Q4 2020 Spirit Airlines Inc Earnings Call

[music].

Okay.

Welcome to the fourth quarter and fiscal year, 'twenty and 'twenty 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&A session. If you have a question. Please press star one on your phone.

And I would now like to turn the call over to Dean and gable Diane you may begin.

Thank you James and welcome everyone to Spirit Airlines fourth quarter and this.

And is being reported and simultaneously.

A replay of this call will be archived on our website from 60 days presenting on today's call are Ted Christie Spirit's, Chief Executive Officer, Matt <unk>, Our Chief commercial Officer, and Scott Haralson, Our Chief Financial Officer also joining us on the call today are other members of our senior leadership team.

Following our prepared remarks, there will be a question answer session for sell side analyst.

Today's discussion contains forward looking statements 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 on it and our reports on file with the SEC, we undertake no duty to update any forward looking statements.

And comparing results today, we will be adjusting all periods to exclude special items. Please refer to our fourth quarter 2020 earnings release, which is available on our website for the reconciliation of our non-GAAP measures with that I turn the call over to debt. Thanks, Dan and thanks to everyone for joining US today as we report the results of the final quarter of the most difficult ear and spirit <unk>.

Three my thoughts turn first to the resiliency and grit of the spirit team My Sincerest and humble. It's thanks to our team members for their contributions throughout the year. They met the challenges of 2020 with a winning attitude and pull together to ensure that spirit is well positioned for the opportunities ahead.

Together, we have built a company with the pillars necessary for success. Our guests have noticed the improvements we have made and others are taking notice as well I want to take this opportunity to congratulate the spirit team on being named to Fortune's 2021 list of the world's most admired companies spirit was not just the only.

LTC to be named on the list. We are also one of only three U S Airlines and one of only eight airlines worldwide to be included a very validating and earned recognition.

As we all know the pandemic headed and abrupt and devastating impact on our industry and 2020, certainly turned out much differently than how it began.

But from a diversity comes strength and Thats definitely been true for spirit.

I'm very proud of how our team pivoted as needed and came up with solutions to new problems from the beginning our top priority was and continues to be the well being of our team members and guests. We quickly moved to adopt enhanced cleaning and standardization protocols along with many other measures that met or exceeded the CDC guidelines.

And rules, we've redefined how to make tactical changes to our schedule and faster and closer to departure than ever before which has been and asset, especially given the choppiness of the recovery.

And we did so while delivering strong operational performance for the full year 2020, our completion factor was 97, 9%, which based on preliminary results earned us a first place ranking among reporting carriers and our on time performance was 86, 7%, earning us a third place ranking.

During 2020, we furthered our commitment to invest and the guests by leveraging technology driven solutions to enhanced self service options and we also launched an entirely new mobile app experience that has earned a four eight star rating.

And I could go on and on but I'll summarize by saying I am very proud of our talented and dedicated team with case counts declining and the vaccine rollout underway now is the time to turn our focus to preparing for the recovery and thanks to the efforts of all the spirit team members, we are very well positioned to do just that.

There are still many uncertainties about how the recovery will play out but one thing. We know is that our leading low cost structure remains a key competitive advantage and we intend to protect that asset to ensure our leadership position and the industry is maintained.

With that I'll turn it over to Matt and Scott to discuss more details of our quarterly performance.

Thanks, Ted the unprecedented events of the last 12 months have challenged all of us to rethink and reengineer a number of our processes.

And I joined Ted and thanking our team members for all their contributions for taking excellent care of our guests and we're taking care of each other as we move through the pandemic.

Turning to our fourth quarter results total operating revenue for the fourth quarter declined 48, 6% year over year.

Demand in October 2020 was relatively strong and unfortunately this momentum was dampened by the Spike and case counts leading up to the Thanksgiving holiday. However demand for travel during the peak Christmas holiday period gave us another welcome glimpse of the strong pent up desire for air travel.

Load factor for the full fourth quarter averaged 71, 5%, but some of the peak travel days hit the mid eighties and load.

Total revenue per passenger flight segment decreased 14, 5% year over year, primarily driven by a 25, 6% decrease and average passenger revenue per segment, while non ticket revenue per segment only decreased four 5% to $55 42.

And for some added color the small reduction and non ticket rate is fully driven by effects of the pandemic on a couple of line items.

Our customers are savvy and they evaluate purchase decisions based on total price and.

And as illustrated by our strong non ticket revenue per segment the value of the option to pay for the extras of their choosing our guests and others are recognizing the improvements we've made and our product our operational reliability and overall level of service in fact spirit moved up one spot to fourth place and the 2020.

Additional of the middle seat scorecard, which is the wall Street journal's annual airline ranking of U S Airlines by operational performance trailing only delta southwest and Alaska.

Additionally, just a few weeks ago, we launched our redesigned free spirit and loyalty program. We are very excited about the enhancements to the program and believe guests will enjoy the new benefits, which in turn will drive increased revenue and returns for shareholders.

Moving ahead to the first quarter outlook. In addition to the usual seasonality change we see from December to January the trends for January and February were negatively impacted by increased jurisdictional and regulatory restrictions as case counts, especially on the west coast spiked. Additionally.

Additionally, the new testing requirements to enter the U S from international destinations, which went into effect on January 26 has also had a very recent and profound negative impact to our Latin American and Caribbean network, which currently represents 20% of our total flying.

To be clear the inbound testing requirements do not impact U S territories. Therefore, the impact from testing effects approximately 15% of our total network is approximately 5% of our flying is two and from U S territories, which is not included and required testing regulations.

Having said that the booking curve remains unusually compressed across the network. So forward visibility remains somewhat limited we anticipate travel for spring break will be muted compared to normal, but our sun destinations will show relative strength based on trends thus far.

We are encouraged by the early signs of traction and the latter half of March and therefore, we anticipate our exit rate from March will be much stronger than what trends indicate for early March. These trends are also supported by our recent survey data, which indicate sentiment has improved dramatically and in fact, our survey data shows sense.

<unk> is at the highest level, it's been since we began tracking the data last spring.

And we are seeing evidence of this translating and our search data, which will later translate into bookings and capacity.

Capacity for the first quarter 2021 is estimated to be down 17% compared to the first quarter of 2019 with January down, 19% February down about 22% and March down approximately 11% compared to the same months and 2019.

While disappointing we do believe the January and February trends are clearly transitory based on survey results rapidly declining case counts and anticipated vaccine penetration, we expect that by the end of the second quarter. The leisure demand profile will more broadly stabilized and thats, how we are.

<unk>, our network and our capacity.

With that as our backdrop, we still expect to be back to 2019 capacity levels by mid year.

But as always we will be keenly watching the developments between now and then and adjust our plans as we see fit and now here's Scott.

Thanks, Matt also wanted to say, thank you and congratulations to our spirit team members. The recognition from Fortune magazine, The Wall Street Journal and a host of other web sites and publications as a reflection of the great Airlines, we are running and the great experience, we are delivering to our guests and I am on.

Honored to be part of this team.

Now turning to the fourth quarter of 2020 financial performance, our adjusted net loss was $158 million or a loss of $1 61 per share.

Our EBITDA margin for the fourth quarter was negative 17, 8% in line with our revised guidance given in early December.

Adjusted operating expenses for the fourth quarter decreased 21, 5% year over year to $659 million.

This change was driven by a 25% reduction and capacity as well as a 57, 7% decrease and aircraft fuel expense due to decreases in both fuel rate and volume.

Despite the 25% decrease and flight volume compared to the fourth quarter of 2019, some volume related expenses increase year over year for example, landing fees and other rents increased six 8% year over year due to rate increases at various airports and salaries wages and benefits increased modestly primarily due to an increase and crew.

Members versus 2019.

On the balance sheet, we ended 2020 with $1 $9 billion of unrestricted cash and short term investments. This.

And this cash balance is almost twice as much as it was prior to the pandemic.

During the fourth quarter, we took delivery of two <unk> hundred 20, Neo aircraft, one of which was debt financed and the other finance through a sale leaseback transaction.

We ended 2020 with 157 aircrafts and our fleet.

With most of our <unk> hundred 19 fleet and long term parking for the fourth quarter. We only operated roughly 130 aircraft during the period.

We are however, starting the program to bring the <unk> hundred 19 is back into service.

As Ted mentioned, we have time to prepare the network and the operation for the recovery and 2021, we will invest some time and money to get the airline and ready to run full speed once we get to the point where demand is strong enough to do so.

We can take advantage of this lower utilization period and set the airlines up for success and 2022 and beyond.

One of the initial steps and bringing the parked aircraft back into service there will be a fair amount of catch up maintenance expense to get them ready for service after being and long term parking.

We will also have expenses associated with additional training from new hires as well as ongoing training for crews who have been on a longer term voluntary leaves.

We have been working with Airbus throughout the pandemic to move our aircraft positions around as I discussed on prior calls we were able to push from 2020 and 2021 deliveries out of the period.

Since then we have been able to move some positions around to fill and some holes we had no delivery stream and 2022.

In total we moved six additional aircraft into the year, bringing our total aircraft to be delivered in 2022 to 17.

This does drive higher net pre delivery deposits and 2021 and.

And net pre delivery deposits for the year are now estimated to be approximately $105 million.

Together with our other capex of $60 million to $85 million.

Our estimated total spend for capital expenditures in 2021 is on 165 million to $190 million.

Operating expenses for the first quarter are estimated to be between 740 and $750 million.

Fuel price per gallon is anticipated to be $1, 75, or 32% higher than it was and the fourth quarter.

In addition to the first quarter typically being a seasonally weaker quarter than the fourth our views on the first quarter of 2021 have been progressively worsening throughout the quarter given the tightening of jurisdictional restrictions international testing mandates and increasing fuel cost plus.

Plus our shortened booking curves have a smaller but we are a smaller portion of revenue booked today than we would historically.

Given this we estimate our EBITDA margin for the first quarter will range between negative 45 to negative 55%.

This takes into account our quarter to date performance, our projection that demand will stay muted through the first half of March and that the back half of March will be relatively strong.

<unk> could be as much as half of the quarter's revenue and any improvements spring bookings would improve our EBITDA production.

And with what we know today this is where it sits.

We realize that most stakeholders arent overly focused on many of our traditional unit metrics and we agree until we get back to full utilization of our assets unit metrics from not the most useful and evaluating the business.

For now our focus remains on maintaining sufficient liquidity and maximizing EBITDA margin.

However, as we look out into the future. We know unit metrics will eventually matter again, our goal is to get back to pre Covid unit cost levels, but first we need to be able to run a full airlines.

Prior to the pandemic, we were guiding to a 2020 CASM ex fuel number of around 565.

We anticipate being able to run 100% of our available capacity some time around mid 2022.

At that point, we would expect our non fuel cost to be trending below success.

How far below six will really depend on a few decisions we make over the next couple of years around our fleet.

Where we fly our capacity growth and our financing decisions.

But one thing is for sure we have all people recognize the value of having the lowest cost structure and the industry and net won't change.

In closing, we don't believe the pandemic changes our opportunities for growth in fact, it might even increase the available opportunity set for spirit.

We will continue to have the lowest cost and the industry and will be a beneficiary of a leisure and VFR demand resurgence when it happens our strong and improving brand together with our low cost will position us to succeed as demand recovers.

With that I'll hand, it back to Ted.

Thanks, Scott the road to get to today has been filled with many new challenges and difficult decisions I couldnt be prouder of our actions and progress over the past year, while not necessary is also nice to have these achievements recognized publicly.

We still have a ways to go before leisure demand fully rebounds. However at the vaccine is more widely available case counts abate and travel restrictions ease and we anticipate our guests will be ready to go visit friends and relatives and enjoy the many destinations we serve as we get closer to the summer months. It is with this in mind, we turn our focus toward the rig.

Covered.

With that back to Deanne.

Thank you Ted.

And James we are now ready to begin to take questions from the analysts we ask that you limit yourself to one question with one related follow up.

And we are ready to begin.

Thank you if you have a question. Please press star one on your phone and if you wish to be removed from the question and <unk> you May press, the pound climate and the husky and if youre using a speakerphone and you may need to pick up the handset first before pressing on numbers.

Once again, if you have a question press star one.

Our first question comes from Mike Lindenberg.

Hey, good morning, everyone.

Hey, two quick ones here.

When we think about the composition of where your capacity is going to be deployed this quarter. I think Matt you said, 20% was Latin America Caribbean, but you did call out I guess five points to that I guess.

Turning to Puerto Rico and.

Virgin Islands.

March quarter.

Does that change is it more 90% domestic 10%.

Latin and Caribbean and if you can give us some color on that thanks.

Sure Mike actually the numbers I gave you there are what we're doing in the quarter now so 20% of our flying is Latin American Caribbean, approximately 5% is a touch more than that but approximately 5% and U S territories, 15% would be international.

And the rest would be domestic.

Okay. Okay. Thanks for clarifying and then how long and I'm just curious.

Notwithstanding the very short booking curve. Several carriers are now looking to offer tickets out beyond kind of that traditional 330 day period, I know historically, you've done a bit.

And your win.

Maybe more like 180 200 days.

And that's on.

Potentially opening up more and inventory further out does it make sense does it not make sense based on how you think about longer term et cetera. Thank you for answering my questions sure.

So right now.

We do not see the need to push the schedule that far out way out into the future networks change opportunities change.

And historically, the booking curve hasnt really pushed anywhere near that far out for us in terms of impacting our overall results. So we're comfortable.

With the length of our schedule and that does vary usually were out but you said 180 days will go out to 240 days sometimes.

But having said that just about the booking curve and general and thinking about bookings out into the future.

We are besides talking about the back half of March there, we are starting to see.

Some traction starting to occur out and the early parts of summer as well just wanted to make sure I clarify that too that the booking curve is compressed.

For the mess for the majority of when we take volume. However, we are starting to see traction out on this summer and in some cases, we're actually starting to see volumes at or above last year's levels for out and the early parts of summer. So there are people looking to fly and there arent people looking looking out there I would just say this stuff that we're getting and the <unk>.

Right now, it's still small numbers, but it's very encouraging and kind of goes along with the overall theme that there is pent up demand out there and people want to fly.

Great very helpful. Thanks, Matt Thanks, everyone.

Okay.

Next question from Brandon O'brien ski.

Hey, good morning, everyone and thank you for taking my question.

I guess, Ted can you talk to the metrics that are driving you guys. When you want to add capacity to the schedule I mean.

Are you in any way constrained by the Airbus Order book I think that's a fair debate with investors, whether you want to have exposure to a legacy order book and maybe not have that exposure on some of your competitors do so can you talk on some of those constraints and whats driving the future here.

Sure so close in and good morning branded by the way close in.

And we evaluate capacity based on EBITDA performance. So that's the way, we're we're moving the capacity through the system and.

And we feel like we have the right tools now to help us refine that close and as we look at our opportunities down the road and you heard Matt mentioned that by the summer of this year, we anticipate being back to 2019 capacity levels.

Really the limiter over let's say the medium term is more our ability to deliver crude.

We have airplanes and that had been and long term storage that as we as Scott mentioned, we're bringing those back into service, we will have to train crew and higher crew to get ourselves ready, which means we won't be running that full airlines, even with the fleet. We have delivered today and will deliver over the next little bit until the middle of next year.

So that's our limiter right now beyond that.

Right before the pandemic hit we ordered 100 airplanes with Airbus.

And I think we said that that was still well under shooting the total opportunity that the company has.

That we would refine around that and find necessary lift to round out the delivery scheduled.

And if anything.

A silver lining to this pandemic because we believe that does open up doors for us to find airplanes, when we need them and you heard Scott mentioned that we did find a few to be able to address some needs in 2022.

And it's good to be in that position that we're actually going to need airplanes. And addition to what we have over the next five to seven years, and it's and it's nice to be in a position and be able to take advantage of that for one. So I think those are the ways, we're thinking about short medium and longer term.

And I appreciate that and I guess, the commentary on 2022 and Scott.

And back to below six and CASM CASM X, that's really based on debt utilization and your ability to get crude back into the system that right.

Yes, I think thats part of it Brandon.

We said <unk> been pretty clear that running a full airlines is important too.

And airlines like Spirit, we didn't have the structural changes that other.

Airlines are going through our fleet was already simple we didn't have the agent workforce before so we're going to make sure that we run an efficient airlines and doing that is running a full capacity of the airlines and thats going to be important as we think about getting back to pre Covid unit cost.

Truth be told I mean airline cost really.

Start with what you fly on where you fly it so.

We as we continue to think about our fleets our network.

And how we schedule and over the next few years, that's really going to drive how far below six we get so those decisions are really still to be made but that's how the math is going to work.

Okay. Thank you.

Our next question is from Duane <unk>.

Hey, Thank you.

How much of the cost progression from the fourth quarter to the first quarter is a function of PSP optics.

Hey, Duane this is Scott so really when you think about the move between Q4 and Q1.

And the PSP really didn't have a lot of impacts we were already starting to to bring crews back.

In order to anticipate the running of more capacity and the back half of the year.

So the PSP component didn't didn't really move the cost numbers.

A lot of the move between Q4 and Q1 is related to capacity.

And fuel and that drove more than half of the change and the expenses but.

We're already moving the airline forward.

That's helpful and then just.

Maybe one for Matt.

Can you give us a sense for how your thought process is evolving regarding how dynamic or tactical and youre going to be from a planning perspective, obviously looking backwards.

It has been an unprecedented year for you and for the industry and for all the people involved.

But going forward is the message that youre going to be more patient patient with bumps on the road on demand like what youre seeing with international and and less tactical or we're not.

Thanks Duane.

Answer to that question sort of a couple of answers to your questions. So I'll try to keep it as concise as possible.

We are definitely and reacting to and understanding what's going on from the booking curve perspective as best as we can it is compressed. So we do have to take into account when we think about making changes what we have done though moving forward.

Is.

<unk> been able to isolate a lot of our flying where we think there are issues that are happening or may happen and we've been able to redesign our schedules to make sure that we're isolating the flying for the crews and for the aircraft on a lot on a lot of what could be.

I guess demand risk involve flying so if we get closer into that fly and we don't see the results that we like from a booking perspective, we have and ability without disrupting the network to make some make some changes close and so in that regard I think I would tell you that we have and we have improved and will continue to have an ability.

80 to make close and tactical changes as we see fit.

<unk> said all of that.

Once you get really close and on top of the flying itself. Then you start to have different kinds of analyses on what costs do you save by not flying some some things. So when we're a few weeks out from travel and some of the costs can't really be saved by not flying so all of that is part of that.

Decision process to think both tactically and then further out strategically and how we set up the network.

I appreciate the perspective, thank you.

Good day.

Our next.

On a question from Hunter Kay.

Good morning, everybody.

Good morning.

He did the Nols that you are building right now have any impact on the math.

And I am taking 33 airplanes that youre not going to need the tax shelter from accelerated depreciation that you.

Would normally get if youre running the business sort of focus on sort of cash management.

Yeah Hunter it really doesn't.

So we're looking at the assets really from the 25 year view.

The other long term assets, our view of returning back to profitability will happen in the near term.

And so we're really taking a longer term view around the opportunity set and not.

Sort of thinking about the near term NOL or cash tax component of the business.

Okay. Thanks, Scott and then.

Couple of questions on the Jetblue American tie up and New York.

First do you expect to get any of the divested slots.

And at DCA and then why.

Why do you guys have posed to us.

It's not a it's not a JV and I can.

And coordinate on pricing GAAP full revenues.

It's a big deal and why why why are you guys spend so vehemently opposed to it and the filings.

Hey, Hunter, it's Ted Thanks for the question and I wish I can elaborate but we do as you referenced seven open complaint here.

So I think I'd be remiss and offering any further commentary on that.

Okay. Thank you Ted.

Our next question from Catherine O'brien.

Hello, Good morning, Ryan and thanks for the time.

Good morning.

So I have a question on some of the staffing and utilization comments you've made.

Is there a capacity is going to be back to 2019 level by mid 2021, and the second half of 2020, and youre seeing from salary and benefit inflation having.

Having more crew members and the second half of 2019, while net cruise the limiting factor to getting back to full utilization and 'twenty 'twenty one is it.

And you think a portion of your color on lead.

And just wondering going on with crew productivity or was it.

Calculus skewed thanks.

I'll start this is Pat and Scott can jump and behind.

So there is lag is basically the answer so.

We've we've been as we've discussed and our our work groups have been very flexible and proactive with us over the course of this pandemic and and using voluntary leave programs to get on our cost down as.

As we navigate the downturn, but bringing those people back.

Online requires and training and.

And that does have expense with it as well as time.

And we haven't we have a fixed set of resources that we can use to get those people through training bowls and.

Fixed plant and stimulators, and in and and trainers and themselves and so it does have to move its way through the snake a little bit.

And I think Thats why that ends up being a little bit more on the limiter. In addition to the hiring that will have to do to staff. The additional airplanes that are being delivered as we speak so Scott.

The airplanes airplanes are a big component of this.

And look where we're 20% bigger on the number of aircrafts today than we were in 2000 <unk> thousand 19. So the deliveries are still coming so what we're talking about is getting to the point and we can operate all of the entire fleet not our 2019 fleet. So.

The measure keeps moving even though we pause the hiring so we've now got to spool that back up again, so we got to catch up what we missed for probably what amounts to about a year's worth of hiring we got to do that again over a condensed period. So.

That happens as we said, it's a lag but the aircraft if you have kept coming in.

Got it very clear and thanks for that.

And then one for Matt I guess, how should we think about the moving pieces on revenue going forward.

Just on your guidance it seems that lowered our fare and non ticket.

And to work from a bit into the first quarter can you just walk us through on your fee and higher revenue managing right now it sounds like from your peers.

Planning demand slowed thing for you.

And the funky going on with non ticket given the international and the non cell line and that's a couple.

So I appreciate it.

Sure.

No theres not too much funky going on in the international network with non ticket.

Generally speaking the issue with.

International network is going to be on the volume side more so than it is on the on the yield profile. That's not to say there is not some impact on the yield profile. There there is but it's largely a volume issue.

And I'm sure you can understand why with that in terms of the overall network.

We have been and will always be a low fare carrier and our cost structure helps to support that we grow markets and we stimulate markets. None of that's changed within our business model and none of that will change moving forward.

So we are first and foremost going to be a volume carrier, that's who we are and what we do our cost structure supports that and then as we see the ability to yield manage we will and we do.

So I don't think anything is really going to be changing right now.

You can imagine the whole industry is dealing a little bit with the supply versus demand imbalance and what's going on right now and my opinion is just it's transitory I think this is the third time since the pandemic started that we've had a dip in demand relative to case counts and other things that are going on with headlines and the <unk>.

Yeah.

So we will come out of this just like we have before it'll be stronger than it was before and I really think the best the best news moving forward is that.

Customers want to fly, we're seeing that across our survey data.

And one thing we don't talk about a lot, we're not going to give perfectly clear detail on this but we have still a cancellation rate that.

And that is relatively high it's very high compared to normal.

Circumstances, and it's still relatively high even for being almost a year and.

The pandemic what that means is that there is a lot of people that are buying tickets. They want to go somewhere and then their their plans change for a variety of reasons most of them.

Being impacted by something related to COVID-19, and their personal lives and some way shape or form or where they want to fly to.

To me that's another <unk> <unk>.

A real positive sign that there is a lot of demand out there and for whatever reason people can't go soon and you can define soon and varying ways, but soon those those issues will be alleviated and then we will see the pent up demand actually be able to go when they want to go and where they want to go.

Okay got it thank you.

Sure.

Our next question from Helane Becker.

Thanks, very much operator, hi, everybody and thank you for the time.

So just as I think a pretty easy question on that.

Flight attendant contract that comes due in May are you talking to the Fas are you postponing it how are you going to address that.

Good morning, Helane, it's Ted.

Okay.

I think debt.

And we're in regular to be clear, we're in regular communication with our flight attendant leadership group.

And have been for quite a while and I would I would describe the relationship is very strong.

And the timing of the contract and that sort of thing.

It will mature here over the next six months or so meaning what the next step is and how we handle the open and when it's time to start negotiating.

And at a quick pace so.

I wouldn't put a fine point on the actual date, but it'll come clearly we're all distracted right now working through the issues and the airline has in front of it but but that time will come and we'll be ready to do it and I know are our partners and <unk> will be ready as well.

That's great. Thank you and then my follow up question.

Is with respect to the third party on.

Maintenance business Youre doing at Miami for Global X.

How are you thinking about that is that like a business that you want to get into is it just the convenience that they are there you are there you can do this for them on.

And just trying to find something and the annual report last night and the K, but I couldn't really find anything about it so if you're on.

I'll talk about it maybe you can point to the page.

And I think I think if that's your answer it's so small.

And that it Didnt bear mentioned.

I think I think the reason.

To your to the.

Genesis and your question I think it's more of the latter issue, which is it's convenient and we happen to be sizable here in south, Florida, and we could offer a little bit of assistance, whether or not that's a business. We engage and is for a later date.

We have periodically helped and.

On a few maintenance items for other companies in the past as well, where we've had basis very small stuff and the reason that this one is public is because global ex needs to talk about it as part of their certification process, but otherwise it would be well under the radar.

Gotcha, Okay, well, thanks, very much sorry for all the questions.

Robert.

Thanks.

Our next question is from Andrew <unk>.

Hi, good morning, everyone.

I guess my question is really for Scott.

Yes.

<unk> has gone and some low cost pressures that your debt you talked about in your prepared remarks.

Model year, 2021, Opex, giving back.

Pretty pretty close to 2019 levels I know youre not guiding for this year, but I guess my question is do you agree with those and if not why.

And you guys have been talking a lot about.

And one of the first box on cash breakeven and profitability and whatnot any guideposts can can you are there any guideposts you can provide.

That caused backdrop, there in terms of where revenues need to be to get back both cash flow cash breakeven and profitability.

Yes, Andrew from <unk>.

Fuel perspective, I mean, it's even though we're forecasting a fairly sizable increase over 2020, it's still down versus 2019.

So if we think about profitability for the airlines and returning to that it's the same math and we've talked about before which is really around EBITDA margin.

And if you adjust for fueled and that.

It makes the hurdle slightly lower than 2019, so assuming we're around the 20% number for EBITDA margin.

Some some kind of unit revenue at full capacity at 20% discounts and 2019 puts you in the range of where you.

You would be from a cash breakeven perspective, obviously, we've pulled expenses out so the hurdle is a little bit lower than that but.

And that gives you a proxy for how we're thinking about when that might happen.

Returning to a full airline is critical.

Getting to EBITDA breakeven and eventually to profitability. So that's the first big step will drive capacity will drive load and that will maximize trials some sort of a net order.

And thats, probably and how it's going to play out.

Great and then I guess.

Just a follow up there and just kind of with the cost structure.

Just curious why.

<unk>, you're still forecasting based on your EBITDA margin guide revenues down Directionally 50.

And 50% still versus the first quarter of 19, and I know youre, putting the airlines for the recovery, but with revenue slowdown 50% why are you.

Why aren't you taking more capacity out right now thank you.

Yeah, I mean, I think ultimately Ted.

And Ted mentioned earlier, we have.

Pretty tight model and how we think about the deployment of capacity.

And given where <unk> Saar.

Theres not a lot of incremental benefit for flying it but there is incremental benefit so.

We have.

<unk> sophisticated view on how we think about it.

And where <unk> sits today and.

Where fares are.

We're running a pretty close to optimal EBITDA production.

So that implies that if we were to fly and less EBITDA would be worse.

So I think I think look I mean, it's it's tough and understand the math because youre not sitting over here, but.

What we talk about every day the single biggest thing we can do to maximize EBITDA and this period is to fly the right amount of capacity and.

And so that's our number one focus.

Got it thank you.

Mhm.

Our next question from Jamie Baker.

Hey, good morning, everybody, Jamie Baker Jpmorgan similar question to what I asked Jetblue I'm trying to understand how pricing and revenue management is going to respond to demand recovery.

Because even in just a modest recovery scenario youre going to be experience a pace of bookings build.

Likely well in excess of what your automated systems have experienced in the past you could take some time and tell me. If you think this is irrelevant, but as with any automated process. So I'm wondering what the response will be to inputs that havent been witnessed and experienced before.

Jamie This is Matt thanks for the question so we.

I've been here about a little over four years now of four and a half years and since we've been here, we've gone through I think three different kinds of demand environments.

Before we got to the pandemic. So it's been it's been every year, we think about our processes. We think about our data, we think about our ability to respond and and.

And you see that and how we also not just move the network around but how we think about revenue management of the ticket as well as non ticket. So I would answer your question by saying I agree with you for a lot of airlines and they're going to have systems that may be a little bit slow to respond to changes in demand recovery, we're not going to be one of those airlines we spend.

A lot of time thinking about how we compete and with the point to point network and how we've seen competitive reaction over the years, we've become experts and understanding how our how our competitors think about us how they think about their own pricing and our markets and how they think about their yield management and in some cases lack of yield management and our markets.

And we're used to that in fact, I think that we have the muscles already built to be the best debt responding to this when demand recovers because we've been there for a number of years already so we're ready for this and we can move very quickly based on how demand moves either up or down for that matter Jamie.

That's very helpful. I appreciate that and just a follow up came on in terms of getting below <unk> and 2022.

And just to clarify.

We're talking on an annual basis, not just dipping below six.

And at some point, but.

More importantly to the extent that you do fly the requisite capacity and don't achieve that outcome. What do you think the reasons might be I mean, what are the cost buckets, where.

Or is it or is it really a no brainer and if you produce that capacity, it's almost mathematically guaranteed to be below six I'm just trying to assess your confidence.

No. It's a great question, Jamie I think the way we've talked about it and so we're going to get to full capacity most likely around mid Mark and 2022.

And we will we will get to some point after that we will get to a run rate.

CASM that sub 6% how far below six depends on a number of variables and I think the variables that benefit us on the downside, we will likely be the ones that may.

Have some risk from the on the other side.

Including some of the inflationary components that we've talked about we've talked about airports being and.

And difficult mover.

As of late hopefully that reverses as the industry gets too low.

On a more efficient throughput and the airports, so hopefully that migrate to the other way, but they're going to be things that we do some of the decisions we make around the fleet on how we schedule the airline that will dictate some of that but there is there's obviously labor pressures that we're all going to face, but we're going to have to mitigate those.

So I think it's for US we didn't have a lot of the structural changes during this period. So it's the same issues that we've had and the path will be the same issues that we have going forward, we just have to be efficient and thoughtful about how we run the airlines.

Okay. That's very helpful. Thank you for taking my questions everybody take care.

Our next question from Joe <unk>.

Hey, good morning, everyone and thanks for the time.

And just.

Matt a quick question about your near field International business that isn't U S territories Caribbean markets et cetera, what's the traffic flow between VFR and pure leisure I'm. Just curious if there are differences and the duration of those near field and our national VFR trips versus leisure trips and maybe a different sensitivity to the new testing requirements.

For your traffic base, that's flying more to visit family as opposed to three or four day beach vacation or is it just too early to tell.

No it's not too early to tell Joe the the more pure leisure play and none of our destinations are really pure pure leisure plays but the ones that are highly reliant on leisure and vacation traffic has definitely been impacted more than the VFR traffic and without getting into.

Big details I can tell you that the search the search volume definitely reflects that but its not as the spirit as the results are showing people want to fly and they want to travel to these destinations Theyre just right now on the sidelines because quite frankly, if youre not in the industry, it's a little hard to understand.

And it's a little hard to have the confidence that you need to understand that you can get tests and a lot of these leisure destinations, but it's a change and it's something that not everyone fully grasp yet that could change a little bit over time.

And then once we really get more away from the situation. We have now and have a lot more people vaccinated I think we're going to we're going to see just and overall confidence shift as well.

Right.

And I appreciate that Matt.

One Scott you made clear you think are well funded right now plentiful liquidity does that still hold true if next week, the administration and where to start requiring COVID-19 tests for domestic travel and Ted are you involved and those discussions with the White house and how would you handicap that overall probability at this point thanks for the time.

Yeah, Hey, Joe so thinking about.

Liquidity and.

And at a high level, not specifically around testing and look I mean.

We feel pretty good where we are so the quick answer is we're not planning on anything additional I.

I think what would drive that.

As the same things that drive.

Thoughts around the balance sheet and leverage and capacity growth and all of those things, it's really around demand unit revenue production.

For profitability.

Those things will be.

And at the forefront of how we're thinking about planning the airlines once we reach sort of profitability levels again.

And look we're not going to be.

Nave about the idea that longer term unit revenue depression with our growth rates.

As and a great outcome, so we're going to be flexible and ready to adapt the airlines and <unk>.

Net world, but our view today is that.

We're going to be a beneficiary of the outcome and and we're going to be ready to grow the airline again and there is going to be profitability for us to be had.

But we're going to be flexible and thoughtful about protecting our six year events. So.

And I guess.

As it relates to domestic testing and the issue why.

I personally have not had direct communications with the White House, we are a member of a lobbyist organization and represents.

The <unk> and they have been and communication with the secretary of transportation and there.

And they are aware.

Of our concerns we do not support the idea we think it doesn't address the issue.

And I think everyone has and you've heard not just from me, but from our peers that it would be logistically extremely difficult to do.

And expensive.

And I don't know that that given given all of the protocols and airlines and put in place and and the confirmation from independent authorities that travel onboard airplanes is not a transmission event.

That's why we don't believe it addresses the issue so that point has been made.

Normally and we're hopeful that that will carry the day.

Absolutely I appreciate it.

Our next question is from Joseph Genuity.

Good morning.

Matt you talked about I think mid 80 load factors during peak periods and fourth quarter. If I heard you correctly can you talk about the pricing you saw during those periods like are you seeing strong demand at the same price point pre COVID-19 or is this strong demand, but with much more promotional fares.

On let me answer the question on average.

Joe.

It's on average we're going to see.

Lower yields even on even on the strongest of days and strongest of flights, having said that it's not necessarily about the high end of the of the booking curve and has more to do with getting getting a base on board and one of the things sort of the base on board has been it has been paying less to get on <unk>.

<unk> one of the issues that we've had and I don't.

I think based on the the environment and seeing and experiencing I don't think we're unique and this either but the booking curve being compressed does does make us a hedge a little bit on how we how we put revenue on the airplane. So are we selling a little bit too inexpensive on peak periods.

I would tell you we are relative to where we would like to be but our feeling is that we need to do that in order to make sure. We get a good base on board. So that we then get more confidence and understanding how the traffic will actually flow through the network.

That makes sense there Joe.

Yes. It does thank you and then Scott Youre going to Love. This question can you give us EBITDA margin guidance by months for first quarter. So what was January and what's the assumption for February and March and then just CASM ex get better or worse and <unk> versus <unk>, given how youre talking about supply and kind of prepping the business to run at full speed.

And again, how should we think about the impact of those costs on <unk>, assuming you get close to kind of pre COVID-19 capacity by the end of the quarter. Thank you.

Just thanks for that.

And I can't give you EBITDA margin by a month, but sort of talk a little bit about the inputs here right.

We know January and February are seasonally lower than March and we're going to be a little smaller and January and February and then we were in March so.

Those are going to be sort of directional components that will help you get there.

But I can't give you the number but.

And so to your to your second point around Q2.

I think the view is today, we're going to be bigger and Q2, probably some sizable amount probably around 30% bigger and Q2.

And I would expect US right now we're sort of looking at expenses growing at probably around two thirds of that number.

Going to invest some things and the business to get ready for full capacity and 'twenty, two so theyre going to be a little bit higher on the expense side from that perspective, but we're going to start to see efficiencies and the business as we as we grow capacity.

Okay.

And the two thirds ex fuel or including seal.

That's going to be total op expenses, including fuel.

Okay. Thank you very much.

Yes.

And our next question from Darryl Genovesi.

Okay.

Hi, guys. Thanks for time, Inc.

Scott and Frank if I heard you correctly you said.

And you can get back to.

And.

And non fuel unit costs on your back at full utilization.

And how do you think that will happen in mid 2022.

And to make sure I understand the framework come on with what you said on the fleet.

It sounds like the 2022 capacity view the ASM capacity view that you are using the frame that cost guidance like 30% higher versus 2019 is that right.

Well, we havent, we havent talked about capacity for 2022, yet I mean, you can use sort of fleet growth as a proxy for that we have our fleet numbers out there.

We have we've grown the airline.

16 aircraft last year will grow on 16, this year and 2017 and 2022. So you can sort of do the proxy for capacity, but we haven't given a number yet Sheryl. This is Dan and the comment about the 30% with regarding second quarter of 2021, and we think will be 30% larger than and capacity and we were and first quarter of 'twenty one.

No. Thanks, Danielle I'll follow up that on basically doing what Scott just suggested I'm looking more quickly.

And you said about the deliveries and what you said on I think five.

819 retirement coming up.

And I was kind of getting to like a 30% type of capacity boots post implied by the comment that.

Youre going to get back to.

Operating operating at full utilization and such as what you implied.

And I just wanted to make sure I'm doing the math right and.

And if thats right given that nominal demand is still sub 50% lower.

From 2019 today I guess the question really is should.

Sure CASM ex below six and so really we were guiding light here. It just seems like you're taking a lot of risk on.

On RASM too.

To get to that target.

I might jump in here this is Ted.

<unk> demand below 50% may or may not be true and our level.

And and and.

In fact, we don't believe it's true.

The leisure component is 100% award.

Approaching 100% of the demand today.

And we expect it will be the vast majority of the demand over.

And the earlier parts of the recovery and so and.

Again, we've said this over the last couple of calls the pandemic doesn't necessarily and disrupt our story and still.

There's going to be leisure demand and we're going to capture on a portion of that.

And so for those reasons, we did not permanent make permanent changes to our delivery schedule and we did not make permanent changes to our our business plan.

And now with that said tactically we have been smart.

About deploying capacity and making sure that we don't <unk>.

Analyze EBITDA and.

And so if disappears if our current assumption.

Daryl appears to be wrong, we would make changes to address that but for now that is the assumption and I think it's founded a lot on on good history and theory.

Okay, Thanks, and thanks, everybody.

Our next question from Savi sites.

Hey, good morning, everyone.

And Scott and maybe clarify and on the and a sequential channel and just say understanding of could you quantify just how much that maintenance and.

Spend might be that's elevated.

Turkey and more so than <unk> and also just training I'm just trying to understand that.

How much is elevated.

And to kind of catch up to kind of the aircraft that are coming and trying to understand when you could potentially you can see sequentially, where capacity is still going up and your costs not really okay.

Going up as much because some of those costs go away from trying to get on understanding and I was wondering if you can help quantify that.

Yes, that's right I mean, so for you when we talk about capacity increase and the Q2.

That's going to drive.

Probably half of the cost increase the other portion will probably be driven by.

Catch up expenses.

And aircraft parked we're going to have to get through May.

Maintenance events that will probably take us.

A good portion of 12 to 15 months to do so we expect these catch up expenses to last really through the year.

And we will probably spend call it $30 million of catch up expenses through that period and.

And that's going to be.

Other.

Heavy maintenance components.

On both the airframe and engines it'll be training for crew.

It'll be new hires so all of those things will happen and you can't snap your fingers and have the need.

And the airline ready to go so it will take US 12 months to 15 months to do it and and it will.

Cost some money to do that.

Okay.

Super Helpful. And then just on the AD.

Purchasing right now and I know you talked about cancellations on just kind of curious just how much of the APL is as credits and.

What what percentage of your new sales rank on a cash operations versus credit these kind of credits that from cancellations.

Hey, Savi. This is Scott so <unk> balance is roughly $400 million, we're probably in the $250 million range.

And so probably 60 plus percent of the ATL is sitting and credit shells.

And from a redemption perspective.

And we're in the range and probably 10% to 15% of our bookings are coming in the form of credit sales at least at this point.

And I don't know if that will change over time, but that's probably a good proxy.

That's helpful. Thank you.

And our next question from Dan Mckenzie.

Hey, good morning, guys.

And I'm wondering if you can just elaborate a little bit on the new credit card deal and how it might drive a change in behavior. So what percent of on the historical passenger basis, maybe likely to travel more possibly pay more to rack up more miles.

And what could the credit card economics look like say three years from now to this because this program ultimately be maybe 10% of your revenue say in three to five years.

Hey, Dan its Matt.

And not going to answer your question exactly with the detail that you would like because some of that.

Is are things that we're not really ready and willing to share totally on that but I can tell you that our expectation is that the new the new loyalty program and the credit card deal is going to also create more repeat traffic for us as well we're already.

Pretty good at getting repeat traffic onto the plane based on based on our model and how reliable we are and how reliable and consistent the product is out there so that in and of itself creates very high repeat rates and terms of how many people. We think are going to travel more.

That that's all theory and that is all things that we have.

On paper.

And for us internally, but I will tell you that what we've done to design. The program gives an incentive for passengers to engage with the model. So we want people to get rewarded for adding more ancillary onto their onto there.

And <unk> and on to their trip and that in and of itself. We believe is going to create a higher repeat rate and a higher brand brand efficiency in terms of customer acquisition and the future and all of all of those pieces holistically that lead to marketing expense as debt.

Translates then into revenue on the aircraft all of that should get better with a stronger loyalty program and the credit card will be a key component and helping us drive that through.

Understood. Okay, no I appreciate it thanks Smith and.

And with that we are at a time for the day, but thank you all for joining US again today and we'll talk to you soon thank you.

Thank you ladies and gentlemen. This concludes today's conference. Thank you for your participation you may now disconnect.

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