Q2 2020 Spirit Airlines Inc Earnings Call
[music].
Welcome to the QQ 2020 conference call. My name is errand to now be operator for today's call. At this time all participants are not listen only mode. Later, we'll conduct a question and answer session and the question and answer session. If you have a question. Please press Star then one and you touched on some I'm not trying to call her to Maria Barclays.
And your analyst Investor Relations Ma'am you may begin.
Thank you Erinn and welcome everyone to theoretically second quarter earnings call because he's been recorded and simultaneously webcast.
Everything else equal with the I can only website for 60 day.
Any or could they called our care Crazy to Chief Executive Officer, It's got parents want to keep and I've got officer, and Matt Klein, Our Chief Commercial officer also joining us on the call today, our other members of our senior leadership team.
Following our prepared remarks, there would be a question answer session for sell side analysts.
Today's discussion will contain forward looking statements that are based on the company current expectation I've got a guarantee of future performance and that's subject to risks and uncertainties.
Factors that could cause actual results to differ materially from those reflected by the forward looking statements are included on when we put some filed with the FCC. We undertake no duty to update any forward looking statements.
Comparing because today, we would be adjusting oculus exclude special item.
Please refer to our second quarter 2020 earnings release, which is available on our website for a reconciliation of our non-GAAP measures that I now turn the call over to you.
Maria and thanks, everyone for joining us today I want to start by saying I'm very proud of how the entire spirit team has responded to the changes driven by covert 19.
Many of our procedures processes and work environments have changed all while a personal lives have been disrupted.
Our team has done an incredible job adapting as necessary, while maintaining their focus on delivering the best value in the sky.
As we begin to welcome our guess back we are taking purposeful steps to provide a safe and healthy experience for our guests and team members.
We continue to expand and enhance our cleaning procedures during the quarter, we launched anti microbial flogging of our facilities and aircraft, which is effective against the Corona virus.
This new process further improves upon our existing high grade disinfected Bobby.
In addition to these and other enhanced cleaning procedures, we are enforcing our policy the guest and team members must where a mask while on board.
These enhancements coupled with the most advanced air handling and filtration systems onboard any aircraft flying today, we believe create a safe and healthy environment for all.
Financially our top priority is to conserve cash and enhance our liquidity position.
Given the significant decline in demand due to covert 19, we dramatically reduced our flight schedule for the second quarter.
During the month of April we made several significant schedule cuts given the highly suppressed demand environment operating only about 50 flights per day.
In may given the weak demand we continue to operate this minimum schedule.
We increased flying in June as a result of encouraging, albeit tenuous signs of demand rebounding.
These favorable dynamics, our low cost structure, a relatively strong June and an uptick in forward bookings for July resulted in favorable cash dynamics for the month of June.
In connection with the Finalization of our aircraft deferral agreement with Airbus. We also will amended our 2018 PDP financing facility extending the expiration date from December of this year to March of 2021.
Due to deferring aircraft and amending this financing facility in June we made a principal payment of nearly $50 million if not for this onetime principal payment. We would have achieved nearly zero average daily cash burn for the month of June.
This of course doesn't mean, we're through the worst of it in fact with the recent barrage of headlines regarding the increase in new Corona buyer cases for of ours cases, we've seen another step back and demand.
We expect the rest of the summer to remain challenging for us and the industry. However.
When demand for leisure travel rebounds, and stabilizes as evidenced by our June results are leading low cost structure positions us well to be among the first to return to profitability.
With that I'll turn it over to Scott to discuss more details of our quarterly performance.
Thanks, Ed.
Drilling Ted and thinking the entire sphere team for helping us navigate through this crisis.
The last few months have been challenging and our teams perseverance has been inspiring.
Our financials for the second quarter, our adjusted net loss was $286 million or a loss of $3.59 per share.
Adjusted operating expenses for the second quarter, 2020 decreased 43.3% year over year to $481 million.
These changes were primarily driven by a 92.5% decrease in fuel expense and reductions in other flight volume related expenses.
Salaries wages and benefits expense was about flat compared to the same period last year. Despite an 11.6% increase in our pilot and flight attendant workforce prior to the onset of the Covance 19 vendor.
Enhancing and preserving liquidity remains the top priority.
We ended the second quarter was $1.2 billion of unrestricted cash and short term investments.
During the second quarter, we completed a public offering of common stock netting us proceeds of $192.4 million completed a convertible debt offering netting us proceeds of $168.3 million and we increased our senior secured revolving credit facility for $110 billion to $180 million.
Of which we drew the full 180 million during the second quarter.
These transactions, bringing our total liquidity raised through financing transaction since the onset of the pandemic to over $540 million.
And last night, we lost and at the money offering for 9 million shares were common stock, which if executed at yesterdays closing price would yield about $150 million.
In addition, we received proceeds from the payroll support program portion of the care Zak with $301 billion and expect to receive the remaining 33 million of proceeds before the end of July.
We are pursuing additional financing for our unencumbered assets. We currently have traditional unencumbered assets that are valued at approximately 600 million and intangible assets such as our free spirit loyalty and $9 barrel club programs as well as other brand related assets that we believe could be used as collateral to.
Get additional proceeds.
We have applied for alone under the cares Act secured loan program. If approved we are eligible for up to $741 billion and we have until September thirtyth to determine whether or not to participate.
Regarding our fleet plan, we have reached agreement with Airbus to defer some of our 2020 in 2021 aircraft deliveries and corresponding predelivery deposits.
For the remainder of this year, we will now only take three additional aircraft, bringing our total 2020 deliveries to 12 versus 16 previously.
For 2021, we now have 16 aircrafts scheduled for delivery versus 25 previously.
You can find a copy of our updated fleet plan on our website.
Of the three remaining deliveries this year two will be debt finance and the final delivery will be financial facilities that transaction.
The 16 deliveries in 2021, our secured under direct lease arrangements and we have not yet secured financing for the remaining six.
We expect to use sale leaseback financing for the six aircraft. The first of which is scheduled for delivery until June 2021.
Total capital expenditures for this year are estimated to be approximately $560 million or 215 million net financing.
The amounts not financing this year are primarily related to predelivery deposits payments.
For the remainder of the year, we estimate our capital expenditures will be $112 million or 28 million net of financing.
The majority of these expenditures are related to aircraft.
As we progress through the second quarter, our cash burn declined primarily due to an improvement in net sales we define average daily cash burn as the sum of operating cash flows debt service total capex net of financing and predelivery deposits payments.
It does not include the impact of any other financings capital raises or funds from the payroll support program.
Our average daily cash rent trended from about 90.5 million in April to about 1.5 million in June.
Ted mentioned, our cash burn in June included a onetime principal payments.
Of nearly $50 million related to an amendment of our PDP financing facility in conjunction with our Airbus aircraft deferral agreement.
Our first quarter call back in early May we previously guided the cash burn levels of around $4 million per day for May and June. However, we ended up at just under $3 million per day for those two months, excluding the PDP facility payment, which was not contemplated in our $4 million per day estimate.
Looking forward based on current demand trends and the operation levels, Matt will discuss we estimate our average daily cash burn to the third quarter 2020 will range between three and $4 million per day.
Before I close I want to address the question as to how we can maintain our cost advantage in this environment.
Even if our utilization is temporarily lower than in previous years.
Our cost advantage come through for things higher utilization higher density seating configuration more efficient fuel burn and overall lower cost.
In the in the higher utilization has the smallest impact of the four while our structurally low overall cost base is the largest contributor to that advantage.
Correct. If we would have operated the daily utilization at the industry average of almost 11 hours per day in 2019, we would still have a CASM ex well under six cents. This.
This is still half of the CASM ex of the three largest carriers and 30% to 40% lower than the other lower cost Airlines point being our cost advantages here is here to stay all airlines are going to be facing short term utilization reductions in it impacts everyone's customers.
With that Theres, Matt.
Thanks Scott.
I also want to thank our spirit team throughout the upheaval caused by the pandemic and economic crisis. Our team has pulled together to support one another and the communities. We serve I'm inspired by our entire team Im proud of everyone's dedication during this unprecedented time.
As others in our industry have commented the cobot 19 pandemic has had a material impact on travel demand. Our total operating revenue in the second quarter declined 86.3% year over year.
As Ted and Scott both indicated the demand environment has been volatile our flown load factor in April was 17.9% on a 76% reduction year over year capacity. The may flow load factor was 65% on a nearly 94% reduction in capacity and the June.
Loan load factor reach 79.1% on a 79% reduction in capacity.
We were very encouraged by the trend we're seeing for summer travel throughout the month of June.
But unfortunately as the headlines turned negative in mid June regarding the increase of Cobot 19 cases demand for July cooled off a bit.
Having said that we anticipate July flow load factor will be in the low to mid Sixtys, we anticipated the recovery would be rocky and it's certainly has been.
But today, it's on basis July capacity is estimated to be down 18% year over year August down, 35% and September down 45% year over year.
This equates to third quarter capacity being down 32% compared to the third quarter last year.
International travel bans are still restricting us from serving many of our international destinations, but once the bands are lifted it remains our intent to bring back service to all the destinations we started prior to cobot 19.
In the international markets, where we have reinstituted service visiting friends and relatives are big part of the demand segment and we expected to be so with other destinations once they open.
As such we anticipate we will add back service to our VF, our markets first and broaden our service as more tourism oriented destinations come back online.
The timing of stabilize demand recovery remains uncertain, but it will recover.
The economy of the United States is resilient and as always bounce back stronger than it was before any previous crisis presented so.
Based on history, we believe price sensitive traveler is going to visit their friends and relatives will be along the first travel segments to rebound followed closely by low fare leisure travel.
Both of these segments are core to our network, but we are in a great positions offer low fares and doing so out of profit.
Now I'll hand, it back to debt.
Thanks, Matt.
The continued health and economic crises that have caused unprecedented challenges on many fronts social unrest in our country is another challenge, we must overcome now more than ever we need to unite as a country and stand together against racism and bigotry of any kind.
At Spirit, we celebrate our differences and know that we are stronger together because of them.
Despite these challenges our team has remained dedicated to provide excellent service to our guest and each other and to offer compassion for those around us I'm humbled and encouraged by the heart of the spirit team.
In times of economic and societal prices such as this the power of travel and human connection is ever more needed.
In any macro setup fares are the single most important component of anyone's air travel selection and the simple truth is that spirit is best suited to carry planeloads of low fares as our cost structure and network construction give us the tools to do so in a profitable and sustainable way nothing precludes any carrier.
From offering low fares, however, only a low cost airline can do so and when.
History is shown in a multitude of past recessions that low cost airlines outperformed the market. Some of questioned the sustainability of below cost model be it because of utilization density or lack of hubs.
Facts and economic realities favor our model during periods such as this discussions about market share marginal cost and hub economics are irrelevant to our business model, we will selectively deploy our assets in ways that we believe driving the best possible return get us through cash neutrality and on our way back to profitability while this.
Anyone's guess as to when demand will return to normal one thing is very clear the margin of travelers needed for spirit to achieve these goals is significantly narrower than it is for any other airline with that back to Maria.
Thank you, we're now ready to take questions from the enemy. We ask that you are giving yourself to one question with one related follow up erring were ready to begin.
If you have a question. Please press Star then one Samsung partially Streetlights MCU. Please press, the time, saying or the hash key and will be the labor for the first question is now can you see some speaker phone you maybe it's because first of all press slogan.
Once again that is start and wondering your touchtone phone if you have a question.
Your first question comes from savvy, Sir your line is open.
Hey, good morning, everyone.
Thank you could provide a little color I appreciate it as I said the trends have maybe flat data or reverse but.
Yes, I understand just how the year over year kinetic net revenue.
Progressed.
And kind of what your expectations would be especially given the noise around seasonality.
I'm sure why don't I introduced and Matt can jump in here as well so as we indicated in the second quarter.
Revenue really began to move in a positive direction relative to our size force.
Throughout the later part of May into June and we added capacity.
Into the summer period as reaction to that.
Once we head into the fall.
It's a seasonally off peak period of time and I think it's fair to say September and October are going to be very off peak. This period. So I think you would expect that.
Year over year revenues would be challenged in that period of time when compared to the to the experience. We had thus far for the latter part of the second quarter and into the early part of July.
But Matt you want to give any more specifics.
I think savi as we think about the progression through the summer.
I think it's important to note that peak periods have performed relatively well again. This is all are relative basis of course July 4th holiday was strong theres lot of travel demand out there.
Our I think evidenced by what we're going to do from a load factor perspective in the month of July it's still speaks to demand is out there what were what we're being very aware of and recognizes that as we get out of the summer into the fall.
Traditionally off peak periods will continue continued to be traditionally off peak.
So we're expecting there to be a normal progression probably a little more exaggerated this year for obvious reasons and then we're just thinking about how we prepare ourselves as we head through.
Timber it into the fourth quarter at a hit the holiday periods again at the end of this year, so little bit of I'm not going to give you exact numbers on how the revenues progressing through the summer into the fall, but thats kind of the way the Brett we're thinking about off peak periods heading back into peak periods.
That's that's actually still helpful. Thank you and then on just on the cost trend I'm kind of curious now that you're pulling down capacity again.
Into the third quarter.
But still above kind of the second quarter, just should we assume kind of the lower year over year declines or is there anything else that we should consider as as for that across actions taken.
Thanks Ivy. This is Scott, yes, I think when you think about a third quarter Opex, we're probably going to be in a range of 670 to six $680 million of Opex expense that includes about 80 million gallons at $1.26 of as compared to our 480 million of.
<unk> expense in Q2.
I think you could think about it that way.
That's helpful. Thank you.
Your next question comes from my Crane break your line is open.
Hi.
Hey, good morning, everybody I guess.
Two questions here.
Really Scott.
The way the the.
Here's loan program under the carrying back to 741 million.
The way it reads from the leasing it does sound like right now it's up to 741 and the actual on may be actually less than that and I'm. Just curious you highlighted 600 million of unencumbered traditional collateral that could be pledged and then you highlighted some other items with monetary amounts.
Your like maybe I'm reading too much into.
Yes that Manny.
Have enough collateral come back from 7.1 or maybe it would require almost all of your collateral that we have against smaller non triggers small.
Have a sense.
We can only this will add some color to that on that problem 41.
We have sizable collateral fall back yet.
We can do that so I think for the government low we're targeting to use our intangible assets. Those so thats the loyalty program in the $9 per club.
And we expect that we're going to be pretty close to loan to value. That's needed for the government loans were still in the process of finalizing the valuation and and how the government would would take those assets, but we do expect we'd have enough to cover the loan if we wanted to do that.
The not require any tangible assets.
That's that's actually great color. Thanks, Scott and then just actually my second question and again back to you when I think about your ATM also from the March quarter to the June quarter, It moves from $411 million 452 Atlanta.
That makes sense when you think about like here at your future sales hires you head into peak period.
How about as we think about the split though.
Paul at traditional tickets that better on the books that have been purchase versus what is potential refiners.
Did that split change all that much from March to June I don't know if it's like a 1002 thirds you know carriers have started to.
The demarcation seems to be split along those lines I'm just curious if there was a share it with that works itself.
We're hearing that still very similar to what's in the same march quarter and thank you.
Right, Yeah, Michael the ATM outlets to grow.
Our.
Oh for it as well so with the 450 plus million dollars GTL, our credit shell balances is just shy of 250 million.
So it does a pretty good chunk of the deal.
That's that's probably the wage stigma.
Okay very good thank you.
Your next question comes from Brandon Oglenski. Your line is open.
Hi, Good morning, everyone. Thanks for taking my question.
Ted I think given that you announced the order book restructuring.
Can you give us any insight into how you're thinking about 2021 or even been normalized period I mean, how fast do you want to resume growth and do you think you could even do it.
Before we get like a vaccine our care for this virus. So we are the competitors have highlighted.
Demand will come back until we have that outcome.
Hey, Brandon.
Sure. So obviously we work.
Scott on the team work closely with Airbus to create a little bit more breathing room for us with regard to the order book, but.
Another component of our fleet that remains that is that is exist. Today that is somewhat we've described is kind of a swing component of our fleet is the.
Entirely owned.
Threenineteen fleet, which is somewhere between 25 and 30 airplanes, it's in that ballpark.
And we reserve the right to use those airplanes or not at any given point either at a at regular utilization lower utilization, we're not at all and so the the work we did with Airbus gives us.
A decent amount of breathing room with regard to deliveries Capex and also flexibility as it relates to timing the recovery and then the additional shopper shock absorbers using those other aircraft.
To to help us time at a little bit better the core of your question, which is what is the what is our expectation and when will we time the recovery. Unfortunately don't have any pressure and information on that that that would help you, but where we are using the real time information that we're seeing today to help.
Guide our views on what the fourth quarter peak will look like what will look like heading into the spring of next year. It is our expectation by the way that the company will resume its growth that as Matt mentioned eventually there with the economy will recover leisure travelers are returning to the market already and we expect that that will will continue its going to be bumpy.
And so navigating that window of time is really the crux of the issue and spirit is assembling a level of resources to be able to do that with fleet flexibility with.
Deferral rights and making sure that we have the appropriate.
Capital onboard to navigate it so.
I don't have a definitive date as to when we expect that to happen.
Because we're digesting real time information, but I think we have created enough flexibility to be able to do it when it happens.
Well I appreciate that responds to them.
I guess is question can be difficult to answer but.
As this situation, where you've got to build it and they will come or how you manage capacity most of our multi wait to see the bookings run hotter schedule you will help us out for folks that don't run an airline.
Yeah.
Well, it's a great question and we mentioned Thats on our May call that we were not intending to lead the lead the recovery, we were going to evaluate the market see where demand recovers and then deploy into it which is exactly what we did in June and July.
And I think that worked well for us.
If you've seen from our forward schedules, we are removing capacity versus the peak in July as we head into August and September and I think that shouldn't shock anybody because it as Matt mentioned it is in off peak period, and we don't intend to try to drag the market to recovery, we're going to evaluate it and that will mean, we're going to have too.
We continue to move the network in and out.
Depending on the seasonality and the pace of the recovery so.
To those that don't run an airline it's again, it's treacherous.
But I do feel.
Pretty good about our ability to use the assets, we have to navigate within that window timing. It perfectly is anybody's guess.
But our focus on.
On seasonality network flexibility and cost structure, we think sets us up to be able to navigate it.
Thats kind of where we've been driving the network over the last 45 to 60 days.
Appreciate it.
[music].
Your next question comes from Jamie Baker Your line is open.
Hey, good morning, everybody. So the question.
May not be answerable, just given how choppy demand trends are if you were to characterize how your competition is behaving in newer markets.
Relative to say the fourth quarter of last year would you characterize competition is more aggressive less aggressive or the same Matt.
Or impossible to tell [laughter], Jamie good morning.
Instead.
So.
When compared to a normalized period, you're right, it's impossible to tell because I think the mantra choppy I think that the capacity movements across the various airlines are are different.
And and.
Individuals' strategies around which type of traffic to target and that sort of thing those are all not normal today. So I think it's impossible to kind of characterize it.
What I will say is that.
Our activity in June and July has reinforced that that low for fares can bring back activity and.
And as the the.
The kind of media market and the new cycle in late May in early June began to turn more favorable and we were looking towards a relaxation of restriction leisure travelers were like a coiled spring they were ready to come back low fares, okay, and admittedly that has hit another bump in the road here because the new cycle is.
On the other way the numbers clearly in our home state of Florida are not encouraging and and as you know our network is largely Florida, we have 45% to 50% of the of the network touches, Florida, and so even specifically to us we probably have.
A little bit more of a challenge right now as Florida navigates its issue, but what's been encouraging over the last 60 days is seeing how people react when the new starts to get more favorable any information starts to become more favorable and that's where we think we're going to be ready to to deploy okay. It's navigating the window of time in the middle there.
Our that becomes the challenge got it that's helpful and as a follow up and again. This may also be.
Difficult to measure, but are you seeing any demand difference based on.
Stage length I realize you don't obviously don't have truly long haul flying but.
Interesting leisure patterns out there for example, you know consumers are.
Totally willing to spend 90 minutes on a spirit aircraft, but longer flights, you're seeing different demand trends anything like that.
Hi, Jamie its Matt I'll take that.
Good.
I would basically say.
The law of supply and demand continues to hold as probably the best way to say it win win when we see opportunity.
To to attract that kind of traveler. The leisure traveler, then it doesn't really seem to matter, where theyre going if we have the right the right price and the right scheduled the right time for them that we're seeing there we're seeing ridership.
I would tell you that heading in I'd say back in April may.
Was operating under the thought that you're bringing up which is the further the flight the less likely a guess may be willing to sit on any aircraft no matter who is a product.
That doesn't really seem to be the case, it really seems to be where there's pockets of strength and there is demand for that for that kind of travel leisure travel then it doesn't seem to reflect the length of the whole relative to the ridership.
That's great. Thanks for taking my admittedly long key questions appreciate it.
It's.
Your next question comes from Dan Mckenzie Your line is open.
Thanks, Good morning.
No questions here, Matt, Florida State of Florida, 45% to 50% of network.
I know, Texas, and California are bigger markets for you guys as well has there been a difference in demand progression in the cobot hotspot States. If you will pardon me versus the rest of the network and I guess I'm, just wondering how that's impacting or.
Or how that's affecting how you're optimizing the schedules as.
As we head into the fall.
Yes early so we are tickets Ted mentioned, we're taking in real time, all the information that we can for various states.
And at applying that to our thought process back back when things first started.
End of things started the pop up into New York Retro area relatively quickly, we basically stopped flying to near Metro area for a period of time based on that information that was sort of at the outset of of of the outbreaks earlier as as that got better we added more service back into New York Metro area as we're seeing.
Impacts from headlines, which are legitimate obviously from what's happened with case counts some leisure oriented destinations are being impacted and that has a direct impact on on demand.
We have a relatively large presence in Myrtle Beach and Myrtle Beach. For example has had some negative news and then you see bookings relatively quickly kind of tail off and there's an impact with cancellations as well so as the headlines move around the country. Then you start to see cancellations pop up and a lack and a real.
Production in gross demand at the same time, we're not going to be immune to that that's happening to every airline cross across the country right. Now we do feel like there is some geographic impact to us that on a mix of the network basis, we're probably feeling more than others, but we also anticipate that will start to chase.
Range as as things that end up change here across the country, where we have some presence in California, but we're not a major player in California that may impact Airlines really really soon that are bigger players in California. So we expect it's going to be a little bit of squeezing the balloon until everything is under control.
As the months progress.
Understood Okay.
And then second question here balance sheet roadmap question.
Scott I'm wondering what the balance sheet looks like exactly it into the year.
In terms of of debt just based on.
How you're thinking about what you're going to need to raise in terms of additional liquidity here and then what is the year end liquidity target the tier that you're shooting for.
Hey, Dan So we'll start with cash of that May lead into some of the the debt discussions. So we're not going to give a full year target or have any guidance on the balance, but but what I can do is probably walk you through some of the math of how that may play out.
Maybe start today was at $1.2 billion cash balance and.
We have an ATM in the marketplace that you can you can take estimate on how much we take of that in the year.
We have the government loan aurs or some type of program, where we use the.
But if our program and I know for club as collateral.
Good day, a guesstimate on on how much we could take them there there's other carriers acts benefits.
Thats sort of gives you your pro forma cash balance and then we've given guidance on cash burn of three to 4 million for the third quarter, you can probably expect the fourth quarter directionally to be a little bit better than that.
What are going to give a number because we're not sure where that's going to play out, but directionally a little bit better so that could get you to sort of a year in cash balance that we're looking at.
At least a ballpark and then of that from a leverage perspective, we havent added a ton of debt so for.
Really the revolver has been the big components and a little bit of the government payroll support program, but we are going to lever up a bit.
Back half of the year either in the form of the government alone.
Or some type of program, where we use the intangible asset so the levers going to move up of this is nowhere Rhonda.
Understood. Okay I appreciate that thank you.
Your next question in queue comes from Duane Pfennigwerth. Your line is open.
Hi, Thanks.
Just wanted to check my understanding of your definition of cash burn it's not it's not a spirit question. Because these these definitions are all over the map but.
If your 2021 Capex is in the range of say 700 million.
But it's a 100% financed.
That would not impact your cash burn so in other words, you could get to cash flow breakeven, but the balance sheet could still be expanding.
Yes doing the its net of financing. So we were leased 100% of the aircraft we took.
The net would have basically zero cost from a capex perspective, but from a cash okay perfect.
Okay, that's consistent and then.
Not sure if you Havent offhand, but can you give us breakage revenue for all of last year. We got we got the first half what the disclosures last night I Wonder if you had that for all of 2019.
The way I do not have that on hands. So can you can see if we can compiles of the there until if we disclose full breakage for for 2019, but we can we can do to look.
Okay.
And then just just on demand kind of Big picture and forgive me. If you said this already but there's some industry peers that have talked about demand in the kind of 20% to 25% of 2019 levels over the summer is that how you are seeing also.
Duane This is this is Matt.
I'm not sure exactly with the references that sort of the competitors.
Our talking about but in terms of.
How we think about overall demand. We also had a question earlier I want to add to this that savi acid the very beginning about revenue.
We are prepared to talk about that in the third quarter capacity will be down 32% as we had mentioned earlier, we're expecting a revenue outcome year over year to be down about 65%, so revenue down 65% year over year relative to the 32% reduction in capacity.
For the third quarter.
Okay.
No that helps add color to your question there Duane that's it sorry, sorry to have you repeated I appreciate I appreciate the answer very clear.
Yes, the pump thanks.
Your next question comes from Joe Capital Your line is open.
Hey, Thanks, very much good morning.
My first question is a strategic one for chatter Mad whoever wants to I'm curious if the current crisis presents a sort of a hidden opportunity for spirit to actually go and seek out new strategic airport partners, whether that's in the domestic market or near field international destinations just airports that can offer attractive fees or terms.
To attract spirit to those airports sort of help them stimulate demand and support the economic recovery when it does pick up again or I mean is that something that's that you'd even consider doing right now maybe going out with RSP is to position for one things normalize or is that something like that just very back of mine during times like this.
Well clearly was front of mind. Thanks for the question Joe.
What's from mine, obviously is navigating the crisis right now focusing on liquidity cash burn using the network to enhance those types of things, but with that said.
As we as I mentioned in my prepared remarks, we expect that as the economy begins to recover that our travel segment will be leading that and we believe that spirit will be at the front end of it.
That travel segment, so evaluating our opportunities throughout the course of this crisis, while not the first thing that I wake up and think about in the morning in the last thing I think about a night is is a component of it and.
And so we we.
We expect the business the brought broadly the industries.
Speaking broadly we'll get smaller.
And with that we believe there will be opportunity and so thinking about how to.
To pursue that is one of our projects again not the first one.
But but something that we think we can do whether or not its.
Exploring unique airport partnerships or expanding in areas that were previously difficult for us to to gain access.
We're looking at our existing franchises the way we fly today be it in large leisure destinations or even international in other ways for us to capitalize upon our geography quite frankly so.
So I think those are all on the list and we expect as as recovery happens that they will materialize.
Right right. Okay. Thanks, Ted My second question very quick one just and apologies if I missed it what's your latest thinking on the need for layoffs or furloughs in the fourth quarter. After after the apparel funding expires.
Sure. So there is obviously a bright line data at September Thirtyth, right now where the cares Act.
Covenant does expire we are still in fluid.
Evaluation as to.
What we think we would need to do.
I mentioned that you know.
As we talked about this kind of like the period of time that were attempting to navigate until the the leisure segment begins to recover how do we do sell and.
And included in that could be Rightsizing of fleet.
And or Rightsizing of other fixed related expenses and that sort of thing we are in regular discussions with our organize work groups and they have actively been taking voluntary action to provide the company with flexibility thousands of employees accepting.
Voluntary.
Leaves that help.
That help us navigate the crisis and reduced fixed expense and so.
So while those are on the table, we continue to look at ways too.
Mitigate the need for an end voluntary action post September thirtyth.
But right now I think we're still reading the game film to be honest because.
The summer has been up and down both sides and we want to make sure that we that we digest all the information before we make a call being small being a little bit more nimble being a single fleet type allows us to do that a little bit closer and then I think you're seeing from larger airlines.
Got it thanks Ted.
Yes.
Your next question is from Hunter K. Your line is open.
Hey, everybody good morning.
Morning.
Scott what would your daily cash burn be saying like a three month lead time, if you had to take your capacity growth rate down to zero.
Well, we've generally talked about sort of the baseline cash burn for the business at today's levels of fleet will be around $4 million a day.
So that we could we've talked about a fixed variable component so we'd be about half of our.
Operating expense.
So I think thats, probably kind of number.
Well Thats very helpful. Thanks, a lot and then you talked about.
Utilization being down I think you've referred twice to it as being temporary or short term. So what is the lag between the time when you actually hit your pre covert capacity levels and when you hit your pre covert utilization levels I guess what happens first.
And would there be gap between those two things occurring thanks, yes.
I'll try first tonner, because it's a it's an interesting topic because threaded into your question is how long is the.
The period of time that we've been discussing this whole call like how long is the dependent just lower part of the recovery, which were just not sure about so it well ill just it's potentially a cost question that so much had demand question to some clarity on I mean, I am really it's not on the only asking about like your view on when demand recovers just.
So a clear what I mean.
So about the utilization lag when you can get back at 12.3 hours per day, sorry to interrupt you I just wanted to clarify.
Okay.
Sorry, I interpreted it view would have the utilization goes up when the demand recovers, but you see said the 12.2 or yeah versus 2019 capacity I mean, yeah. Yeah. It's just that's right. It's just what happens first CES 2018 capacity on SM basis are you have to 12.3 hours per day first and maybe that is it the band question wasn't.
Tends to be in one, though yes, there. Thank you.
The fleets moves in 2019, obviously when taken delivery so.
To get to 2019, a assumes we could have lower utilization.
Right right with and the only thing I'd add because I was going to get to it is that to the extent that we decided to keep all the airplanes utilization b.
I would would lag VA sand production, because we are bigger to the extent, we decide to keep all the airplanes and that's the when I said navigating the period of time by which we believe we're in this down.
So in the shoulder part of this down.
Would would guide our decision on whether or not that's true and we haven't yet made that call but.
But that those those are the working parts, it's the fleet count and and a return to demand.
Okay, sorry to interrupt you. Thank you appreciate it sure.
And your next question comes from highly Endeka. Your line is open.
Thanks, very much operator high team and thank you very much for the time.
I know I should probably notice and I apologize that I don't do you own.
On the land upon which you were going to build your headquarters building and if so would you consider selling it to get through this crisis before.
Pursuing at once we get.
Back to some level of whatever is normal.
Hey, Julie this is Scott so yes, we do on the land.
So I don't think the decision to sell the land would be to generate cash I think it's really a decision around what we think the future of that.
Facility is going to be so if we decided to continue down the path, obviously linzess, we decided to change of plans and that it gets up so I don't think it's for generation of cash.
Okay and then my unrelated question is.
One other things that's changed among some of your peer group its ancillary fees and I'm kind of wondering what you're thinking about the future of those fees and how they're going to luck.
Now once we get to.
Ill now some level where people are are not afraid to fly again.
Hi Lane, it's Matt good morning.
So with what's interesting is right now and the environment. We're in today our.
Our seat assignment charges in bagged charges have been relatively stable once we got into a.
Closer to somewhat normal situation that we're in now with demand, although it's nowhere near real normal if that makes any sense.
Is there hanging in there actually so those charges seem seem to be ones. It's part of our models quarter. Our model at our our customers are continuing to after the normal way there if you're referencing sea change fees. If you mean that one overall.
That one is always up for for a discussion.
I think our perspective on that is we're going to have a structure out there that we think generates the most overall total revenue for us and still provide services to submit to the guest so we're always that evaluation of all of our all of our service charges. So to the extent that we think a change would benefit the car.
Customer and benefit our revenue generation than we would make a change right now in the world. We are in today, it's been relaxed we do not anticipate it's going to be that way.
Just a couple on Capex first so maybe first a clarification did your agreement with Airbus to defer aircraft and up resulting in a slightly larger reduction to 2020 capex in that 25 million target you called out last quarter I think on my math is getting closer to 10, although there could be some other moving pieces there.
And then in your 10-Q, Aercap cut Capex of 356 million for 2021, but.
16 aircraft for delivery that single low or something else being netted against that I guess, just probably bigger procure question.
How should we be thinking about 2021 capex into thank you again, so from the Capex number this year really I think the one of the components is a net of Pdps.
Yes, the PDP.
For this year, we expect them by $80 million ish remaining of Capex. This year. So maybe that's the difference in your 2020.
In 2021.
It's it's a little bit different because the 16 deliveries that we have 10 of those are direct operating leases from less orders that are not part of or order books.
So the six than we have from Airbus during 2021 or really the capex of what you're trying to think about.
Okay got it and then anything on the non aircraft. So I wish we thinking about.
For 21.
The remainder of this year, we said around 30, a little more than $30 million of non aircraft capex.
We haven't thought about 2021 yet.
So you could use a barometer of 2019 or 2020 as a as a guesstimate for 2021, but we haven't done our our Capex plan for next year.
Okay, great if I could we being just one quick more fleet. One I know you I know you just noted that your decision on how big the fleet is going forward will be demand dependent but can you help us think through flux do you have any event. It did want to get to a smaller fleet is it is it just that 20 to 25 18 19, Onefleet you mentioned.
Earlier or should we ought to be thinking about lease return not thanks again for all the time.
Sure.
I'll I'll take that one.
Thanks for the question. So I think the as I alluded to those those three nine teams that we own or the other natural first step.
Beyond the utilization of course, so for just talking about fleet.
There there is zero cash burn airplane today. So they can they can be partially used they can be part or they can be retired and there's 25 of those aircraft in the fleet today.
So that's going to be which which for the size of the airline we are is actually a sizable percentage.
Of hopefully.
So I think thats the biggest component lease returns, we don't have any scheduled lease returns in the near term here.
So I think.
We've really be focused on this some fleet of aircraft first.
So to finalize the point, we own about 20, almost 20% of more fleet unencumbered is the 25 Threenineteen do we have four athree twenties unencumbered as well.
And we don't have looked at that we don't have a lease return until really the into 2020 to absorb feeling covered assets to give us some stability.
Okay, great. Thank you very much.
And your next question in queue comes from concession artists. Your line is open.
Hey, good morning.
Scott I know the loyalty program in the co brand.
Card updating those were two initiatives and I think maybe they've continued to progress through all this could you update us on on how that's going and what the nature of the conversation with would be of a has been are they approaching things differently given the environment and how sensitive do you think the economics of your co brand card are.
Yes.
You know potentially being smaller or are growing at a slower rate going forward. Thank you.
Hey, Joe It's Matt I'll take that question, so I would I would characterize discussions.
With bank of America.
Is extremely stable and very productive.
And the reality the situation is that due to everything going on right now we've actually slowed some of our development.
On some on the program overall in terms of at the technology perspective, and getting things ready to go so.
Long answer short I think the relationship is great.
Things have been approached about same way and really the pacing item is a lot of the Ti work that we purposely slowed down right now.
This while we're thinking about capex overall, but thats not an indication of our lack of desire to moving forward and we will move forward. The timeline just got pushed out a little bit due to everything going on right now.
Got it and then just in terms of maybe the demographic of your customers can you just talking about maybe what portion of your customers are older. Just in light of Cove. It has that did that shift as demand.
Came back and then have you learned anything in terms of what's effective marketing spend and what's not as you have kind of turned off and turned on the airline over the past few months. Thank you.
This revision so.
I'm going to get into the exact percentages, but we do have a pretty good handle on the demographics of our of our customer base. What I will tell you, though is directionally. The ages of of people on the aircraft have come down during the pandemic. So the the traveling.
Consumer on average is becoming younger.
Onboard and along those lines also things like household income I mean, we're tracking as much as we can and some of those other components have changed around a little bit I'm as you'd expect with the younger a younger.
Average age the household incomes come down a little bit.
With that as well, but we're getting very good information.
These days in terms of surveys and as the pandemic has continued we're actually getting better information. It seems like our guests are as willing or in some cases more willing to share their experiences with us.
And along those lines of experiences of Evan good our net promoter scores have in fact improve during during this period of time. So it just goes to show that continue continuing to run a good operation matters at our Guessers are seeing that as well.
Thank you.
Absolutely.
Your next question comes from Andrew Your line is.
Hi, Good morning, everyone can you hear me.
We can here, yes, great.
Sorry, if I missed this huh.
If I missed this earlier, but just trying to get a sense for like what type of revenue decline you think you need to reach in order to be cash burn breakeven.
Any sort of guide post you can give there and I guess, if you are uncomfortable, giving a guide post looking forward, maybe give us a sense of where June revenues came in to achieve that sort of.
Cash burn breach breakeven number.
Hey, Andrew this is Scott.
Interesting question on the drop in revenue it the way that we sort of thought about it technically is look EBITDA margin is your.
Sort of.
Ongoing cash generation breakeven number.
So if you're to 20% EBITDA margin you can withstand a 20% reduction in revenue to be cash breakeven is an estimate.
So I think it at any point below that number of revenue declines greater than that number you have to take a corresponding amount of fixed offset of your business.
Especially if you're going to operates.
A smaller amount of capacity so difficult to say what that number would be but I think from a longer term respective yet to get EBITDA margin zero.
Gastric any lighting, we feeling we could add to that as our EBITDA margin going into the crisis was higher than than the vast majority the airline so as it returns. We expect that we will you first one to generate cash at what percentage of revenue was the trickier question and it's hard to say that definitively without knowing whether you mean wouldn't sable fair.
And with the same capacity deployment, all that sort of thing.
Right Fair enough are you willing to give a June revenue number.
You mean like revenue decline what your revenue decline yes.
Yes, so I think.
We haven't given any monthly data that that.
Yet.
Andrew but.
One thing about cash neutrality in the month of June obviously, the way that we and other airlines have defined cash inflows and outflows is the some of our bookings for forward period minus your cash expenses minus shared your depreciation all their year amortization of debt all are kind of stop so the.
Set up in June was pretty good because demand was definitely coming in for them on.
And we were booking July.
Which which all airlines were doing at the time, So I think what what's more important to to the analysis is the relative performance there and it shows you that in a recovery we're already going to be.
Ahead.
Based on the return of the leisure traveler.
Okay got it my other questions have been answered thanks, a lot you.
Got it.
And your final question comes from Darryl Genovesi. Your line is open.
Hi, good morning, everybody Thanks for Tom.
Yes.
Our thought you reduced your second quarter capacity by 83% your labor costs.
Barely budged I know you have the moratorium on both the door, but.
Other turned the operating under the same structure restrictions were still able take out.
20, 30% or Q2 labor costs. So we just hoping you can help us understand some of the moving pieces Bunny service I think will serve us on labor supply.
I'll start Scott can can jump in as well, so yes labor cost basically flat.
Despite the falling capacity I think the other input is that labor volume went up because we were a growth airline heading.
Heading into this period, so we have more.
Bodies on the property year over year than than we would've otherwise so I think thats offsetting some of the benefit of the voluntary leave programs that we saw and of course those built throughout the quarter. So.
We didnt get a full run rate.
Benefit in there.
And and you know, we're not set up given given the companys opportunity to eventually resume its growth profile and and.
And you know.
Go through the recovery as as leisure demand recovers.
We have to determine how much of this is permanent how much of this is temporary and and I think that.
A bigger carriers with more travel segments like long haul international and business travel being larger components of it are probably making the same decisions, but maybe on a more accelerated basis, because it's a different market.
And so I think that could be also contributing to.
Maybe what your perceiving as a disconnect between where we are and someone else Scott will integrate so the we increased.
Total overhead.
People, probably around 12% year over year.
So that number is going to be.
Driver of the disconnect plus we had some moves that we made intra quarter.
Than we had to spend a little money on the bias and flexibility.
I did help us in other areas of the Pinedale. So we were a little bit inflated.
NSW be in the second quarter of and that shouldn't replicate itself in the third quarter.
Can you think can you just say where you are relative to your minimum on hours.
You mean from an average.
Crewmember.
Yes, so and that's probably want to make the most yeah.
You think that goes.
And maybe the exit rate would be good too.
Yes, I mean, obviously for versus the second quarter, we operated a minimal airline.
We're going to be four times the size of that in the third quarter. So we'll approach minimums, but I.
I would still estimate we'd be.
[music].
Okay. Thanks, Mike I appreciate it.
Yes.
Thank you ladies and gentlemen, this concludes our call for today.
Thank you ladies and gentlemen. This concludes today's conference. Thanks for participating you may now disconnect.
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