Q3 2021 Spirit Airlines Inc Earnings Call
[music].
Welcome to the third quarter 2021 conference call. My name is James and I'll be your operator for today's call. At this time 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 then I'd like to turn the colored or Dan gable senior director of Investor Relations.
You may begin.
Thank you James and welcome everyone to Spirit Airlines third quarter 2021 earnings.
This call is being recorded and simultaneously webcast a replay of this call will be archived on our website for 60 days.
Presenting on today's call are Ted Christie, Spirit's, Chief Executive Officer, Matt Klein, our Chief Commercial Officer, and Scott Haralson, Our Chief Financial Officer also joining us in the room today are other members of our senior leadership team.
Following our prepared remarks, there will be a question and answer session for sell side analysts.
Today's discussion contains forward looking statements that are based on the company's current expectations and are not a guarantee of future performance there could be significant within a certain that cause actual results to differ materially from those reflected by the forward looking statements, including the risk factors discussed in our reports on file with the SEC.
We undertake no duty to update any forward looking statements in comparing results today, we will be adjusting all periods to exclude special items.
Please refer to our third quarter 2021 earnings release, which is available on our website for the reconciliation of our non-GAAP measures with that I'll turn the call over to Ted.
Thanks, Dan Thanks to everyone for joining us today over the past 18 months, our spirit team members have proven time and time again that they are the best in the business third quarter 2021 started off very strong with July being solidly profitable. Unfortunately, our own irregular operation in August together with a surge of Delta Varian cases led to.
To a third quarter loss of $74 $6 million.
Higher fuel prices continued travel restrictions and near term staffing issues have all played their part in delaying our return to sustained profitability.
The direct and indirect impacts of the pandemic have lasted longer than anyone could have predicted it.
It may take some time for the industry to adjust to the near term challenges, but nothing about the current environment changes our long term view for spirit as we've indicated previously one of our challenges has been staffing levels at our airports with the most notable being at Fort Lauderdale Airport.
I'm pleased to announce that earlier this month, we reached a tentative agreement with our ramp service agents in Fort Lauderdale represented by the International Association of Machinists, and aerospace workers, which includes competitive wages and benefits and following ratification of that agreement, we look forward to resuming appropriate staffing levels and over time, adding back capacity.
<unk> to one of our guests' favorite leisure destinations.
I'm also pleased to say that we recently published our inaugural sustainability report the report showcases our commitment to meaningful advancements of our ESG initiatives.
Before I turn it over to Matt and Scott to discuss more details of our quarterly performance I want to say, how proud I am of the spirit team.
Operationally it was an unusually challenging summer and their spirit pride and dedication shine even on the most challenging days and helped us recover the operation and take care of our guests and now over to Matt.
Thanks Ted.
The special shot out of appreciation to our team members and thank them for their perseverance and delivering quality service to our guests regardless of the circumstances.
Turning now to our third quarter revenue performance as a reminder, I'll be comparing this year's results to the same period in 2019 total operating revenues declined 7% compared to the third quarter 2019 in line with our revised guide given in mid August.
On a per segment basis compared to the same period in 2019 total revenue per passenger segment increased 0.7%.
The passenger revenue per segment component declined seven 6%, but we once again saw very strong non ticket revenue results with non ticket revenue per segment, increasing nearly $5 compared to the same quarter in 2019, and eight 9% increase.
This non ticket result is yet another record for spirit.
We remain extremely pleased with how well our investments in enhanced product offerings improved customer facing merchandising and revenue management initiatives are paying off.
Turning to the passenger ticket side of the equation load factors were very strong during the peak summer demand period.
However, average load factors were a bit softer than expected for the second half of the quarter driven in part by our own operational issues and the rise of COVID-19, various cases.
As we have communicated previously given the constrained staffing resources. We are currently a good bit smaller than Fort Lauderdale than we would like to be and that will have a negative impact on our fourth quarter results as Fort Lauderdale was one of our best performing markets, especially at this time of the year.
Nevertheless, it is the right decision until we can achieve the appropriate staffing levels to support our desired level of operation there.
In the meantime, the team is doing a great job managing through the changes.
Elsewhere in the network, we have been growing our leisure and VFR routes in the third quarter. We started service support that we are at the Mexico, We also announced new service to Goose, the Gaba Honduras.
And in early October we brought spirit to Miami with our launch of service to nine non stop destinations, which will soon grow to 31 destinations. We are very excited to be growing our network, bringing our low fares to more guests in more places.
And we have an exciting lineup planned for next year as well as we continue to expand our network footprint.
For the fourth quarter 2021, we now estimate our capacity will be up 11, 2% versus the fourth quarter of 2019.
This is more than 10 percentage points lower than our initial expectation with half of that related to targeted reductions at Fort Lauderdale with the other half spread throughout the network.
Moving ahead to the fourth quarter revenue outlook, we are extremely encouraged by the search trends, we're seeing for the holiday periods.
And all indications are that yields AD loads for the peak holiday travel periods will be quite healthy.
Taking all this into account the revenue range implied by our EBITDA Guide.
It's $938 million to $975 million or about flat compared to fourth quarter 2019.
And now here's Scott.
Thanks, Matt also want to start by saying things to our entire sphere team over the summer period, many of them worked extra shifts or perform duties outside their usual jobs to support the operation and they did so with the utmost professionalism and dedication.
Now turning to our third quarter 2021 financial performance adjusted EBITDA margin was positive 1.0% this was better than expected due to lower costs.
Compared to our expectations shared in mid August cost came in lower due to a little less flight volume a slower than expected pace of hiring and airport rents and landing fees improving at a faster rate than anticipated.
Compared to the third quarter of 2019 total operating costs increased 15, 1%, primarily due to higher crew member head count increased flight volume a greater mix of aircraft financed under operating leases higher depreciation and amortization and additional costs incurred as a result of our irregular operations.
In the period.
Our cash balance remains strong we ended the third quarter was $1 9 billion in liquidity, which includes unrestricted cash short term investments and $240 million of available capacity under our revolving credit facility.
Turning to our fleet during the third quarter, we took delivery of four <unk> hundred 20, Neo aircraft ending the quarter with 168 aircrafts in our fleet.
We also completed sale leaseback transactions for our Airbus deliveries through 2022.
With these transactions we have financing in place for all our aircrafts scheduled for delivery now through the end of 2022.
In addition, we completed a direct operating lease transactions to secure additional aircraft to help meet our targeted capacity growth through 2024.
In addition, we announced earlier this week that we executed an agreement with IAE for Pratt and Whitney GTS engines to power the aircraft associated with our fleet order placed with Airbus in December 2019.
The agreement covers engines for the firm 100 aircraft ordered as well as options for another 50 aircraft.
In addition to the engine order, we entered into a comprehensive long term maintenance agreement to service all our neo engines, we already operate one of the youngest and most fuel efficient fleets in the industry and this order for the latest ETF engines combined with our existing pipeline of new aircraft will ensure we continue to be a leader in fuel efficiency.
Increasing fuel efficiency as part of our ESG goals, but it's also helpful to the P&L, especially in high fuel price environment.
Like we are currently facing today.
Fuel prices impact all airlines, but because we have greater seat density than most of our competitors and our fleet is fuel efficient hour per passenger fare would need to move up less than other competitors to more fully offset the rising cost of fuel.
For the fourth quarter, we estimate our ASM per gallon will be about five 5% better than the fourth quarter of 2019.
Said differently at today's fuel prices, that's equivalent to about $18 million in savings.
Regarding capital expenditures, we continue to estimate a total of about $290 million of Capex for the full year of 2021, including net pre delivery deposits of about $120 million.
To recap the forward looking guidance, we provided in our earnings release, we estimate our EBITDA margin for the fourth quarter will range between negative 5% to breakeven.
This assumes total operating expenses of $1 $50 million.
The $1 billion $60 million.
We are assuming a fuel price per gallon of $2 54 and.
And DNA of about $75 million.
Regarding 2022, we previously shared we expected to hit full fleet utilization by mid 2022.
However, uncertainties about staffing resources have led us to slow the pace of returning to full utilization and we now expect to produce 53 to 55 billion ASM.
We are still targeting sub 6% CASM ex fuel once we reach full utilization.
The timeline to achieve this target has stretched out to later in 2022 or early 2023 due to our slower pace of growth and increase inflationary pressures, particularly labor and airport costs.
So again, we are still targeting unit cost ex fuel below six but its likely closer to six than we originally anticipated.
In closing the resiliency and strength of our business model has allowed us to deliver the among the best financial performance throughout the pandemic and gives us confidence in our ability to navigate the challenges ahead.
What has proven to be a prolonged recovery period.
And the recovery has fully taken hold we are confident that we will still be among the best margin producers in the business, while remaining the low cost leader.
With that I'll hand, it back to Tim Thanks.
Thanks, Scott before we move to Q&A I know many of you may have questions about lessons learned from the Iraq in August we do believe the disruption was caused by a confluence of factors exacerbated by staffing issues, primarily in Fort Lauderdale.
The IRA unfolded, we experienced many crew dislocations, which which stressed our ability to recover.
We are never going to be able to perfectly solve for all variables to avoid every disruption no airline can but we believe we can get better at recovering more quickly when it does happen.
The main takeaways from our review our that in addition to airports staffing there are several other areas, we're adding a few additional positions could be beneficial in helping us to recover when <unk> occur.
Our current recovery process is heavily reliant on manual integration, we've automated a few processes over the last several years that have been helpful. And we are exploring if there are opportunities to do even more.
Given our scale. We have also been considering if it is time to add a few more crew basis, we're making some changes, but we don't believe any of them will have a significant effect on our cost structure as a high growth carrier. It is a continuous exercise to review how our network flows and we make small changes all the time.
We are not pleased with our operational performance in this instance, but the fact is we have a proven record of reliable operations that was evident in 2020, when we flex the network dramatically to adjust the schedule due to the quickly changing demand environment throughout the pandemic. This puts tremendous stress on our resources yet we finished <unk>.
Third an on time performance and first in completion factor in 2020.
The targeted schedule reductions in the fourth quarter of this year are working as intended our operations have stabilized and we believe that operational and crew network changes that we are planning for in 2022 will enhance reliability without sacrificing efficiency and utilization.
We continue to believe we will be able to produce operating margins in 2023 that are in line or better than what we achieved in 2019 in.
In the near term our priorities include increasing staffing to support higher growth, while maintaining reliable operations and making network moves that position us for the post pandemic environment, an environment in which spirit will remain the low cost leader with ample opportunities for continued growth and among the best margins in the business.
With that back to Deanne.
Thank you we are now ready to take questions from the analysts.
Ask that you limit yourself to one question with one related follow ups should you have additional questions is feel free to put yourself back in the queue, if you'd like James we are ready to begin.
Thank you 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.
If youre using a speakerphone you may need to pick up the handset first before pressing the numbers. Once again, if you ask a question press star one on your phone or first question comes from.
Brandon of Glenn's team.
Barclays.
Hey, good morning, everyone and thanks for taking the question.
I guess I wanted to follow up with your closing remarks there.
For better or worse investors have viewed spirit is maybe.
Off track on being the lowest cost generator and Scott even set out like you guys are still targeting sub six CASM, but closer to six than where you were.
But then you say what we've learned from lessons operationally the things that we're going to change aren't adding a lot of costs I guess, how do you square those two comments that hey, CASM actually is coming up a little bit from where we thought it would be but we can still generate.
Profitability to levels, where you are or even better.
Well as it relates to the CASM being.
Maybe it's still sub six it's within the range of what we thought about I think the inflationary pressures that we've been experiencing a real probably a little more severe and more pronounced than we had originally anticipated principally on labor, but airports are always a concern that was true before as well. So I think it has more to do with that and it has to do with R.
Our analysis and reaction to the company's operational performance. This summer so as we evaluated what we experienced throughout the course of the summer. We're now looking at ways that we can enhance reliability and still deliver the same efficiency with the units which is what's most important.
I have to say that while it's a very it was an exhausting summer for the spirit team I am very excited about and an insurance of about the the output that's coming out of that work.
And I think we're going to be able to make both network design changes in both the the way the.
The airplane network flows and more importantly, the way the crew network flows.
That will help us create a more reliable network and as I indicated in my comments, we're probably going to come up with ways that are going to speed recovery. When we when we run into bumps those will always happen there'll be whether we live in Florida, there is going to be hurricanes in and that sort of thing. So I think that will we will have some ways that probably are going to make us even a little bit.
Better in that regard so cost benefit being.
Part of that so.
I would echo what Scott said I think we're very encouraged about about the cost structure inflation aside.
Inflation's face.
Every airlines facing inflation today, it's almost like taxes, and we're going to continue to be the low cost leader.
I appreciate that response I guess at what point do you hold yourself from the company accountable to achieving sustainable profitability.
Even if you keep pushing back to full utilization target because some of Thats, just I guess bill payment with your fleet delivery schedule. So what what levers can you pull to get to.
Sustainably in the black.
Well first I mean, we always are 100% accountable to the profitability of the business. So that's always been true.
And that will remain true going forward and the levers. We can pull are the same levers we would've looked at prior to the pandemic, we're going to evaluate individual route performance, we're going to make sure that our growth is delivering the ROIC that we had intended.
We will adjust if that's not true, but the market opportunities that we're looking at today are as rich or perhaps richard than they were two years ago.
And that is why we have committed to the growth rate that we're committing to if we're wrong, which we don't anticipate that being true and by the way Ron could be in either direction, but if we're wrong, we'll adjust and.
And we believe we have the necessary levers to do that both for fleets being larger as well as smaller.
And I think we will show that we've been prudent managers look over the course of the Companys public existence, we've consistently delivered mid teens or better operating margins.
And I think I hope there is some credibility there that we'll continue to do so going forward.
Thank you.
Okay.
Okay.
Our next question from Helane Becker of Cowen Securities.
Thanks, very much James Hi, everybody and thank you very much for the time.
So as you guys think about 2022 I guess the implication is it's going to be another transition year.
So number one is that a correct assumption and then number two.
Ted as you think about the operations and staffing and so on.
How do you get ahead of these.
These issues.
Here, what you are seeing about.
Weather and stuff happening, we all understand that its the airline industry, but on the other hand.
You want to be in a position where you can recover quicker.
Or prevent stuff from happening so that you don't have.
The unfortunate incidences, where people don't like.
Sure.
All right.
Total interim indirect.
Got you.
Yeah.
Annualized that's kind of might that attempt to ask a question.
Well as to the first part viewing 2022 is a transition year I don't know what the right label as we're viewing as a recovery year, we believe that.
The pandemic is moving in the right direction. Despite the the Delta variant.
Impact of the summer or the line is still going up we're still flying more capacity, we're delivering better margins than we were at the same time last year and we expect that to continue into next year. So we expect it to be a recovery year, it's not going to be all the way back probably to where we want it to be but but we're going to do our best to move that along as quickly as we can which leads into the SEC.
<unk> point, you raised which is how do we get ahead.
Of of this issue that we are all faced and I think it would be I think I would have unanimous agreement on the phone call and in the room that the past 18 months have had broad and wide ranging impacts that have been difficult for people to forecast. It is a different environment today than it was prior to the pandemic and so.
We've been actively learning from that the way we recruit the way we hire the way we staff all of those things we have learned from and getting ahead of it.
<unk> was our objective going into the summer and without doubt we missed it. So part of the reason that we're looking at taking our foot a little bit off the gas here for a little bit of a period of time is so that we can do exactly what you're suggesting which is lets see the hiring come in let's build the base to get ready for.
The summer of next year for example, and we'll layer that capacity and as necessary. So it's been a it's been a tough labor market. We are adapting to that I mentioned some specific moves here in fort Lauderdale, but but that's been true throughout our system.
And I do believe that as the economy begins to recover and people start to feel more normal about their lives and the virus starts to subside again that will also move more normal the labor market will become more normal and we're going to be ready for that.
Gotcha, Okay. That's very helpful. Thanks, Ted.
Our next question from Mike Lindenberg of Deutsche Bank.
Hey, good morning, everyone, Hey, I just wanted to question here.
Scott the comment that you made and Ted you can chime in on this just the.
A comment about being among the best margin producers in the business, while remaining the low cost leader when the recovery has fully taken hold I'm just I'm, taking it from the release.
When I sort of think about your model at least historically and let's move that September quarter aside because of the irregular operations. I mean that was just extreme when I think about your model. Historically, you would be the best margin producer and also among the low cost leaders as we went through a downturn that's usually when the <unk>.
LCC model really thrive and you went out perform and it just feels like based on a statement here that maybe things have changed a bit and maybe it's that.
<unk> inflation is going to be with us a little bit longer and I realize that historically for the <unk> labor has been maybe a larger area from a cost advantaged perspective vis vis the big carriers and the legacies. So I'm just I'm curious if there's kind of a shift in philosophy here or maybe youre, just sort of hedging your bets maybe being conservative.
Maybe this downturn that we went through is like no other and we can't really comp it against the Dfc or 911, I mean, just your thoughts on that thank you sure Hey, Mike I'll go first and Scott can jump in but thanks for thanks for the leading question because you set me up perfectly.
Warm in good and bad times and throughout the course of the pandemic.
If you look at margin performance when things started to actually come back. So we can't look at like the April period of last year, we've been amongst the best margins in the business.
And if you give me the credit.
For now.
The benefit of <unk>.
Removing the <unk> in the September quarter that remained true then too.
So so if anything the statement is a re validation of what has always been true.
And a confirmation of what we expect to be true in the future. So Scott what would you.
Exactly what I would say I think you go back and look at the pandemic over the last year.
We were in the top two or three margin producers in all of the quarters again outside of the quarter. When we were flying 5% of the airlines.
Everybody was kind of figuring their way out of that point, but I think you saw it over the last decade and you saw it over the last 18 months.
We're predicting that to be the case in the future.
Very good thank you.
Yeah.
Our next question from Conor Cunningham of MKS partners.
Hi, Bryan Thank you.
So you mentioned changes to potentially increasing staffing potentially new crew basis network changes and also inflationary pressures.
A lot. So why do you have confidence that youre going to be able to.
Just to that and maintain your your cost advantage to your peers I mean, the United for example, these plans to lead on costs.
Drive cost back down to 2019 levels.
If that plays out I mean, there they're compressing to you on our CASM ex perspective, I get that you said there are some automation and other adjustments, but just what else are you doing that leads you to.
To maintain your cost advantage to everyone else.
There's a few things and they are looking to try to get them one at a time.
So you mentioned some of the things that we've talked about our crew bases in hiring we do that every year, we've been growing at double digit rates for a while and that means you sort of reinvent the airline every year or two in doing that so crew bases in hiring that's all sort of normal operations for so we did all the time this is a little bit of a unique environment.
Interesting times, a lot moving around at this point.
Youll look we're usually really good at forecasting the business.
The last decade, we've been pretty accurate.
It's been somewhat more simplified historically, but right now it's definitely just more difficult to forecast we have.
Labour rate volatility labor behavior of very difficult right now to really forecast airport rates at this point. So we will have a lot of movement in that area. So that variability does cause some heartburn right. It does impact our confidence just because of the range of possible outcomes, but but the good news is that most of these <unk>.
<unk> affect the entire industry. So.
Labor in airports, it's everybody's problem one unique thing for US is that we are financing the aircraft a little differently today.
And then we did in the past so that's something unique to us but for the most part this affects the entire industry. So the.
The good news is that while.
We're going to have to digest all of these so as everyone else so our relative cost advantage.
Should be maintained.
And in your quote on United.
There too.
Two plus times, our unit costs, so not I'm not expecting them to come to the levels that we are and everybody has their own unique components.
Around costs, but I think once things settle out youre going to see our unit cost advantage continue to widen.
Okay I appreciate it and then.
With non fuel unit cost kind of ramping throughout the industry higher fuel in general as well driven in part by a better economy.
Your thought process changed towards base fares in general like for example, Mcdonald's to Scott.
The other day about highway historically higher average pricing.
To offset a lot of our labor increases Starbucks just now just.
Just raise base pay for for all hourly employees with the assumption of offsetting with higher pricing like why wouldn't that be the case for you guys in general I mean, it just seems like there is an ability to push fares now.
I have ever been before given all of the cost pressures that are out there in China I. Appreciate the time. Thank you.
Yeah sure Carter. This is Matt I'll take that question. So generally speaking fares will move based on supply and demand.
As demand continues to improve.
I would anticipate that we would see upward yield movement I can give you. An example, thats happening right now so while we are coming off of a low base and a base of which we.
I'm not satisfied with where.
We are seeing yield starting to firm, especially if you look at traffic say inside seven days from departure, we don't we don't carry a lot of that traffic, we carry our fair share of that kind of traffic and we are seeing that traffic start to improve and we're also seeing those yields.
Start to firm.
So to me that's an indication what we're coming off of a low base that we have been and we are starting to be successful.
In pushing yield increases through through the network.
Another thing I would mention too in terms of fares in general and what we're seeing happen from a demand perspective is and this is a little bit counterintuitive, but I will tell you that our conversion rate is actually while quite strong is starting to fall just a little bit over Thanksgiving and Christmas well what that means actually is that.
As the fares are continuing continuing to improve over Thanksgiving and Christmas customers are taking a little more time to shop around and that is an indication of in fact that.
We're going to see yields that we expect to be a little bit higher instead of customers seeing fares into snapping them up they're shopping around a little bit more which is actually good news and why we have some confidence here that fares will continue to move up those are more short term in nature, I think youre talking more longer term and as always at the supply versus demand.
Balance and we're comfortable and confident in our network and that what we're building will removing two moving forward will deliver will deliver the RASM and deliver the margins that we expect to see from a network long term.
Appreciate the color. Thank you.
Okay.
Our next question from Duane <unk> of Evercore.
Hey, thanks, Thanks for taking the question.
I wanted to ask you about targets.
Sure.
The early innings post this most recent meltdown the focus was on settling down the operation in.
And fighting fires and attribution and things of that sort.
But I wonder if you'd be willing to share with us if the nature of your conversations with the board has changed has there been any.
Discussion about fundamentally what you're trying to solve for.
For example is there any discussion about an absolute profit or absolute margin goal for 2022.
And showed an absolute profit goal drive capital allocation, which would include.
Our fleet plan from arm's length, right from arm's length, it's easy it's easy from RMC.
It feels like the organization is solving.
For our pre pandemic fleet plan.
Hey, Duane it's Ted.
So obviously the board is very much aware of the company's five year objective.
We are a long term planning cycle business with long term assets, we view the.
As I said earlier, the route opportunity and market opportunity to be large in our market there.
There are also well aware of the company's margin objectives, which we've shared with you guys and I think it's consistent so.
They expect us to deliver on those things much like you do.
And I believe we can.
So.
To your comment about whether or not it's a pre pandemic or post pandemic fleet plan.
Again, it is our belief today that the market opportunity is as large or perhaps even larger than it was prior to the pandemic.
And we believe with our cost structure and our current network presence, where the best suited to explore that at the lowest fare and lowest cost level.
And I know.
Do you have other different products out there in different airlines conserve those those segments, but that's what's important to us and important to our board.
I appreciate the thoughts and then maybe just a hypothetical question.
A little bit out of left field, but.
This year over two framework that we've been stuck in from a capacity from a cost structure from a margin perspective.
Is there any thought on sort of putting out targets for 'twenty two on a year over year basis, where youre talking about capacity and margins and hopefully RASM not just CASM, but hopefully RASM on a year over year basis and thanks for your thoughts.
Yes, we're considering the right way to present it.
I get your point.
At some point you start going year over three year or.
But we will make sure we presented the most.
The clearest way on the most digestible way.
Thanks.
Next question from Hunter Keay of Wolfe Trahan.
Holster here.
Good morning, everybody.
Scott and the budget right now are you expecting profits next year.
Well, we have a number of scenarios obviously.
Still in that process today.
I think we are looking at sort of a middle ground scenario, where we do generate a little bit of a profit hard to say at this point, we're still trying to figure out.
What unit revenue looks like for Q4 much less for 2022, so we have a number of scenarios at this point.
Okay. Thanks, that's helpful. And then another one for you Scott how do you how much do you spend each year on an overhead and how do you measure it.
On overhead.
Sort of a generic term I mean, I guess, you are sort of really getting at sort of fixed and variable components.
And those change over time really depending on how close you get to departure.
But overhead really in sort of the corporate overhead component is really primarily people.
And Thats.
A big component of the expense.
What I would say youre talking about we've talked about 50 50 variable or fixed.
And Thats the way I would sort of think about overhead is sort of that 50% of our expense component.
Okay.
Thank you.
Our next question from Stephen Trent of Citi.
Good morning, everybody and thanks very much for taking my question.
Yes.
Two quick ones for you.
One I noticed that you.
You launch and service to <unk>.
When do you think about.
The FAA downgrading.
Mexican aviation to CAD tool.
That ostensibly give some advantage to U S carriers flying south bound versus Mexican carriers, launching new north bound do you see any more.
Of those type of opportunities in the pipeline.
And the second question just real quickly.
To the extent of what our long term could you envision spirit.
Participating in M&A.
Either as a buyer or a target.
Yes.
Hey, Stephen It's Matt I'll take your first question I think that will take your second question.
In terms of Mexico in General, we see we see lots of opportunities in Mexico, we've been flat.
Flying there for quite some time and there's always opportunities are for leisure.
Traffic, there and I think over time, we'll be thinking about VFR traffic and seeing how we can best develop a network there for VFR traffic as well and then I'll turn it over et cetera, yes, even as it relates to M&A I think the answer is going to be consistent with what we've said before one thing I'll reiterate we're extremely excited about the.
The organic opportunity here, we think it's pretty big.
And we believe we have the resources to go and explore that however, it's in our best interest to always be.
Looking around at ways that we can best deliver return to our shareholders.
Today, we're the largest U LCC in the space and and so we want to figure out the best way to capitalize upon that so we're always thoughtful but at the same time very interested and excited about organically what we can do.
Okay very helpful color guys. Thank you very much.
Thanks.
Our next question from Chris Stephanopoulos of Susquehanna.
Good morning, Thanks for taking my question. So your prepared remarks sound that the response to what happened in August is more structural and in a good way versus what your response was we look back at some.
Some of the press releases and transcripts from 2015 and 2019, so curious.
If you could rank order the top three initiatives that you've put in place to address this.
Is there an Iraq committee or what gets.
Investors the confidence that when demand plus weather, plus Kingston say reservation system or <unk>.
Sure.
Tes are critical parts of our network, where spirit can now.
None of this and I'm not saying that.
Can completely avoided but Bob.
We have confidence that the magnitude of.
Sort of breakdown, but we won't see a similar sort of magnitude of breakdown and also is there anything I haven't looked at the proxy, but is there anything now thats going to be tied to kpis for executives.
Around those and I guess the third part is should we expect as you come into 2022 and 'twenty three.
These changes that we would see a higher otp scores. Thanks.
Okay.
I'll try to address those Chris first.
The reaction in this current period versus what we experienced in 2015. So we took learnings from 2015 actually deploy them into the network.
And they were successful and I think that was measured by the company's reliability in 2016, 17, 18, 19 and 20.
What's different is as Scott indicated earlier as the company grows 15% a year and while we're pretty good at forecasting what that looks like and adapting the network to it and making necessary design changes to enhance reliability clearly this summer we didn't get enough in front of it now I'm willing to if you give me a little bit of credit to say this was a weird period.
<unk>.
For airlines from a planning perspective, but despite that we should have done better we should have known better by our team we should have done better by our guests. So it starts with the network design. That's both the aircraft network and the crew network and basically we tear it backup part again and make sure. We've got the right construct both in the form of basis and in the way that aircraft flow.
And I think we're going to have some real wins come out of that which I am excited too to see.
And then.
And then to the extent that we do have any irregular operations, which like you said and acknowledged earlier will happen how do we recover faster so putting in place a more.
Our robust plan about how we react to it and more importantly, how do we predict it's happening what are the leading indicators for us as our network gets bigger it gets a little bit more complex.
And so we're evaluating multiple inputs, which is probably what led us to our issues in early August and what are the right ways for us from a green yellow red perspective to evaluate each one of those inputs and I think theres going to be some very exciting takeaways from that as well using data and automation to help the team made good decisions than we can recover faster.
And I think Thats whats really important is yes, we will not avoid them altogether, but we want them to become smaller and more non events because I understand your concern.
That investors may have and I would like to assuage that concern because I do believe that we're a unique set of circumstances, we have been growing relatively rapidly and we are reacting to that but I think we can be more proactive and thats. What this process is teaching us now as it relates to kpis.
And how that is measured we are already measured.
In our short term incentive on the company's operational performance measured by on time performance and it is not an insignificant portion of our short term incentive.
And that has that has played out well for us over the last four or five years, because we've been pretty good producer of on time performance. So I.
I think our board is focused on it.
The management team is focused on it.
Because we want to deliver the best experience for our guests and we did not do that this summer.
But we believe it's an isolated incident that we can move past. So looking forward into 2022, youre going to see similar kpis that will be measured.
Will be held to that standard going forward.
Okay. I appreciate the depth of response follow up here, so the closer to six CASM ex fuel moves lower.
You feel better about the environment.
Unlocking more capacity could that closer to <unk> get back to a high fives or lower.
The that you outlined back in July is that at all being contemplated in your planning for 2022 at this point. Thank you.
Yeah. Thanks, Chris So I think the port that that's key here is capacity, we've talked about before getting back to full utilization and we mentioned in the prepared remarks that we're going to slow the pace of that a bit.
So that we make sure we get the hiring in place in order to run the scheduled level, one as opposed to get out in front of it a little bit now our plan all along is to hire enough.
<unk> run a full airline a little quicker than maybe we hope.
And if those things happen. It is very possible that we're able to get to full utilization a little bit quicker than maybe we're talking about here in our guidance that's possible, but we're not going to get ahead of that too. Soon so it is possible that we get to full utilization by late summer it is possible, but it all depends.
On hiring.
And we'll just see how that goes next year, what it will look I think it's our goal all along is to get to full utilization as quick as we can balancing the operational components that we always do even more so today with the Iraq and the changing landscape underneath us. So we're going to be patient and we may be a little bit conservative, but our hope.
Is that we can get there a little bit sooner and I'll, just add to Scott's comments, which were all correct.
We're obviously a part of the environment, we recognize that supply and demand have an impact and we've always been managers of that to the extent that there is a more robust recovery or a lower fuel environment that can stimulate additional activity, we would be responsive to that and we believe we can have levers to pull in that regard because utilization on our.
Our fleet is meaningful.
And so yes, there are ways for us anymore.
And a faster running economy to perhaps lean in a little more than that would have.
Unappropriate impact on CASM ex as well so so yes, we would take that into account also.
I appreciate all the color. Thank you.
Our next question is from sovereign shifts of Raymond James.
Hey, good morning, everyone.
And I realize you've answered some of this.
On spot.
And then I also realize that unlike some of your kind of non UFC competitors, there isn't a lot of efficiency and productivity and <unk> savings can be wrung out relative to 2019, but and maybe for Scott could you, perhaps kind of walk through the major cost line items and on a kind of a per ASM basis.
Just how much is kind of inflationary pressure, we might be seeing or.
Some range that we might be seeing.
Relative to 2019, once you're back to kind of pre crisis utilization.
Yes, obviously, we will try to hit on some of those and I think they're all going to be the ones that we've talked about before.
Labor right now is a moving target.
On rates and hopefully we stabilized behavior over time, the labor rates are moving north.
To predict where they will stop but thats, a moving target airports right now very difficult to predict.
Where theyre going to rationalize that but our hope is that throughout 2022 as throughput at airport starts to become more predictive.
Those rates are easier for airports to predict and it stabilizes, how we forecast the business, but it's going to be labor.
Which is going to be.
Throughout the spectrum, we talked about it at the ramp and gate agent level, but were seeing it throughout the organization I think as most companies are.
And it's going to be at airports those are the two largest.
And we also talked about financing aircraft. So aircraft rent on a per ASM basis is going up of those three areas account for.
Probably more than 90% of the move in unit cost.
So that's the vast majority of the revenue.
But on the airports.
You said return to normal winter traffic levels retention on the right.
Didn't say normal.
The way I would describe it would be it has elevated upwards of 50% on a on a per departure basis for us and we think that it will probably stabilize at somewhere around 20% higher but thats a predictive guests at this point I am I don't expect it to go all the way down to the per passenger per departure basis that we had pre COVID-19.
But don't expect that that.
Jonathan.
Follow up on that.
Just capacity and bring it back up it sounds like is it is it is it solely like bringing Fort Lauderdale backup and it for example, and it's only on making sure the staffing levels.
And what's the kind of likely cadence as you kind of go through 2022 is it a little bit more back half weighted or is it pretty fairly kind of consistent.
Uptick in capacity.
Hey, Savi, it's Matt I'll start and then Scott can.
It can come in after me here.
So a piece of this definitely is fort Lauderdale staffing and we want to make sure that we're being smart with the schedule and making sure that we're looking.
And how to add that back in of course, we would like to get that back to full utilization of Fort Lauderdale as soon as possible, but as Scott mentioned and Ted mentioned, we're going to be smart and how we do that to make sure that we have the right guest experience and not cause other kinds of disruptions for our guests.
Along the way, it's not just Fort Lauderdale per se.
The biggest issue is we do see some pressures in some other airports.
But generally speaking it is fort Lauderdale will continue to ramp up through the first quarter into the second quarter and although we although we're not anticipating as Scott mentioned that we'll be back at full utilization by early summer, we will be we'll be getting pretty close to that and Thats, where we think we'll be able to flex back up.
By the summer again, not quite the full utilization, but approaching approaching that number Scott I would agree. Thank you Jordan.
Perfect. Thank you Dan.
Yes.
Our next question from Jamie Baker Jpmorgan.
Hey, good morning, everybody I actually liked Mike's question, a lot and I wanted to expand on that by asking a slightly different variant.
You had known in March or April of 2020.
That the government was going to allocate something around $75 billion of aid to the industry would you have behaved any differently and do you think that your 2023 margin commentary today would be any different.
So Mike I assume you Jamie it's Ted So you mean, if we had known about it but it was still going to happen when we have behaved, yes, yes, yes.
I don't think so.
We reacted early on in the pandemic.
Knowing that we had to solve our own problems.
So we anticipated that we were going to do that regardless.
And I think we would behave exactly the same coming out and I can't speak for everyone else.
And and we probably had a slightly different view on on.
That program than maybe some of our larger competitors.
But but I would tell you that I believe that we did everything exactly according to what I would have anticipated in fact, I think the group executed extremely well throughout the course of 2020 and now as we look forward into 'twenty three.
We see the opportunity and thankfully, we did make those moves because I feel good about the company's balance sheet I feel good about the Companys order book and our ability to tackle that opportunity assuming I'm right.
Okay interesting.
Thank you and then second question just on fuel efficiency. If we look at ASM per gallon metric steadily rose during the crisis. It peaked in the fourth quarter of last year, it's been coming down ever since as you rebuild the network, but the guide for this quarter does suggest a sequential increase again just wondering on.
The revised 2022 capacity forecast of 53 to 55 billion.
How should we be thinking about the various moving network pieces that would allow us to sort of better model fuel efficiency relative to 2019 baselines.
Yeah, Hey, Jamie.
Haven't done the forecast on 2022 ASM per gallon, but I'll call it.
Some of the moving parts here.
The movement, primarily in <unk>, 'twenty and 2021 on that metric is really been driven around mix around the flying of the neil's versus our oldest aircraft in 2019.
So if you think about that production, we're going to fly most likely the <unk> hundred <unk> hundred 20, <unk> first and then it sort of trickles down so as as capacity gets gets flexed up and down your mix of neo versus call it Seo or threat here.
Does that metric so thats the primary driver of the change now.
Now we have been building our neo fleet over this period and we will continue to do that next year. So that is a tailwind to the metric, but we will incorporate more of the aircraft into the fleet next year as well so that's going to be a headwind. So as those things sort of play out hard to really tell but those are the puts and takes so we don't have a final number yet, but thats, where the things that are going on there.
Okay very much appreciate the color. Thanks, a lot guys.
And the next questioner from Catherine O'brien with Goldman Sachs.
Good morning, everyone. Thanks for your time.
So there's been a lot of industry focus on fine of Florida, and some other leisure markets over the last 18 months. The recovery of course, then led by leisure demand.
I guess on the scheduled for early next year are you starting to see that additional capacity decline at all or it's too early to tell.
He gave you said so first the.
Youre right.
We've noted that right. So we're largely we're not only a florida headquartered airline but.
50% to 60% of our airline touches the state.
And so we're very aware of insensitive to capacity moves within the state and it's been interesting to see how what's happened over the course of the pandemic in fact for the fourth quarter domestic capacity in the United States is down still.
Around 6%, but Florida is up like eight.
So despite competitive pressures in our home state, we're still outperforming the industry in half so <unk> been doing so because of our competitive position here and where size in the right places and we intend to expand that now looking ahead.
Anyone's guess.
But I would tell you that if assuming that and we agreed by the way with the broader commentary that inner.
International traffic will return corporate traffic will return timing of that is in question, but we tend to agree with that that commentary assuming that happens that that capacity that has been moved into domestic leisure will in all likelihood move to other places better suited.
Which is probably going to be beneficial to low cost carriers.
And so don't know exactly when that happens in the forward schedules are still in flux.
But we anticipate it will.
Got it and then one just drilling a bit more into the labor inflation you called out as one of the main drivers to not getting as far below 6% CASM as you previously thought.
Of course, very well documented labor inflation ever in the economy.
With 80% of your labor under Union contracts is it is it that other 20% the jersey inflation or if not are you expecting to see rates increase and new contract cycles. Within a couple of years is it is it changing staffing levels permanently to improve the recoverability you guys have been.
Looking back over the call or maybe as your labor force getting more senior.
I know I gave you like five options there, but just trying to get a sense of what is changing in a longer term expectation versus what is transitory.
Yes. Thanks, all of those are moving around so we talked about.
The airport staffing, which has been above and below wing of which we are unionized in Fort Lauderdale, but the other airports in our system are all outsourced so while the labor costs of those are not under our umbrella.
It does influence our cost structure, so that labor component when you talk about labor, it's all of that but as the ground handling component.
For our outsource providers as well as those internal but we're seeing it throughout the spectrum. The biggest percentage increase is happening at the airports we spend.
Probably spend upwards of $300 million next year and airport labor expenses. So it's a big number for us but.
The Union component is a little bit fixed in the short run.
But the other stuff we are seeing a good bit inflation throughout the spectrum. So that is happening, but as you mentioned two there is a component of the labor increase of even for the unionized folks internally that is happening on a rate basis, an average right. So we spent.
Last call it year or 18 months the early parts of Covid without hiring any additional crew members. So that changed the average rate structure within the business over time as we start to hire those again and we did that starting back in January February that will have a dilutive effect of our average rate, but the overall expense for labor.
There is going to be significantly higher period.
Thank you Brad.
And with that I think that's about it for this call. Thank you all very much for joining us today.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for your participation you may now disconnect.