Q3 2020 Spirit Airlines Inc Earnings Call
[music].
Welcome to the third quarter 2020 conference call. My name is James and I'll be your operator for today's call.
All participants are in a listen only mode. Later, we will conduct a question and answer session.
During the Q and a session. If you have a question. Please press star one on your phone.
Now I'd like to turn the call over the N. cable senior director of Investor Relations you may begin.
Thank you James and welcome everyone to <unk> third quarter earnings call.
This call is being recorded.
Well I.
We play this call will be archived on our website for 60 days.
I think on todays call are Ted Christie, <unk>, Chief Executive Officer, Scott Harrison, our Chief Financial Officer, and not find our chief commercial officer.
Also joining us today are other members of our senior leadership team.
Following our prepared remarks, there will be a question answer session for sell side analysts.
Today's discussion contains forward looking statements not based on that are based on the company's current expectations are.
Not a guarantee of future performance and are subject to risks and uncertainties.
Factors that could cause actual results to differ materially from those reflected by the forward looking statements are included in our reports on file with the SEC. We undertake no duty to update any forward looking statement income.
In comparing results today, we will be adjusting all periods to exclude special items.
Please refer to our third quarter 2020 earnings release, which is available on our website for the reconciliation of our non-GAAP measures with that here's Ted.
Thanks, Deanne and thanks, everyone for joining us today as we sit here today nearly seven months removed from the beginning of the cobot crisis I'm ever more impressed and humbled by how our team has navigated. This incredibly dynamic time I think all our spirit team members for their commitment and professionalism and dealing with the challenges and consequences of the cobot pandemic.
Has imposed on our company and the industry.
Together once again, we have shown the flexibility and resiliency of our business model, we still have a ways to go before we resumed business as usual but.
Thanks to the efforts of our team our strong guest satisfaction metrics excellent operational performance, improving brand image and industry, leading low cost structure I remain confident spirit will be one of the first to reach sustained profitability.
Additionally, I would like to take this opportunity to provide a special acknowledgment to our union leadership groups and all our team members, who worked with us to find a solution to mitigate planned furloughs various voluntary time off programs in place through May 2021 enabled us to capture the necessary savings, while preserving jobs and our options.
Demand trends worsen or recover faster than expected.
The strong participation in these innovative programs demonstrates the us free to core of Spirit Airlines.
We also offered early out programs to eligible team members implemented a modest reduction in force of our management staff and business partners those were painful but necessary actions to help us manage through this crisis dirt.
During the third quarter 2020, our operational performance continued to excel completion factor was 99.8%, which earn spirit a first place ranking among reporting carriers and we delivered on time performance of 90% or better for each of the three months during the third quarter 2020 year to date through September Thirtyth, we rank second in.
Completion factor and third in on time performance among reporting carriers. This is remarkable performance, especially in light of the numerous network changes since March which can further complicate a complex business such as ours.
Getting guests back on the plane is one of the first and most important steps to recovery and we're doing that quite well for October we estimate our load factor will average in the mid seventies.
While these load factors are still on reduced year over year capacity. What is clear is that history is indeed repeating itself leisure travelers are much more resilient and they clearly preferred products that provide the lowest total price of travel.
As we have been saying since the beginning of the crisis our model shines in tougher times as we are best positioned with our cost structure and our network to respond to building leisure demand. This hypothesis has proven correct. Once again over the past few months. It is likely the recovery will not be linear and we anticipate demand will ebb in.
Slow however, all the work we have done prepares us to add capacity back where it makes good financial sense to do so and react quickly to demand indications and changes.
With that I'll turn it over to Matt to discuss more details of our revenue performance. Thanks that I want to start by saying. Thank you to all our spirit team members for going the extra mile to take excellent care of our guests. They are high service standards, especially in the face of additional challenges brought about by COVID-19 have helped us deliver great van.
Due to our guests.
Despite heightened anxiety levels by some travelers around COVID-19 concerns our guest satisfaction metrics have never been higher our guests value. The operational improvements we have made our extra sanitization efforts continued focused on guest how our low fares and customize it will travel options and of course, our friendly and efficient service.
Yes.
And we're continuing to make other enhancements to the travel experience for our guests. We are rolling out new cabin interiors upgrading our seats, which offer enhanced comfort and provide more usable leg room and as we announced last week. We are re launching our loyalty program in January to.
To bring more value to our guests and unlock enhanced earnings potential for the airline.
The public feedback we've received from industry experts on loyalty programs have rated our new program amongst the best in the industry and they've congratulated us on integrating key features of our business model into the program itself.
We are also improving the overall travel experience for our guests by rolling out Touchless and self service opportunities that expedite the check in process. We have developed meaningful updates to our mobile app that have already shifted many guests to use their own devices for check in and we recently launched self backdrop and a number of our stations, which.
Allows our guests to adapt to tag and drop their own bags, but.
Additionally, spirit is the first airlines launched domestic facial biometrics solutions on self backdrop aimed at expediting our guest airport experience.
Turning now to our third quarter revenue results. Our total operating revenue in the third quarter declined 59.5% year over year due to demand impacts from the pandemic.
Total revenue per passenger flight segment decreased 21.1% year over year.
Well, both average fare and non ticket spend per passenger segment declined year over year as expected non ticket revenue per segment declined much less than ticket revenue per segment.
Average fare per segment decreased 35.1% to $35 at 57 cents, while non ticket revenue per segment only decreased 7.2% to $51.37.
As a reminder, because we operated so few segments in the second quarter 2020 items not related to passenger travel such as breakage brand loyalty and other revenues had an outsized impact on output per segment results. However, during the third quarter. The impact from these items was in line with the third quarter last year. Our team is doing a great job or.
Offering our guests more choices and driving superior non ticket revenue results.
In fact right now in October our non ticket revenue per segment is expected to slightly increase versus October 2019, yet again illustrating the strength of our business model.
Turning to our network, we've seen some international jurisdictions lift or travel bans, but were but we are still not operating 100% of our previous international network.
Demand for international destinations remains highly correlated with quarantine restrictions.
So while we will bring back service to all our international destinations we have been doing so at a pragmatic pace.
Our current December holiday travel period network expectations for our Latin American Latin America, and Caribbean network have us increasing HSM is versus 2019, demonstrating that the strength of our international network continues to perform.
Turning to capacity expectations October capacity is estimated to be down 36% versus October 2019 with November December each down approximately 20% year over year. This equates to fourth quarter capacity being down about 25% compared to the fourth quarter last year.
While we feel while we feel more upbeat and encouraged by the trends post labor day, we are closely monitoring the situation as we expect demand will be fluid and at least somewhat correlated to COVID-19 headlines and jurisdictional quarantines. The booking curve is still materially shorter than normal, but both it and our travel search curves have been.
Aggressively lengthening we were pleasantly surprised with how October trended and bookings for the Thanksgiving period are certainly encouraging.
Based on our current assumptions, we estimate total revenue for the fourth quarter will be down between 43% to 45% year over year.
Obviously, if we see heightened travel restrictions or other disruption it could change this outlook, we're not seeing anything in our bookings to suggest this is going to happen, but we are mindful that the recovery may still be a little bit bumpy and there will be some noise, while demand recovers to pre co bid levels.
But make no mistake about it our demand is solidly on the way back and we know that the strength of our model presents us with even more opportunity to bring low fares and more go to United States Caribbean and Latin American traveling public not surprisingly price sensitive travelers going to visit their friends and relatives have been among the first travel segment.
Mr rebound followed by vacation travel both of these segments are core to our network and together with our industry, leading cost structure and ancillary revenue model, we remain well positioned to excel at serving this part of the demand segment and now here's Scott, Thanks, Matt joined Ted and Matt and thinking all of our spirit team.
Members for their dedication to the to the success of our company throughout the organization. We have maintained a can do attitude in the face of all of the uncertainty of the last seven months and I'm grateful and honored to be part of this team.
Turning to our third quarter 2020 financial performance, our adjusted net loss was $215 million or a loss of $2.32 per share.
Adjusted operating expenses for the third quarter decreased 24.3% year over year to $650 million. This change was primarily driven by a 62.9% decrease in aircraft fuel expense due to decreases in both fuel rate and volume.
In addition, other expenses such as distribution ground handling and crew accommodation expenses were lower year over year due to a substantial decrease in flight volume better.
Better operational performance also drove a significant decrease in passenger reaccommodation expense compared to the same period last year.
However, despite a significant decrease in flight volume compared to the third quarter last year other rents and landing fees increased year over year due to airport signatory adjustments and rate increases at various airports at spirit serves.
Our fuel efficiency as measured by Asms per gallon improved to 10.3% year over year, and we expect to see about the same year over year improvement in the fourth quarter due in part to the fact that we plan to keep our Athree 19 fleet part until next year.
Turning to the balance sheet, we ended the third quarter with $2.1 billion of unrestricted cash and short term investments during the third quarter. We received the remaining $33 million of the initial payroll support program funds completed our aftermarket stock offering netting a $157 million of proceeds and we issued.
$850 million of 8% senior secured notes collateralized by our brand and royalty assets. Upon successful completion of the secured notes offering we notified the us treasury that we had elected not to participate in the Cures Act loan program.
Regarding fleet, we took delivery of one debt financed aircraft ending the third quarter was 155 aircraft.
Earlier in October we took delivery of two aircraft one of which was debt finance and the other was secured under a sale leaseback transaction.
With these two deliveries we will end 2020 with 157 aircraft.
We have 16 aircraft scheduled for delivery in 2021.
10 of those are secured under direct operating lease arrangements, we expect to use sale leaseback financing for the remaining six aircraft. The first of which is not scheduled for delivery until June of 2021.
Total capital expenditures for 2020 are now estimated to be approximately $545 million or $200 million net of financing.
A further reduction of $15 million since our guidance last quarter.
In the fourth quarter of 2020, we estimate our capex will be approximately $45 million or $5 million net of financing. Most of these expenditures are related to aircraft.
As for 2021, Capex again, assuming we use sale leaseback financing for the six aircraft not yet financed our initial estimate is about $100 million to $125 million, we'll have outflows of about $40 million for net delivery deposits and another $60 million to $85 million of other capex primarily related to.
Aircraft, including one spare engine and other spare parts.
Our daily cash burn averaged $2.3 million for the third quarter. This was better than our updated guidance or approximately $3 million, primarily due to better than expected revenue and timing of some payments.
For the fourth quarter 2020, we estimate our average daily burn will be around $2 million per day slightly better than what we saw in the third quarter of 2020.
As a reminder, we define average daily cash burn as the sum of operating cash flows debt service total capex net of financing and Predelivery deposit payments. It does not include the impact of any other financings capital raises or funds in the payroll support program.
Given that we have fortified our liquidity position, making cash burn as a metric less relevant we are migrating our guidance towards more traditional metrics such as EBITDA on EBITDA margin cash.
Cash burn has its uses but becomes less important as the liquidity runway gets extended beyond the near term horizon and working capital fluctuations become less important.
EBITDA and EBITDA margin better reflect our sustainable cash generation capabilities and our guide post for our decision making.
As an example in determining our level of capacity our goal is to maximize EBITDA and we'll continue to make capacity adjustments up or down that align with this goal.
Our adjusted EBITDA margin for the third quarter was negative 43.9%, which is good enough for second best in the industry.
Looking ahead to the fourth quarter, we expect our fourth quarter total operating expense, including fuel to be between $675 million to $685 million, assuming a fuel price per gallon of $1.23.
We estimate our EBITDA margin will improve considerably to a range between negative 9% to negative 14%.
In closing our financial metrics are reinforcing the strength of our model in recessionary times leisure travel is resilient, especially at low fares and we are seeing solid load factors strong non ticket numbers and top tier margin production, while this environment as bumpy and hard to predict we are ready for that we built a strong balance sheet with ample liquidity.
This combined with our low cost structure sets us up well to manage through this crisis with.
So with that I'll hand, it back to Tim.
Scott in summary, our team has done a great job tackling the challenges presented since March while the pandemic continues to have a negative impact on demand for air travel, we do not believe it changes our competitive position or represents a paradigm shift our future is still very bright I think the spirit team for doing a great job managing through this crisis.
When I lift the accomplishments of the spirit team on my Whiteboard I'm proud to say that we have addressed many of the issues. We identified in March such as to ensure the health and well being of our guests and team members to spring. This pandemic to solidify our cost advantage and minimize our cash burn to fortify our liquidity position and to pivot our network in ways.
And magnitude that I never thought possible.
Operationally, we are doing great. Our guest satisfaction metrics are higher than they have ever been and our low fares plus ancillary revenue strategies, capturing ever higher load factors.
Soon it will be time for us to turn our attention to the recovery and I look forward to spirit finding ways to continue to build upon our advantages and resume the company's growth in ways that will enhance our profitability and shareholder return.
With that back to Dan.
Thank you Ken James we are now ready to take questions from the analysts we ask that you limit yourself to one question with one related follow up.
Thank you.
We can begin our culinary session. If you have a question. Please press star one on your phone if you wish to be removed from the question queue. You May press, the pound sign or the hash key and if you are using a speakerphone you may need to pick up the handset first before pressing the numbers.
Once again, if you have a question press star one on your phone.
Our first question comes from Helane Becker.
Good morning line there.
Oh Im sorry, good morning can you hear me, yes, now with the hail and how are you.
Not like a 100% certain what happened there.
Okay.
Thanks.
Thanks for taking my question I think sequentially you guys actually did a really good job.
Generating higher revenue.
Could you just talk a little bit about what you're seeing in terms of lives.
On.
Tom will come back.
It just seems like what percentage.
Maybe Orlando Fort Lauderdale, you're seeing that May have come back number one and number two what's the timeline to get to non fuel unit costs.
Back down to 2018 level.
Thanks.
Okay, So I'm going to I'll kick off I'll, let Matt and Scott fill in around the edges, but as it relates to the first half of your question with regard to network strength regionally I think as we indicated on our previous call.
Earlier on in the pandemic during the summer, Florida for Shred were a Florida airline.
Nearly 50% of our capacity touches, Florida, and Florida was was having its issues with with the current a virus and I think we are seeing that.
In our activity in our bookings and probably feeling a little disproportionately disadvantaged as a result of our geographic focus in Florida that has has turned.
And Florida has responded well.
So we're seeing good activity across the state.
In in Fort Lauderdale, which is clearly our home and in Orlando and the West coast as well and as Matt indicated in his comments that flows down into the Caribbean and you can tell from our our ads there thats thats been productive Matt you want to add anything more we can turn it over to Scott from there I think I would just I would just add that.
As we've seen more things open up in Florida, and we've seen this in other parts of the country as well and not just here in Florida, but as as there are more things to do for example, once the beaches opened up here in Florida and remained open people from up North I knew that there were things to do once they once they got down to floor.
For example, and that's true across other parts of the country as well so as Ted mentioned there is some there was some impact early on from from our geography and.
Feels like Thats rebounded and we're set up well for the holidays, we feel Scott, Yes, Hey, Helane. This is Scott I'll answer the back half of that question.
With when we think about 2019 CASM ex.
So we were able to cut expenses out of our operating costs this year reduced fixed costs.
But we were already very lean pre committed so we also expect to see pressures into.
In 2000, 22021, and beyond and airport costs.
Airlines are having to cover some of the deficits at the airports today in the near term don't know how long that will extend.
NSW be will continue to rise here at spirit and at every other airline.
So we're not the only ones having to deal with some of the industry pressures of we're also going to lean a little bit more to lease financing versus debt financing in the near term, so thats going to pressure CASM.
So getting back to pre co vid CASM levels of is going to be difficult.
Thats easy to say.
But we haven't given up on that at all we have some levers we can pull.
To help mitigate some of these pressures, but it's still a little early to really talk about post colvin CASM, but those are really the puts and takes.
What is going to be in.
Only thing I'd add is 2019 as you recall it feels like you know.
Miles in the in the rearview mirror, but.
What's a difficult operating year for spirit, we actually had quite a bit of challenges earlier in the year and in the summer and we spent a lot of money.
Recovering from that and that amongst other things will be a tailwind for us for a better going forward.
Because we've you know we've got that benefit so as Scott said, there's definitely pressures, we're seeing across the industry.
But our objective here is to maintain and widen the competitive advantage that we have against everyone else and and when we look at the way things are set up we look at how other airlines are going to have to deal with similar challenges I like our puts and takes better than theirs.
And so whether or not we achieve absolute CASM levels of 2019 in 2021 or 2022, we don't know exactly but as Scott said, we haven't given up on that one.
It's more important is that we're expanding upon the advantage that we have against other airlines and we do think that thats very achievable in the near term.
Our next question comes from Savi Smith.
Hi, good morning.
If I look at your capacity.
In our much improved.
Capacity being in November December I'm, just thinking that things can change, but the most current trends should we expect kind of similar trends in January and February and what we're seeing in October and perhaps March seeing that that our impairment is is that okay. Thanks.
Planning approach.
It's obvious that.
So we have been.
Quite tactical and.
About our capacity throughout the course of the pandemic and you've seen it in the way our network has pivoted around I mean, we were flying.
50 flights a day in May in flying 550 in July and flying 300 in August or so so we've we've been very careful at reading the signs in the tea leaves right now we feel very good about how we're positioned.
In November December and we will digest that information and evaluate what that means for us in January and in February a one thing I would say in based on the experience. We saw in September and October the off peak didnt necessarily behave linearly the same way it would normally so as you are building.
Your way through the recovery.
It's not the same thing to say well September should be off versus where August was or or January should be off the way off of where Nov wise. For example, I think it's just a different set up so if things continue along this momentum change you're going to see us continue to add back.
And if we're right and this is and our plan a is accurate we think by than the midpoint of next year will be closer to where we were in 2019.
And taking 16 airplanes next year, we can start thinking about growing again.
And that's sort of our base case.
And then we'll we'll evaluate whether or not were right or wrong in real time, and we'll be able to make those adjustments accordingly, as Scott said, we built a lot of flexibility into the model and I think we're comfortable that we've got up and downside protection I.
I think it's obvious to add to that.
Specifically to January and February in addition to what Ted mentioned is most of what we will be evaluating is how we think about the off peak days of week in those months. So we think about this strategically of course, but then as we get closer to the travel period is when we really fine tune into what we what we think's going to happen with demand.
And then what we can support on the off peak days, a week until we get back to those peak or periods of spring break and beyond.
That makes sense. Thank you and if I might ask just on the debt financing.
Side of things.
You had any kind of discussions with Airbus on making our delivery schedule. Beyond 2021 is is there kind of thoughts on reworking that or even kind of finalizing the hundred aircraft in a very tiny.
Yes, we have had our obviously our initial discusses their butts and reworked that delivery stream really moving aircraft out of the back half of 2020 in the front half of 2021.
And we feel comfortable that we were able to move aircraft into periods, where we actually didnt have deliveries in the first place. So we've.
We feel actually pretty good about where the delivery set as it as it is today.
We actually might supplement some of those deliveries with.
With with direct to operating leases from less source, that's what our plan all along so I think that would be the flex capacity, we might move up or down that amount, we might look to the less orders for but I think our order book from Airbus is in a pretty good spot.
Thank you.
Next question from Duane.
Hi, Nick worth.
Good morning, Hey, Thank you and thank you good morning.
So just just a couple a network of questions from me such such a crazy year for your for your network planners Your network re planners.
You know agree you've done a good job of changing the plan when required pulling back when needed.
As you think about this year.
Is there anything you take away from this experience organizationally that improves your your long term planning process.
Well I'm going to start and I think Matt will have a comment but I'm going at the answer the question is absolutely yes.
So.
This has been a horrific period for the airline industry in general and for Us I'm not going to try to sugar coat it but we've implemented some very interesting close in monitoring around how route profitability is trending.
In ways that we probably hadn't done before maybe because we were spoiled.
With with how our network always responded but it clearly gives us enhanced visibility closer in and so I think thats. The first thing I think the second thing is while we're thinking about where we sit today as it relates to profitability or lack thereof or focus on cash generation.
I think we've we've developed some interesting tools around that too.
At what is optimal capacity.
Which in some places is very intuitive and some might be counterintuitive to be honest. So I think we've we've thought about both network placement in different ways, we can be much more dynamic in that.
But also in capacity deployment and be very thoughtful about that so that's right. When I would just I would just simply add that this this for the most part falls on the lives when you're talking about for a few years of just being as data driven as we possibly could be and other aspects of the company, where we've been collecting data and synthesizing.
But in a certain way really has come through big time, and we are using in a net and the network planning side that we really hadn't even anticipated previously so as Ted said.
Its has been it's been great to see the new pieces of data and think of it in ways that weren't necessary before and now they're necessary and we have good infrastructure in place now for the future as well.
Thanks for that and then just just along those lines as we think about kind of the industry revenue recovery.
It's a bit of a chicken and egg challenge right like if the industry. If the inventory is not on the shelf you are not going to generate the revenue and there's just so many markets right now that do not have direct service.
So as you look at the World from here going forward is this a time for breadth or is this the time to invest in building some depth in specific markets and thanks for taking the questions sure. It's a great question.
And as it relates to our right now October 29.
The answer is we've we've obviously had to pull flying from our core network that overtime, we expect will come back so.
The first move is restoring the core network back to where we believe it needs to be in the mix in there is an evaluation of opportunistic.
Advancement. So we have looked around throughout the country and in Latin America and attempted to determine are there areas where.
Where we would like to be that we have that we have opportunity perhaps to get into obviously Orange County, as an example of that.
But.
But your your IDR your concept of of depth and breadth. We always have looked at that that way. So the first step has to be to get the network back to where it was before.
Because we believe that's the those are the best flying ideas on the table right now still for the most part and then be opportunistic around that.
As well.
I appreciate the thoughts, yes, yes sure great.
Our next question from Hunter Okay.
Hi, everybody good morning good.
Turning to the other.
On the three high teens, Scott just remind me you said, they're all grounded.
Is that correct and then would you if if the infrastructure and drive out CASM little bit and demand continues to get a little bit better but is there a scenario where you don't bring those planes back and you may be replaced them is that what you're kind of referring to when you talk about supplementing deliveries with some operating leases, which is there a scenario where you would maybe just operating the front end teams back and just base.
So we swap them out for.
Larger hatred 20 family aircraft right.
Right right. So thats got obviously so.
Yes today to three Nineteens are parked.
So and grounded that just.
They are parked in advance of a time period, where we think there will be useful in.
So when you think about the three Nineteens, obviously, we've been planning for those to go away at some point because that they are aging fleet their oldest aircraft in the fleet. So we have planned out into the future at some point, where we would likely replace those either with three nineteens or 320 or 321 aircraft whatever that may be so it's really a matter of timing.
If we accelerated those retirements today or if we felt there was an opportunity to fly those in the near term because when you think about the marginal cost of those aircraft is pretty small today, we own those outright.
And and they have some some unique timing components that make operating NIM fairly inexpensive.
So there are some things we can do with that aircraft depending on what happens with demand. So right now we're viewing it as flex capacity.
Depending on where the market is for Athree hundred Twentys and and all those things it may change, which aircraft we view as the right aircraft for us over the near term. So those are all discussions that are going on right now we're not ready to make a call on on what will happen to the three nineteens in the near term what.
What it is but it's really going to be demand driven.
Okay.
Thank you and then.
What percentage of your customers fly alone.
Well.
Hunter I don't know the number up yet.
We're actually not not dissimilar from from other airlines that I've worked at.
No in the past, so it's going to be roughly around half half the passenger flying.
On their own in this in a PNR okay.
Okay got it thank you Matt.
Yep.
Our next question from Jamie Baker.
Hey, good morning, everybody good morning, refreshing, but not surprisingly hear the term PNR as opposed to six digit record locator.
Thank you.
Yes, it's just one of many industry nits. So so you.
Last we are early last week.
The week on week growth and TSH screenings CNO started this slip into negative territory I'm wondering if that's consistent with what you're seeing on the volume side or.
Possibly there is somewhat of a corporate influence on that broader metric in which case your figures might be better.
Hey, Jamie its Ted and more so as.
As we indicated and I think it was in matts comments too.
While there is clearly headline activity.
And that that's had been flowed throughout the course, we haven't seen anything yet.
That would that would reflect that in the way that our booking trends have moved so.
It's possible that the flux in Ts and capacity.
May be related to other demand segments that were just not caring to your point, but.
But at least as of today.
We haven't seen a change in.
Trending.
But you know we are sensitive to that so we're watching it and then I think we wanted to make that clear in our prepared remarks that were always being careful around the EPS is and we think we are prepared to deal with it one way or the other.
That's very helpful Second question Anna relief.
Second point.
You made a good point about how your monthly capacity has jumped around I'm.
I'm curious, though if this is just sort of using your existing operating muscles.
Or if there is some best practices that you're picking up.
Again specific to how you operate your response to Duane. His question was was helpful. But.
Was more about how you are analyzing some of the day what I'm wondering is whether there is a corresponding operating component as well we've always thought that nimbleness was very much part of your model. It just it feels like you are getting better I am just not quite sure what measures to to look at to test.
That thesis thank you.
Thanks for the compliment I would agree with you and I am extremely proud of the team.
I think they haven't.
I would call them best practices, but im not sure some of them come from somewhere else I think we've developed a few things on our own.
It starts with the network clearly and the network team.
Has come up with a way to make that network much more building block and plug and play than it used to be before so flights can come in and go out and be less damaging to the crew network, which ends up being our achilles' heel from time to time and so I think it starts there and then our operators have navigated that that flux extremely well so it's in the.
The way we are doing line construction is in the way that we've worked with our.
Union leadership on bid procedures, it's a variety of different small things that have added up to us being extremely close friend and tactical than we used to be before.
And I guess, our best practices some of them I am not I wasn't aware to be honest. So I think we we came up with them. So thats right and Jamie with what we're doing here is working very very pleased had mentioned between that network planning and scheduling group and the operating groups and it's and we're flexing up.
And down around peak travel periods, we do that every year. This this year is even larger than normal and part of that can be multiple day transition schedules to make sure. The aircraft need to go where they need to go get the crew and position and be ready for maintenance perspective, So all of those things coming together.
We have been building our team and getting ready for this and the team. That's in place you know knows how to do that and I think our completion factors had mentioned in our on time performance speaks to that so it's been it's been great to see everyone work together all the things that has some airlines have traditionally been silo to off here Everything's Everything's, one big ecosystem and working.
Altogether.
Solid answers. Thank you very much appreciate it.
Our next question from Mike lending Burke.
Hey, good morning, everyone I guess seven.
Q here, Matt just to you we hear a lot about how short the booking curve is and obviously as we approach the holiday season. It is getting a little bit longer, but if you could give us a sense of maybe what percent of tickets on spirit, maybe are being purchased within I don't know if it's three or maybe seven days the right network versus what it was a year ago.
Well, maybe subcu and how that's trending in the fourth Q.
So Mike that's a great question and one that I cannot answer for you, but I can tell you that directionally.
We are we are seeing the lengthening as I said and what we are seeing is around holiday periods. It's it's compressed and it's more compressed than you'd like to see but it is lengthening and even even just in the last week or so we've started to see the curves really kick in which we were.
Expecting to see and the good news is that it's happening and to me. That's what's important is making sure that what is happening is matching up to our expectations. In this compressed curve environment. So that is what I can say for that answer okay. Great and then just second.
You know when you look at other carriers, who are sort of rolling out their own pre departure covert covert testing.
Hey prophecies.
Can you talk about maybe what you're doing on that front.
Sort of in the context of we have American looking to do something with flights to Jamaica, Costa Rica, Bahamas, obviously those are city.
So these are markets that are important to the spirit network or is this kind of a situation where maybe its better for spirit to be a follower rather than a leader just given your price sensitive customer base and so sort of a broad question there, but I'm just curious about your take on all of it. Thank you.
Sure Mike It's Ted so I never like to use the word follower, but I think in this regard.
Industry is figuring out what the best answer is right. Now there are there are in some circumstances testing available that tends to be passed through to the customer.
So its just access to a testing side or a location and then it's done and that's been the first step we've been in conversations with a variety of airports, who are looking at establishing fixed locations within the airport to make it accessible right there to the to the if they have quick testing available and that becomes more routine.
That could be the next step and I think these things at the margin would be helpful for us because our international network.
Does does require a lot of babysitting with regard to testing today.
And so we have had to navigate I don't know if we'll be the leader on whether or not we integrate it.
Into our into our process or for for lack of a better word which tends to be a dirty word rest bundle it right.
But but I think we will be looking and talking with with airport authorities for sure about the best way to make it available.
To make it more convenient for our guests, yes, thats right. So Mike I think your question is more about on demand generation side, probably more than anything else and that's what that's what Ted was referencing just operationally we were where we have quite a few number of destinations that requires certain of certain kinds of tests that we have to in fact do checking.
On before the guest would even arrive at those international destinations. So there was definitely some growing pains of for a couple of weeks on that.
But that's all under control now and we feel pretty good that we know how to make sure that we have the right paperwork and make sure. The tests are correct.
So at least on the operational side, we definitely have a handle on that as Ted mentioned on the demand side working with airports, that's something that we would participate in but we're working closely with airports to understand what that even means and how does it get in the hands of the guest properly.
Very good thanks, guys.
[music].
Our next question from Brandon Oglenski.
Hey, good morning, everyone and thanks for taking my question and I got to admit I'm still cracking up about the single Joe maybe you guys should get a partnership a tender or something early spice up the frequent flyer program.
Hi.
[laughter].
Like sorry that I'm divorced, though it's pretty funny to me.
Add on.
On the outlook for EBITDA margins, we really appreciate that.
But do you think you can get to a breakeven outcome with industry revenue still now recovering or let's say corporate travel not back because argue or larger or higher cost compare is going to be seeking out the same markets. As you guys. Do you think as investors here, we just have to wait it out.
So.
It's a great question and we've spent a lot of time evaluating our position.
Versus the market and Scott will follow me here, because you have some thoughts mathematics on how it works but.
It I've heard I've heard other carriers reference.
What percent of last year's revenue that they need to get to in order to breakeven in that that seems to me to be a little bit unfair when you're not also referencing how much capacity you plan to fly.
Or or what the inputs to the revenue, our which could be load or yield and so.
I think.
You know if you fly for example, one flight.
You can breakeven with at a 50 50 fixed versus variable you could break even with 50% of your revenue clearly thats, an impossibility from a yield perspective so.
Clearly what we do know today is that the low fare leisure customer is the market.
The question will always be who can carry that traffic at a breakeven or better outcome and based on fares that we see prevailing today, we can do that eventually when we get our capacity back to where it needs to be.
We will produce results that will be positive EBITDA and eventually trend our way back into profitability and where we want to be.
Unfortunately, higher cost carriers have a much higher hurdle rate and therefore their breakeven load factors at these prevailing fares are considerably above 100%. So there will have to be a rationalization eventually in there and I think we are prepared to navigate Scott.
Scott what would you, yes, I think to push on that a little bit further is that any business that has a high fixed cost hurdle as airlines do it's.
It's very difficult to get to cash breakeven with a limited amount of capacity.
And so the relative nature around yield is the critical component right as you fly less of your capacity you need higher yields in order to reach that breakeven almost to the point, where the way. The math works is if you're flying a 100% of your capacity and we've talked about this before youre reduction in red.
Revenue that you can handle is really your EBITDA margin. That's your best proxy for reduction now you could you could also handle a in a corresponding reduction in capacity to that level, but you would need the same previous yields so either a reduction in capacity or reduction in yield gets you to that same EBITDA margin breakeven point.
Now if you start to reduce capacity and you're you're having yields that are lower than previous numbers. It makes it more and more difficult to get to cash breakeven. So.
So I think thats, what the industry has as either learned or we'll learn or they already know the dirty Little secret is that you need the capacity and the yield to get to cash breakeven with both of them down very difficult to do and clearly the ramp for us to get back to.
Our previous capacity and a yield that gets us to breakeven is smaller than it is for anyone else because our fixed base is smaller so that so that's a critical point that has set the hurdle rate is lower so you should naturally expect low cost carriers spirit included to fly more than the higher cost carriers the hurdle rates just lower.
And the rate between covering variable in total alphacare in fully allocated cost.
It's just smaller so the way the math works is we'll fly more as as an ultra low cost carrier and will be likely to get to cash breakeven quicker and profitability quicker. That's just the way the math will work.
And and whose line today is our low cost leisure travelers. We're we're set to carry those.
So that's just the way it's playing out.
Appreciate the thorough response and I guess, if I can follow up on that Matt I think you mentioned that your ancillary or non ticket revenue was actually.
Up or if you could comment on that but also in the no change fee environment going forward with a lot of your competition moving there does that change the dynamics that on ticket versus non ticket.
Sure Brandon so.
Right now our change fees are waived just like just like the rest of the industry. So the real the real Theres no product differentiation there right now and in fact right now our change the revenue is basically zero. So when I talk about the October non ticket rate being up slightly year over year, that's in the face of headwinds.
Like no change fee revenue. So just just think about that how thats a relatively large piece. This is gone away yet we still are having the success and it's going to be based on things that we've been talking about for a while just understanding how best to price our seat assignments, how to think about the merchandising of.
Bags and when their purchase in the purchase process and also we're doing a really great job at the airports with making sure. We understand what went to collect for for a lot of those charges as well overweight bag fees.
Something that we've done a great job in making sure that we that we do a good job of collection on and some of the technology, we're putting in place will actually assist us in that over time too. So I don't have that perfectly answers your question, but thats, how thats how were thinking about non ticket revenue moving forward.
Appreciate it thank you.
Well.
Our next question from Joe Hi, Aldo.
Hey, Thanks, good morning, everyone.
Hey.
Question for Scott on on the balance sheet you.
You completed your aftermarket equity distribution, you raised the $50 million unsecured debt. Consequently chose not to take the federal loan. So are you now effectively done with your capital raising needs for the time being and what's the next balance sheet move you need to make is addressing 2021 maturities.
Yes, Joe This is Scott So I think you're right I think we're done in the short term obviously, we're on a wait and see approach to see what happens with the recovery.
We feel pretty good about where the balance sheet as of today, we've been able to maintain the health of the balance sheet, our net leverage.
Is that a reasonable level up a little bit from 2019, the not considerably and that was our goal as we thought about raising capital.
So the cares act on the equity capital provided us a good bit of flexibility there. So.
So we feel like the balance sheets in a good spot.
Now we need even our production on the other side.
We'll see how that plays out but I think as you think about the balance sheet going forward, yes, it's going to be to maintain or decline that net leverage position.
We are able to to to get through this like I said, an okay spot but.
Well, we'd like to reduce that over time and thats going to come from even our production of those and get back to profitability thats going to be an important trigger for for us and it really might change in the near term how we think about financing if we talked about more leased aircraft versus owned so capital deployment will be important.
But I think the idea is to start.
Thinking about the net leverage position, we may we may not actually pay down debt. We may carry an extra cash by a little higher cash balance in the in the short term. So net leverage will be down there will be a little cost to coverage.
But we're going to play with either paying down debt or just carry more cash. So it's really about net leverage.
Got it okay. Thanks for that and then just a quick follow up with a quick modeling question I apologize still for you Scott.
How should we think about the salaries and wages line moving forward. It was about flat in the third quarter, how should we think about that for the fourth quarter and then also for 2021. If you can help us out there at a high level just just given the voluntary savings that youve secured premier Premier employees through next May and your base case assumption that you might be close to 2019 capacity levels by next summer.
Thanks for the time, everyone you guys. So a couple of couple puts and takes here so for Q4.
We're going to be about flat NSW be we're going to fly a little bit of airline and Q4, probably around 10% more.
You know in Q4 than we did in Q3, so we do have benefits from.
More leads in Q4 than we had in Q3, but we did have a considerable amount in Q3 as well so.
That is a little bit of a.
Make sure we have modeled correctly that the number is.
Maybe not as we said $50 million is benefit to not having furloughs and leaves instead, so that that number.
Won't actually play out in the fourth quarter, because we had about half of that in the third quarter. So.
So that flat quarter over quarter EPS.
SW be number is.
Is mitigated a little bit by capacity increases in there as well so when we think about next year, we haven't completed our budgeting process for 2021, so it's difficult to say, but we will be a beneficiary of some of the reductions in force that we have this year, but.
But we are planning to grow the airline again.
We're going to have increased trading in crude costs to make sure that we can that we can fill those.
So I think we're going to get back on that normal run rate, what we may see some azim benefit of in some areas, but I think on.
On an EPS in basis, we may be pretty close to to last year 2019.
And our next question is from Catherine O'brien.
Hey, good morning, everyone. Thanks, so much for your time.
Oh.
So maybe just coming back to the non ticket per passenger strain I've been impressed how well that Taliban, especially in light of the growing gap between non passenger and actually non ticket.
Passenger non ticket and an average fare.
Is it that you know is it that demand for those products is inelastic.
Once the.
Ticket and then purchase.
Hello can you hear me.
If we just heard some view of that business.
Yes.
Can you Didnt get a lot for your question.
Yes sure side basically the question as you know is demand for these non ticket products just inelastic once the purchase has been once the ticket has been purchased or are you seeing an increase in demand for things like seat assignment of Cove. It or is this really around system getting better and then I guess.
That was what we should expect to be driving.
Brian.
In terms of revenue acceleration into the fourth quarter.
Are we should we also expect loads in fares to improve as well just underline that revenue outlook I realize a lengthy question answered. Thank you.
[laughter] Kathryn.
Kathryn agenda knocked the ball out there for it.
I would say that.
Our our guests recognize that optionality has value.
And.
Right now in this environment I think.
Our guests want to we're just having a further.
Elevation that what choosing what they want as part of their travel experience is winning right now and I would say, there's some level of interest to city in there because theres definitely sort of a floor that we feel comfortable with but overall, we're just doing a much better job.
But as the years go by of understanding the demand on certain products understanding, especially since our big front seat product and understanding the can the constraint on the supply.
And how to drive yield yield out of that.
Also what's helping is our revamped mobile app is definitely a better booking experience, including ancillary products. So a lot of the technology involved.
It continues to improve so it's not just understanding the demand environment. It's also the distribution of the products has has improved.
In terms of when we think about overall production in the fourth quarter, we continued to see.
Good sequential traction as it relates to load factor ancillary revenue as well as the passenger fair. So again sequentially. We are seeing good good strength across the board and.
I would add to that that historically as we see the passenger fair improve the ancillary production improves marginally related to the not to the fair itself. So that should act as a further tailwind as passenger fares returned to normal.
So after we get through the pending the worst of the pandemic.
We would expect that to be a tailwind additional to the improvements that we've seen during the pandemic itself. So I tried to be thorough hopefully a credit for it yes that was great. Thank you so much for that and maybe that will be allowed one quick one Scott.
On on the Sally spots like what does that market look like right now from an airline perspective, we're getting more attractive they're looking to add growth opportunistically or our parts from getting a bit more expensive more airlines are looking to finance.
Ops and given.
Given that balance you can generalize to apps. Thanks.
Much help everyone.
Hey can you discuss the good question, it's moved around I think early in the process.
And again, the covert crisis lessors were not willing to put additional capital to work. So the sale leaseback market was was tough but.
But I think we have seen an open up especially for good credits like spirit I think most of the money is going to navigate towards credits like us and other us carriers. So that market is opening up as we speak.
So I think the rates that we're seeing are going to be pretty similar maybe a little bit higher than pre govan numbers were pretty close by.
By the time that we go to market with an RFP either late this year or early next year, we expect them to be pretty competitive to pre go bid levels.
Understood. Thank you very much.
And.
Next question is Joseph Denardi.
Oh, Thanks, good morning.
Ted I'm wondering if you see this as an opportunity to maybe broaden the business model a little bit.
Incorporate more used aircraft and target some of the lower utilization markets out there or the opportunities in your traditional markets still the more attractive path.
That's a question for you all at various points in the past couple of years just curious since all this changes how you see that.
Well as thanks, Joe as you as you know our model has not been about low utilization used aircraft, we take new deliveries and we we stimulate in in larger markets. We do have as as was asked earlier I think Scott answered. The question with regard to the 319 fleeted kind of fits in that window to be honest.
And for that reason can be thought about in a variety of different ways, which we have not formed an official conclusion on as Scott alluded to.
But when we look forward, we're still we still have a robust delivery schedule with new aircraft because the opportunity to do that type of flying is very is we still see that as being very bright so I think thats going to be our core focus focus.
And and kicking up airplanes in the marketplace.
Where we have holes will probably be done on the new side as well because one of the advantages that we've talked about in the past that that doesn't get a lot of press is that our fuel efficiency will move faster than the rest of the industry because of the percent of our fleet that will be neo powered.
And I think that thats going to be a significant margin tailwind for us.
Overtime, and so we would expect that to continue.
But but I think there are there are at least sits today in our fleet some thoughts around should we look at using those airplanes in unique ways.
Got it that's helpful and then maybe better Scott when you think about the airline and maybe most specifically the capital structure, what it needs to look like post co, but do you see all this kind of once in a generation or do you see this is something that needs to be factored in as potentially re occurring even if not to the same magnitude.
Do you just kind of hope this doesn't happen again or do you factor in that maybe it doesn't create that into the capital structure. Thank you.
Yeah, I'll just make a brief comment you.
Hope is not a strategy so.
We take away from each one of these things new learn things and you heard Scott say earlier that we probably will maintain a little bit more liquid balance sheet for a little while as we think about how we digest. This problem. We're in the middle of that right now so it's hard to feel good or bad about what you know whether or not it's out it's a black swan or or.
Possibly more frequent than that but but I think we it would be natural for me to say that we will probably be a little bit more careful Scott no I agree I think as managers of the business look does this crisis has a has been a scar to all of us mentally so it changes how you think about the business.
It will.
And so I think the conservative nature of the balance sheet, you'll likely see that across a lot of industries.
People think about balance sheets very difficult for a finance for data plan for a crisis like this if.
If we would have brought this up to any board meeting your manager meeting that we might have to plan for a crisis of this magnitude we would get left out of the room right that was yesterday tomorrow's a different story.
And so we'll likely see conservatism throughout the business we expected.
Thanks Scott.
James I think we're out completes our time for today. Thank you Tony.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
Yes.