which we talked about January and February. But the things will make a turn as we head into spring break and the second, third and fourth quarters, we do expect to generate some operating cash for the business in those quarters. We expect margin to be positive for those periods. And it’s really premised on the domestic return, our ability to manage some of the costs in the business, which we’re already seeing returns on so that’s really what the premise of the cash generation is. But I’ll let Matt and Ted sort of talk about some of the markets.

Ted Christie: Yes, I mean, I think I’d only add, Mike, that, when we hit, and I think I made a comment, when we hit the late summer of last year, there was some notable shift in domestic demand, and we’re obviously heavily skewed domestic today. And that coupled with Pratt & Whitney not moving in our direction by any mean and getting considerably worse burdened the business with both kind of like a bad setup on the topline and a lot of burden in the cost structure. And that was not a good start. But we’re starting to make the adjustments we need to make, moving as rapidly as we can. Looks like the market should stabilize just based on what we saw on the peak of the fourth quarter and what we’re already seeing for spring break and we’ll make some as Scott alluded to some adjustments you know to right sizing the business as well and all that combined while not fully done and we still have a lot of work to do to get back to where we want to be its progress in the right direction that gives us some confidence that we can start moving the cash needle in the right way.

Mike Linenberg: Very good. Thanks. All right.

Operator: Thank you, Mike. And our next question comes from Duane Pfennigwerth with Evercore ISI. Duane, please go ahead.