Q1 2022 Spirit Airlines Inc Earnings Call
Welcome to the Spirit Airlines first quarter 2022 earnings conference call all participants will be in listen only mode until Q&A. If you want to ask a question. During this session. Please press star one on your telephone keypad and if you would like to withdraw your question. Please press the pound key.
Like to hand, the conference over to your speaker today.
<unk> senior director of Investor Relations you may begin.
Thank you Suzanne and welcome everyone to Spirit Airlines first quarter 2000, 22022 earnings Conference call. This call is being recorded and simultaneously webcast. A replay of this call will be archived on our website for 60 days.
Renting 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 are other members of our senior leadership team.
Following our prepared remarks, there will be a question and answer session for analysts. Today's discussion contains forward looking statements that are based on the company's current expectations and are not a guarantee of future performance there could be significant risks and uncertainties that cause actual results could differ materially from those reflected by the forward looking statements, including the risk factors disk.
Just in our reports on file with the SEC and the consummation of the merger with Frontier Group Holdings pursuant to the merger agreement entered into on February five.
2022.
The merger is expected to close in the second half of 2022 subject to satisfaction of customary closing conditions, including completion of the regulatory review process and approved approval by spirit stockholders, 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 first quarter 2022 earnings release, which is available on our website for the reconciliation of our non-GAAP measures.
Of that I turn the call over to Ted Thanks, Dan Thanks to everyone for joining us today.
We were very pleased with the strength in demand we saw build throughout the quarter from mid February on March saw exceptional strength with total revenue per passenger segment up nearly 10% compared to March 2019, and the improvement in April versus 2019 was even stronger as we head into the peak summer period, we are very excited by the robust demand.
<unk>, we are seeing we estimate our second quarter T. RASM will be up between 18, and 21% compared to the second quarter 2019, which translates into a T. RASM that is the highest we've seen since 2014.
Very encouraging.
<unk> format, and Scott share the details of our first quarter performance I want to personally. Thank all of our spirit team members for their contributions patients and service to our guests and each other.
The last couple of months have been an exceptionally difficult operating environment for carriers that operate in Florida and air traffic control has told US that we should expect these challenges to continue this summer until they can address their staffing issues. We participated in an industry meeting this week with the FAA and it appears that some adjustments are coming but until.
We see them contribute we felt the need to adjust this summer to provide more buffer for our crews while our other network enhancements take shape.
It is clearly frustrating given our large Florida presence, but we will address it head on and make sure. We are appropriately balanced in the meantime, while our attrition rates have been elevated we have had no issues sourcing pilots our pilot hiring and training is on track and we don't see a staffing concerns.
While our <unk> performance is disappointing, we expect profits in <unk> <unk> and beyond as this demand recovery takes hold.
Our business is focused on a few very specific and stringent strategic things one network reliability enhancements and growth to return to peak utilization and profitability three record non ticket performance for widening the unit cost gap and five closed.
The merger with frontier.
All corporate operational and financial goals are intentionally tied to these items and we believe all are achievable in the next 12 months.
And now I'll hand, it over to Matt and Scott to discuss our first quarter performance and second quarter outlook, Matt over to you.
Thanks, Ted I joined Ted and thanking the spirit team their dedication and commitment to care for our guests is unmatched.
Turning now to our first quarter 2022 revenue performance compared to the first quarter 2019 total revenue was up 13% to $967 3 million and total RASM was down five 3%.
However, midway through the quarter, we saw a dramatic improvement in loads and yields such that March T. RASM. This year was higher than March 2019, and this was accomplished while simultaneously growing capacity 17, 1%.
On a per segment basis compared to the first quarter 2019 total revenue per passenger segment increased three 9%.
The passenger revenue per segment component decreased seven 6%, but non ticket per segment increased 14, 8% to a record high of $64 53.
Our team has done a great job leveraging the benefits of merchandising and dynamically pricing our ancillary products and there is still non ticket upside left to capture and we are on track to beat that record in the second quarter 2022.
And given the dramatic improvement in the demand environment. It is anticipated that ticket revenue per segment, we will significantly outperform what was achieved in the second quarter 2019.
We don't carry a lot of large corporate business traffic, but we do carry a sizable amount of small business and conference traffic and that's the piece of the recovery that has been missing until now.
Regarding the network changes Ted referenced we are changing our approach to how we flow our aircrafts, we are adding basis to the network and we are modifying our approach to crew planning, which will build more network resiliency and aid in operational recovery.
We also have enough critical mass in more cities in our network to schedule a lot more out and back flying which we did with our schedule change that took effect on April 20th.
It's only been a couple of weeks, but we are confident these moves should begin to make it easier to isolate impacts when we have regional disruption like we saw in Florida over spring break.
Looking ahead for the second quarter, we estimate our capacity will be up approximately 10, 5% versus second quarter 2019.
For the full year 2022, we expect to fly about 50 billion ASM.
Our second quarter revenue is estimated to range between $1 three 2 billion, So 135 billion.
Which implies total RASM will be up 18% to 21% compared to the same period in 2019.
In closing from a revenue perspective, we like our positioning as we head into the peak summer period and while this environment is quite favorable there will be a another leg up when international testing requirements are bullish and regional jurisdictions ease and now here's Scott.
Thanks, Matt also want to start by saying, thanks to our entire spirit team even in these challenging periods. Our team members have maintained their professionalism and are delivering a great experience for our guests I've never been prouder to be a part of the spirit family.
Now turning to our first quarter 2020 to financial performance, we reported an adjusted net loss of $173 5 million.
Or a loss of $1 60 per share.
Our adjusted EBITDA margin was negative 11, 2% in line with our expectations.
<unk> to the first quarter of 2019 total operating costs increased 53% on 19, 2% more capacity and 32% more aircrafts in our fleet.
We continue to experience labor cost inflation throughout much of the organization.
As a result of the <unk> variance impact on the company staffing levels in early January we offered various incentive pay programs to minimize flight cancellations, leading to additional wage pressures.
These incentive pay programs together with additional passenger re accommodation expense drove about $20 million of costs in the quarter.
Fuel price was the primary source of the increased operating cost in the quarter fuel price per gallon was 41, 1% higher than the same period in 2019.
From a liquidity perspective, we remain in a strong position.
We ended the first quarter was $1 6 billion in liquidity, which includes unrestricted cash and short term investments and $240 million of available capacity under our revolving credit facility.
During the first quarter, we made debt principal payments of $44 $3 million that had capital expenditures, including net purchase deposits of $53 2 million.
For the full year of 2022, we estimate our capital expenditures, including net purchase deposits will be approximately $250 million.
Which includes $100 million related to the construction of our new headquarters and training facility in Dania Beach, just south of the Fort Lauderdale Airport here in South Florida.
Turning to our fleet during the first quarter, we took delivery of three <unk> hundred 20, Neo aircraft ending the quarter with 176 aircrafts in our fleet.
We expect to take delivery of 21 additional <unk> hundred 20 years before year end.
For the second quarter 2022, we estimate our pretax margin will range between negative three to negative 5%.
This assumes total operating expenses of 135 billion to.
One $3 7 billion.
With our fuel price per gallon assumption of $3 85 to.
To $3 90.
The impact of the ATC issues and the corresponding reduction of capacity in the quarter will cost us about three to four points of the margin.
Our fleet utilization for the second quarter will be about 83% of our pre COVID-19 second quarter levels.
We believe we could have been profitable with about 90% of our pre COVID-19 second quarter utilization.
Maintaining our unit cost advantage over the industry is an important pillar of our model.
Even though we have had outsized impacts to our labor costs when compared to some of the other carriers in the industry. We still have the lowest CASM X fuel plus interest and the industry in the first quarter in.
In fact, our absolute CASM X fuel difference, so global larger versus the industry compared to the first quarter of 2019.
As we ramp the airline back to full utilization, we expect to maintain or even grow this gap.
With our robust pilot pipeline the operational infrastructure investments, we are making and the network improvements being implemented to go along with the strong demand environment and non ticket production, we feel confident about our ability to get the airlines back to full utilization and a return to pre COVID-19 profit.
Levels in the near future.
In closing while the close in ATC challenges have caused us to react with lower utilization in the short term overtime. The network changes that Matt discussed along with the corresponding changes in our crew planning process and crew basis will give us the necessary resiliency and confidence to hit our end of year utilization rates.
That are around 95% of our pre COVID-19 levels, and then back to full capacity just after the turn of the new year.
With that I'll hand, it back to Ted.
Thanks Scott.
As we gear up for the busy summer season, we are committed to deliver operational excellence and high value to our guests.
Now I'd like to address the status of our pending merger with frontier Airlines and our board's decision to reject Jetblue proposal.
I'll walk you through a slide deck, we posted on our IR site earlier today.
On slide two we hit the high points to.
To start after a very thorough review our board of directors unanimously determined that the unsolicited proposal. We received from Jetblue Airways does not constitute a quote superior proposal because the transaction proposed by Jetblue is not reasonably capable of being consummated.
First let me clarify the definition of a superior proposal under the frontier merger agreement is a two pronged decision. The first of which is whether it is reasonably capable of being consummated and the second of which is whether it is economically superior.
Because our board's evaluation could not clear the first hurdle the board did not evaluate whether the price offered by Jetblue standing alone provided greater value than our deal with frontier.
As part of the review process, we talk constructively with jetblue, including providing a well populated virtual data room and engaging in discussions the number one gating determination we needed to make was could this proposal be reasonably capable of being consummated in particular would it be approved by regulators.
After receiving advice from our legal and economic advisors, which was informed by extensive discussions with jetblue and its advisers, our board's determination was no.
The reality is that regulators are already suing jetblue over its northeast Alliance with American and it's unlikely the Doj or a court will be persuaded that jetblue should be allowed to form an anti competitive alliance that aligns interest with a legacy carrier and then also undertaken acquisition that would eliminate the largest ULC.
<unk> carrier.
Jetblue is the acquisition of spirit would eliminate a key competitor and a vocal public opponent of Jetblue is anti competitive and EAA deal.
And if you take a step back at its core the Jetblue proposal as a high cost high fare airlines trying to buy low cost low fare airlines, a jetblue spirit merger would likely eliminate spirit as a you LCC and half the expected synergies would come from reduced capacity and increased fares to consumers in contrast, the frontier.
Deal creates a stronger combined you LCC and a much more formidable competitor against the big four and Jetblue as well.
You don't need to be an antitrust attorney to see the issues here.
Jetblue talks about the quote Jetblue effect is there a way of putting pressure on the big four but we believe that claim is based on economic modeling that have significant defects and overstates the impact of Jetblue on legacy carriers.
So if you turn to slide three spirit and our advisors undertook a thorough careful review of Jetblue proposal. This included retaining prominent economic consultants and an experienced aviation economist as well as extensive dialogue between spirit and Jetblue is antitrust counsels over a four week period.
At the end of that investigation, our board determined that Jetblue proposal represented an unsatisfactory high degree of completion risk with inadequate protections for our shareholders. So on April 25th we went back to Jetblue. The outlined how we would propose strengthening the regulatory provisions to reduce completion risk we proposed a strong covenant required.
During jetblue to take any action required to obtain regulatory clearance, including abandoning the NEA at closing and a substantial reverse termination fee. However, jetblue rejected those proposals and instead made it clear there are a number one priority was preserving the NDA with American.
As I said, we believe Jetblue deal is unlikely to be approved so long as Jetblue is NEA with American airlines remains in existence.
The Doj and attorneys general in six states and the district of Columbia have sued to block the NEA and Youll see on slide four the Doj has strong public commentary in opposition to the NDA spirit and many other airlines and air travel constituencies have also publicly oppose the NDA on the grounds that it is competitive.
It stretches any sort of common sense to believe that an acquisition of spirit by Jetblue would be approved by the Doj, while it is suing to block the NDA.
So how do we skip now to slide seven.
As observers are pointed at Jetblue shareholders aren't supportive of this deal either based on the Companys stock performance. However, despite clear concern from Jetblue shareholders. Jetblue has continued to pursue disruption to the spirits frontier combination.
I am wondered whether blocking our deal with frontier is in fact their goal.
Over the last month, we've seen a lot of third parties comment on the deal you will see on slide eight there has been a consistent and vocal commentary from informed market participants such as you all are arguing that a jetblue when spirit combination faces significant regulatory scrutiny and substantial completion risk. This is in Stark contrast.
Two third party agreement that Ive frontier spirit merger delivers greater closing certainty driven by great competition in the U S industry on slide nine.
So with that now understood. The board determined that the Jetblue proposal was not superior, which means we return our focus to the frontier transaction, which we believe delivers on all fronts looking.
Looking at Slide 10, clearly a combination of spirit and frontier is a winning formula and it continues to be superior transaction for spirit guests team members and shareholders.
For consumers and communities it will deliver $1 billion in annual consumer saving and bring more ultra low fares to more travelers and more destinations across the United States, Latin America, and the Caribbean, including major cities as well as underserved communities.
The stronger financial profile of the combined company will empower to accelerate investment in innovation and growth.
And to compete even more aggressively, especially against the dominant big for airlines and Jetblue.
We also expect our team members will have better career opportunities and more stability as a result of our transaction with frontier in fact by 2026 frontier and spirit are expected to add 10000 direct jobs and thousands of additional jobs at the Companys business partners.
And shareholders of both spirit and frontier or have the opportunity to participate in the upside potential of the combined airlines as I mentioned the price per share in the Jetblue proposal is illusory because the completion risk that said I want to touch for a minute on the economics Jetblue is all cash offer is opportunistic can be time to take advantage.
<unk> pandemic induced lows in the airline profitability. It is important that shareholders understand that in the unlikely event that the jetblue transaction could close it could be up to two years before spirit's shareholders received the offer consideration due to an extended regulatory process over that time the airline sector recovery will continue so.
Our proposed merger with frontier, which includes stock consideration gives spirit's shareholders the ability to benefit from pandemic recovery and the upside from unlocking $500 million in annual run rate operating synergies.
So in terms of next steps, we continue to advance towards completing the combination with frontier and expect the transaction to close in the second half of 2022 consistent with what we have said when the merger was first announced in February .
With all that I'll turn it back to Dan.
Thank you Ted we are now ready to take questions from the analysts we ask that you limit yourself to one question with one related follow up if there is time remaining you are welcome to re queue for another question Suzanne we're ready to begin.
As a reminder to ask a question. Please press star line telephone keypad, Andrew <unk> question. Please.
Again to ask a question. Please press star one on your telephone keypad Andrew Your question. Please.
Sure.
Our first question comes from the line of Duane <unk>.
Great.
Your line is now open.
Hey, good morning.
You obviously covered some of this in your in your comments and in the slide deck.
But can you expand on why you think the NDA is such an important piece of the puzzle if we read your rejection at face value.
It sounds like if the NDA wasn't on.
On the table that.
Something maybe you'd be more comfortable with.
Approval odd so can you just talk about the.
The process you went through what you learned over the last few weeks and why you think the NDA such a important puzzle piece.
Sure Duane So I think there's actually three important puzzle pieces. So.
Clearly when we have a sooner that it is being actively sued by the department of Justice for a stated anti competitive transaction and admittedly we are a vocal opponent of that transaction and we expect we might be a witness.
In that particular lawsuit it strikes us as odd.
They think they can actually close on a transaction with us during that period of time. So that is that is puzzle piece number one I would say second to that as I mentioned in our comments at its core Jetblue has a higher cost higher fare airlines and they have stated to us that their plan is to acquire US again are you LCC or lower costs lower fare.
Fair airline they intend to remove seats, which is capacity constraint and the synergy benefit of that deal would would come through fare increases and given the stated objectives at the department level, we view that as extremely challenging and <unk>.
Dreams, a challenging strategy.
Third is that during the course of that proposed regulatory review process given that we expect that not only with the department of post this transaction, but they would actually file suit to stop it we expect that that that process could take 18, 24 months or longer and during that period of time, given the stated objectives.
Of Jetblue, we have concerned about our own business risk here.
We have worries about flight of quality and attrition and all of that and so in order to make sure that we felt we were being compensated for that we ask for a substantial reverse termination fee and admittedly, we don't know whether or not it is even adequate to cover the risk or to compensate us for that risk during that period, but that's how we look to address it so to repeat what we said.
Jetblue, we believe youre going to need to commit to do anything in your power to get this approved by regulators, which which is called a hell or high water provision.
And as an adjunct to that also include that you would have to acknowledge that you would abandon the NDA.
In addition to that you need to commit to a substantial reverse termination fee and they said no to all three of those things.
And so our board was left with the decision that we believe it to be an inferior proposal and for that reason we have moved on so yes. The NDA is clearly problematic, but so is the overall strategy in the rest of the discussion.
And the risk that we would need to take in our shareholders would bear all of that risk.
Okay. Thanks, Thanks for the detail.
Can you maybe just talk about process from here when would you expect a shareholder vote.
And what other kind of milestones should investors be watching for sure. So the good news is during the course of this period. We have also been working simultaneously on on advancing the frontier transaction, which is really tied to soliciting approval from two groups. The first is our shareholders.
And as has been publicly reported and you can see it in our SEC filings, we've been back and forth with the SEC on the S. Four and the merger proxy document, which during the FCC common period. We've resolved we believe all of those comments. So we think we're at the very tail end of that process right now.
So that moved along maybe a little bit quicker than we anticipated.
The way that SEC rules work is once that merger document is finalized and it goes effective then you can schedule, a shareholders' meeting and solicit a vote from your shareholders. We can happen probably within 30 to 45 days after the effective date of the <unk>.
The merger proxy, so we anticipate that probably happening sometime in June .
And then the second approval body that we need to solicit approval from its obviously the department of Justice. So we had filed early in March our initial filing on that the HSR filings submitted with them. The forms that we needed with regard to that as we expected. We received a request a second request as it's referred to for more information and we have been.
Working with the department to satisfy all of those.
Everything they need an answer their questions and then we will work with them to resolve the issues and we're optimistic that we have a fantastic story to tell here that we think we have a very pro competitive deal.
As we stated back in February we're optimistic we can get that resolved and close sometime in the second half of this year. So those are probably the next two gating items to look out for.
I appreciate the thoughts to.
You got it.
Our next question comes from the line of Savi.
From Raymond James.
Hi, good morning, everyone.
Just curious on the capacity plan that you've laid out.
Just what gives you comfort and really accelerating your capacity growth from third quarter to fourth quarter, given kind of the constraints youre addressing over the summer.
Along those lines just how should we think about 2023 capacity does it kind of grow off of a lower base or simulated <unk>. You've also just kind of play catch up to the level that you were planning to grow anyway.
Sure Savi so.
If we look back to where the airline industry was at the second half of last year. There was a lot of discussion about.
Ramping up pilot hiring training and doing all of that work and we adapted to that early on.
By making sure that we had established enough infrastructure and throughput to get ourselves in a position to be able to meet R. R.
Our growth objectives throughout the course of 2022 and beyond and actually feel very comfortable that those things are in place and working well. So absent any interruption that we saw earlier this year with regard to how aerospace was being managed in Florida, we would've flown on our original schedule. So I think it's fair to say that the slope that you see from the second and third.
Third and fourth quarters as probably artificially restrained.
Versus what we would otherwise fly in fact, you can see from our publicly filed schedules. When we made the adjustment we pulled somewhere around 5% to 7% out of the core summer months, which is pretty notable especially during a very profitable period for our business. So I think looking at it that way probably gives you a little bit more comfort that the glide slope is probably a little more.
Rational heading into the second half of the year. So what do we expect of the things that will take hold clearly are our pilot and flight attendant another.
Other necessary staffing initiatives are well underway and working exactly as we anticipated. So we don't see that as being a limiting factor.
Secondarily, we as Matt mentioned, we've been making as a as a debrief and learnings exercise from last summer, we've been making a number of network and crew network enhancements throughout our.
Our network that we believe and as Matt mentioned start taking effect really here in April but in core a lot of the changes beginning more in the core part of summer. Those things. We are extremely optimistic will be very valuable and enhancing reliability for the business, which gives us again additional will give us additional confidence that we.
Can hit our growth targets admittedly, we want to see a little game film.
Want to see it kind of work and all that but based on our experience and what we've investigated around with experts and looked at how other airlines tacker tackle similar issues. We think these are going to be very effective changes for us and then the third is how how we have reacted to and what we anticipate for management of the airspace in Florida specifically.
And as I mentioned in my prepared remarks, there was a very productive meeting this week between the between the FAA ATC and all the operators. So every airline was represented there and they acknowledged that they definitely had some issues here in Jacksonville Center and perhaps in other stations throughout their system, but they were working quickly to resolve those those staffing relate.
Concerns and also proactively working with airlines on finding alternative ways to resolve where they might otherwise have been much more binary in the way they approach the aerospace so giving us more options to work around it and we're going to continue to engage with them. We think now we have a good a good understanding between the two sides of.
The actual problem and what needs to be addressed.
Addressed and so while we can't base all of our planning assumptions on them, making sure that it looks exactly like it used to look.
We are confident that the mix of all those things that I. Just described will give us the ability to kind of grow into the fourth quarter of this year now looking into the next year. The way we're thinking about growth is as Scott has mentioned numerous times, it's really utilization based how do we get ourselves back to the way we ran our airline pre COVID-19, which is on our <unk>.
<unk> utilization daily hours per aircraft basis, because we've been delivering aircrafts throughout the course of the pandemic and I think Scott you made reference to it in his comments that we may be growing ASM is 15% to 20%, but we've grown aircrafts 30, plus percent, which is obviously burdening the fixed costs of the business. So getting back to full utilization is key.
And all of these things that I talked about we believe translates that as we cross the new year and head into the first quarter of next year and that that will help you arrive at what you think our growth rate will be it will definitely be skewed on a year over year basis in the early part of the year because we're under flying what we should fly today, but it will start to look more normal as we lap that.
Okay.
Helpful and if I might follow up on that just given you had mentioned kind of the network changes that youre, making to kind of improve the operational reliability.
How does that impact kind of productivity or even utilization does that change that.
Makeup versus pre crisis were made.
Maybe less productive.
Utilization less utilization.
Does that kind of the network changes impact kind of the.
The rest of the kind of utilization.
It's a great question Savi and thanks for leading the witness because we want to tackle this head on there would be an assumption that you would make that the changes that we described which would include adding some crew basis. For example, changing the way crew pairings or the trips themselves how long they are away from their base makes the airline easier to repair easier to reserve.
During times of interruption those types of changes you've made lead to the conclusion that that actually might be lower productivity or cost punitive. The truth of the matter is today in our cost structure, we band aid that by with with other through other ways. We have higher reserves, we have higher sparing ratios and we have more.
<unk> in the form of block and crew buffer in our systems today.
And as part of our cost structure today intended to address the issue with this change you are really at a minimum perhaps changing the distribution of the existing cost in ways that will enhance reliability or were actually somewhat optimistic it may produce cost savings.
On the net and utilization will remain the same because all you do is really repositioning the way the aircraft flow in ways that you maintain your utilization, which means you may in some instances have to stretch the day a little bit. So you start your origination flights a little earlier than you otherwise might.
But there are plenty of ways for the network team to kind of piece things together to maintain fleet utilization and then overall crew productivity. We view is probably neutral at a minimum perhaps probably better.
Thank you.
Got it.
Our next question comes from the line of Catherine O'brien from Goldman Sachs.
Hey, good morning, everyone I'd like to stay on the on the cost topic. So on prior calls you've spoken to getting to sub 6% CASM at pre pandemic utilization.
Has that changed at all just given the inflation, we're seeing across the industry and the <unk>.
<unk> at large and then and then also just taking into account the retention bonuses you're paying due to the proposed merger and then can you just give us some color on the cost structure impacts those retention bonuses, we should think about going forward. Thanks.
Yeah, Hey, Katy it's Scott Thanks for the question.
Since our last discussion on the projected sub six set in CASM ex.
Labor rates have continued to move up the labor rate moves are going to make it difficult for us to achieve that level of CASM ex of the industry is seeing it but we may be a little bit outsized on the impact of that.
So I think look what those moves were probably looking at a low six cap.
As a number to be a little bit of a reasonable estimate for run rate CASM ex today.
With 2019 CASM ex of around 555.
We're probably looking at around 45 to call. It say 65 points of cost pressure.
So I think the next logical question becomes how does that affect sort of a return to pre COVID-19 margin levels.
So to do that we need additional revenue to offset the inflationary cost pressures.
And that's where that's where non ticket comes in we're about $11 higher in Q1 on non ticket than in 2019 and that number will likely grow throughout the year.
There's a good portion of that increase that sticky that will remain even if payers decline. So if we keep say 75% of that increase let's say $8, a passenger and $8 a passenger of non ticket offset about 65 points of CASM inflation, so if fuel and fares return to sort of <unk>.
19 equilibrium.
We would have been similar if not slightly improve the margins from the pre COVID-19 period. So while we had always hoped that non ticket increases we're going to work.
And be a bit margin accretive for us.
The pandemic has taken its toll on unit costs, but the good news is that we're at least looking at a real path to a return to pre COVID-19 margin levels.
And obviously, we're going to do everything we can to minimize unit cost inflation.
But the good news too is that the absolute CASM ex gap is growing versus the industry.
That provides any platform for improved fare levels then.
The margin expansion idea becomes a real possibility.
Thanks, That's really helpful. And then maybe just for my second.
Follow up.
On the <unk> question on.
The conference in your capacity plan. So you noted earlier in the call. Your attrition picked up but you are having success in hiring I guess through hiring ahead of plans that you can backfill that elevated attrition and then I guess, even if thats true should there be a training delay getting those new pilots filling vacant spot.
Trying to think through the moving pieces of the <unk>.
Tiring picture just to.
To hit that at year end.
Elevation target. Thanks, so much for the time.
Sure Katy it's Ted.
What you said there at the end is exactly correct. So we saw.
The issues associated with increased attrition.
<unk>.
Particularly at the pilot ranks and flight attendant ranks and we made adjustments to it and those adjustments work. So you are right in assuming that it does create a lag.
There is incremental training that we have to do to get things going there is incremental.
Things that we have to add we need more trainers, we needed more simulators, we needed more flight training devices, we need to do all those things and we did them earlier on this year, which meant that we had appropriately adapted and while attrition is at elevated levels. It has leveled off.
And we're seeing a much more stable number and in fact slight declines in attrition.
Over the course of the first and second quarter here in this year. So so our adjustments to that worked.
It's disappointing obviously, we want to keep everyone here and make sure we retain and there are ways for us to tackle that over the long term, but in the meantime.
We fixed the school house in a way that we were comfortable that we've adapted to the system. So again.
So supply constraint for us heading into the summer had nothing to do with our ability to fly our admittedly changed schedule from last summer.
<unk>.
What we saw from a staffing issue we were well on track to hit those numbers. It's it's more about making sure that we created in our Florida buffer.
Understood. Thanks.
Our next question comes from the line of Conor Cunningham from <unk> partners.
Hi, everyone. Thank you for the time, just going back to the EMEA for a second even when you move forward with frontier it seems like youre likely to be against the EMEA, regardless. So can you just speak to I guess concern with that alliance.
There were additional access to slots in New York would that be something that you're interested interesting just given like the cost inflation, we're seeing at airports and just how you price your product in general.
You help would be great.
Sure.
I have made a number of comments on the NDA, while it is anti competitive we've been public.
Opposition to that there is a pending lawsuit between the Doj and Jetblue American on that issue as I said earlier, it's entirely likely that we may be a witness to that so I hesitate to comment more than what I've already said, it's fair to say that the alliance itself is more than just a traditional codeshare.
There are a number of elements in it that actually make it more akin to a joint venture and we wanted to make sure.
In fact, even a merger.
And we wanted to make sure that it received the adequate attention and I believe the Doj is now doing that.
To the extent however that there are.
Divestitures in slot controlled or restricted airports, we're always going to be an interest in that in fact.
We've seen as you've seen of us late.
<unk> been a public we've been very public about our desire to take over the surrendered positions in Newark by southwest.
Despite the <unk> initial approach to that which we had to in fact start a litigation on them. We won and we believe those positions will be eventually awarded to a low cost carrier and we believe were the right one.
So I think it's been pretty clear that.
That in any event no matter, what the reason or outcome is if there are available positions in constrained airports, we believe spirits should be the number one place to go.
Okay great.
And just on the pilots.
No youre contracts out up until next year, but the industries I mean as everyone knows is about to go through another recession.
I realize you said you're comfortable with your pilot pool right now, but when we think about the long term implications of justice shortage why shouldn't we just assume that there is compression on pay rates over the long term like why wouldn't spear it'd be closer to the network carriers over the long term.
But not I mean again, the appeal seems to be that you could grow very quickly with spirit and maybe that's not necessarily the case in the near term as it used to be so.
Any additional color I'm, not asking you to negotiate in public but any additional color I think can be thanks for that.
I appreciate that.
Yes, So look history would tell you that there is.
A way that that pilot contracts have shaken out overtime.
And the argument that you make is that given given where we are from a pilot demand perspective, and all of that that perhaps that that could change versus what history would tell you and the answer is I don't know.
I wouldn't necessarily lead to that conclusion.
But I can tell you. This I've heard a few airlines, most notably United Airlines.
<unk> on what they believe to be the current supply of pilots in the marketplace and the demand for pilots in the marketplace and there being a significant disconnect between the supply of pilots in the marketplace and the demand for pipes. In fact, I heard numbers like 5000 pilots a year and demand for 13, or so thousand pilots a year and I've looked back.
At the data.
On how many pilots actually received ATP licenses over the last 10 years and for a majority of those years.
The number was actually closer to 10000 pilots a year now admittedly post the implementation of <unk> 117, there was a dip because they did put in place a longer training period, and I think that forced pilots to get more experience before they can apply for their their license, but post that dip the lines were all trending up there were more.
More people applying to get private licenses more people applying to get instructor alliances licenses and more people asking for them being awarded ATP licenses that line getting closer and closer to the historical average of closer to 10000 pilots a year.
Unfortunately, the COVID-19 pandemic interrupted that again and it did flatten off mostly because none of us were hiring pilots in 2020.
So now there is demand again, and I think those lines all trending in that direction give us good confidence that macroeconomics work. This is a good profession people who want to be pilots are now coming back to the world, saying I want to be pilots and we anticipate that you could interpret that data to suggest that actually once we achieve more normalized rates it will probably be closer to what you would.
<unk> in the past, which might be like 10000 or more pilots a year.
And so <unk>.
Supply and demand will work itself out over that period of time and that will help inform.
How pilot rate and compression or the lack thereof might might.
It might be impacted by the business broadly speaking our hours, but I'll remind you that we still maintain a unit cost advantage no matter what.
Our pilots or flight attendants are ground personnel, our dispatchers our technicians all of US are overhead are more efficient than they are at the majors, because we pushed more units more seats per aircraft.
And I think that's important to remember in the second point is to the extent that that you're right and there is compression in PE that happens at the lowest end as well, which is where regional pilots today are getting paid and that benefit of that arbitrage that the majors enjoyed today for obese scale perspective will be eliminated under that scenario, which would be very cost prohibited to the majors.
So I guess, there's probably a number of inputs to consider before you jump to conclusions.
Okay.
Thank you Pat.
Okay.
Next question comes from the line of Mike.
Mike Lindenberg from Deutsche Bank.
Oh, Hey, good morning, I have two here I guess, one to cutting that.
As it relates to your biggest airplanes, the <unk> hundred 21 Neo <unk>.
Given the fact that what are we talking about 229 or 239 seats.
Thanks.
Some of the irregular operations and the re accommodation costs.
The fact is these are expensive airplanes and.
When you think about sort of off peak.
Off peak.
<unk> and the right any thoughts on possibly sort of rethinking the mix and focusing on sort of maybe a <unk> hundred 20 neo as this being the right airplane I'm just curious.
Given the disruption in some of the issues that you faced.
If the thinking is.
Pricing as these airplanes here with that many seats and what it does on a unit cost basis that maybe the happy medium for spirit is the kind of focus on our core <unk> hundred 20, Neo type airplane I'm, just I'm just thinking about.
How things have evolved and how much that airplane actually features in your fleet going forward.
Hey, Mike, It's Ted I'll start and then I'll, let Matt add any comments you'd like as it relates to how he sees is evolving our network, but the reason we love that airplane is because there's just tons of demand right now.
Demand for low fare travel there's never been a question in our mind at least.
But there is there is untapped and considerable demand for load for air travel and.
And if anything the last six months have have reinforced that and over the course of the pandemic of course that was true that that low fare leisure travel was the most resilient part so that airplane.
Is critical quite frankly in large markets, where there is facility constrained on either side okay.
Can add capacity in a place like New York City absent us of course, securing additional slots in which we hope we're hopeful we can do it anytime is to add more seats of the airplane and it just becomes more efficient and there is one.
Underlying the demand in that market today no matter, what we do now now the core of our airline is the 320, it's going to be it's always going to be the bigger part of the fleet, but the 321 Neo is a game changer that is going to be an extremely powerful airplane with more range.
A better carbon footprint and we're going to be able to put more seats on the 320 321 Neo version than we have on our 321 CEO . So today, we operate the 321 with 228 seats because of the door configuration on the 321, Neil we actually can add more seats to it.
Without changing the overall comfort level or pitch. So it is going to be a better airplane, that's going to be more efficient and we're really excited about what it is going to do so Matt anything you want to add to that I would only add Mike.
That when we when we do have some kind of small disruption we've been dealing with this we've had the $3 21 in the fleet for a long time, our airports are very well very well prepared for if we do have to do a downgrade of some sort to a $3 20 from a $3 21.
You can place everything is pretty normal there for us if we do have a larger say weather events.
<unk> of the aircrafts sort of doesn't matter or a hurricane or something is coming then we're going to end up.
And we'll put out operational procedure in place anyway that will likely take some cancels and then with the airline back together in a day or two so it's not the size of the aircraft isn't going to matter too much in those events as well.
And that's a good answer thanks, and then just.
Wanted to just go back to you on some of the comments that you guys made in the slide deck, which should help us put that out just with respect to the jetblue effect and I think the concerns that you have with that.
There is that.
It is in the public record, whether it's Doj documents recently with the NDA and even some of the Dot's Steph where in the past jetblue.
Jetblue has been anointed as industry Maverick right Disruptor, if you will.
Now to the point that you've called out some of the benefits of the Jetblue effect towards the fact that Jetblue has had a difference in markets.
With respect to your analysis versus say the conclusions that the Doj and do you have a right that with respect to jetblue.
Where do you differ.
You do see that can you talk about overstating the impact of Jetblue on legacy carriers.
There are a lot of passenger segments that participate in that you guys go.
I know you mentioned small medium enterprises are smbs and having some of that business, but as we move further up the food chain there.
Areas, where jetblue plays and can have a meeting all affect on the big guys, where you don't even play in that space. So I'm, just I'm curious and I realize it probably has to go off comp.
But maybe you have some numbers or any color on that thanks I. Appreciate it sure. So looked at I won't bore you with all the analysis that was done because there was extensive analysis and then we hired independent economists to dig into it for us as I referenced in my comments in the summary is that.
A lot of their analysis as quite a few flaws in it.
<unk>.
The Jetblue first of all they use their the coverage period at Devry <unk>. The Jetblue in fact, theyre going back into the earliest part of the last decade, as our starting point, which was a completely different industry than exist today and while you are acknowledging that in markets, where jetblue competes with a <unk>.
<unk> carrier they have a lower cost structure than that legacy carrier than perhaps they have a lower fare structure as well and they can have an impact what we're talking about is what happens versus the UL cc effect when they compete with with legacy carriers or quite frankly, with jetblue and the allegation that the jetblue effect would somehow be larger than the effect that we have.
<unk>.
Is the comparison point because remember their strategy is to remove us as a you LCC and take seats out of the market and it's our.
Our assertion that that our effect is significantly larger.
So thats really what were talking about okay.
Okay. Thanks for that thanks, everyone.
Yes.
Next question comes from the line of Jamie Baker from Jpmorgan.
Hey, good morning, good morning, everybody I'll try to be quick second half profit guide, we can obviously back into some revenue assumptions, there, but whats the fuel and ex fuel CASM.
Yeah.
At the root of that guide.
Well, we gave Jamie Scott, we gave op expenses.
And capacity assumptions, so we arent, giving a full CASM ex guide.
But I think you can sort of do the math that sort of gets us to.
We pulled some capacity out.
In the second quarter and will likely be under flying a little bit in the third so I think what youre going to see is a bit of a CASM escalator in the second and third and then we will benefit from a return to mostly pre COVID-19 utilization in the fourth.
And then back to sort of I'll call low sixes and the.
And in the first and second of next year. So that's sort of linear extrapolation probably works there.
Sure.
And then on the merger and maybe this is sort of the direction that Duane was going earlier in the call but.
If we set the northeast alliance side and ignore the fact that there is a frontier offer on the table and I realize those are just.
Just for illustrative purposes, and those are big caveat, but did your review of Spirit Jetblue.
Raise any meaningful red flags when viewed through the more typical lenses that justice has used for previous deals.
So you didn't have an argument with EMEA wasn't an issue and if there was no frontier offer on the table again.
Just an illustrative question I'm, not saying, that's where we're going to end up.
But were there other.
Flags.
Just kind of annualize it when your lawyers analyze it the way that justice ordinarily you guys looked at mergers that we used in the past.
Sure Jamie Thanks, and the answer to question is yes, so even setting that's what I've tried to make clear in both the prepared and my answer to Duane.
Setting aside the NDA, which we view as problematic very problematic.
Remember that.
At its core this is a higher fare higher cost airline buying a lower fare lower cost airlines, removing capacity and raising fares.
And given this administration and this Doj, which has a new approach.
Admittedly than perhaps the prior administrations they've made it clear that there are number one objective is to enhance competition.
So we view that as problematic by the way also they've made it clear that traditional approaches.
To resolving issues on merger such as divestitures will not be considered.
So yes, there were a number of red flags across across which is why we had so much concern and why why when we went back to Jetblue April 25th we had such a strong covenant that we believed we needed for our shareholders remember theres tremendous risk throughout the course of this regulatory process and who bears that risk.
The spirit shareholder and we were not comfortable with that risk.
Yes, Okay, alright, thank you very much.
Our next question comes from the line of Helane Becker with Cowen.
Hi, Thanks. This is Tom Fitzgerald on for Helane.
Thanks, So much for your time just another quick question on the on the <unk>.
<unk> did you as part of your analysis and your review did you.
Do you anticipate a lot of customers staying with the combined entity.
Jetblue did acquire you and the deal was approved do you think those customers will be the typical spirit customers will be more likely to pivot to other.
Silicon Allegiant or another low cost carrier if one country.
Well I think what we've learned over the years and what we've talked about the very the very core of our of our airline in the core of our product is that people like low fares.
And our expansion in our growth over the last decade remember, we've grown five or six fold over that period of time is predicated on maintaining a low fare structure and offering alternative stimulated.
Activity.
And Jetblue offers their product, which is a different product from ours, but it is a higher fare product and so simple economics would assume that less people will travel.
And so.
I don't believe that there I mean again <unk>.
<unk> that travel on spirit, oftentimes travel on United or American War, Jetblue or Alaska wherever they may travel on all the airlines, it's not about specific people. It's about there the reason that they're traveling.
Which again is leisure and who is paying for it which again is out of your own pocket.
And where youre going are you going to leisure destinations are you going to visit friends and relatives those types of things affect your buying decision. So I think what happens is less people travel.
Thanks, Thanks for that and then if I can squeeze one more and would you mind, just providing any color on some of the trends you've seen it in customer to customer demands and presence.
Anything that surprised you or Andy.
Any data on like maybe incorrectly demographics, thanks very much for your time.
Yes. This is Matt so the demand is real.
Come on strong it was almost like a light switch was flipped.
We went through February and we saw close in demand we saw demand starting to build further out.
It was definitely.
One of those things, where it becomes a challenge for the revenue management team because they're always tracking trends are tracking short term trends medium term trends and then longer trends as well and when things change either up or down you have to make adjustments quickly to those so we adapted we adjusted quickly to that.
Comfortable with the demand trends that we're seeing today.
Been great along the way here is that our non ticket production continues to improve.
<unk>.
Continues to really quite frankly get to a place that we knew we would get to but we got there faster than we had anticipated part of that is just some of the things that we've changed internally from processes and analytics just came online and learning curve on that was a lot quicker than what we had anticipated which is great news for revenue production.
<unk>.
So it's it also tells us that the non ticket production is extremely sticky.
Because a lot of it has been yes demand is stronger, but it's also been improving based on the processes and the analytics that we put in place. So that's been great and then one thing also I would like to add just about some of the regions that we have in the network today is that the international some of our international flying to Central and South America has been a bit depressed.
<unk> compared to where it has been normally so the results there are having somewhat.
Want to over rotate on it but it's definitely having something of a revenue penalty a drag on on production. We expect that to go away as we move through the summer and get into the more peak periods.
<unk> seen in the last few months has been a little bit under in terms of production for some of the central and South America parts of our network.
Suzanne we're ready for the next question.
Our next question comes from the line of Dan Mckenzie from Seaport Global.
Okay.
Oh, Hey, Thanks, Good morning, guys. Thanks for all the commentary its really helpful.
Prior to the merger announcement the messaging Scott on CASM ex of sub six was really clear and I hear you today on on low sixes in the first half of 'twenty three.
You started to look at what emerged CASM ex outlook might look like with frontier is low six CASM ex still reasonable or possibly something higher.
Yes, we haven't talked about any sort of combined unit unit revenue as our unit costs.
Translation, what I mean, I think you can talk about some of the things that.
Frontier and spirit today, and then we know theres cost synergies in place so.
I think you can extrapolate from the inputs, but we haven't given a formal view on what the combined unit cost would look like I think it's fair to say that we have.
Been public about it we expect there to be around $100 million of cost synergies between the business and those are direct ways that the combined business can offset the pressures that the industry is seeing and there are unique compared to what the rest of the industry has available to it and its toolkit. So.
There is nothing else that would create pressure.
To combine two ulc's, if anything there are ways to create efficiency.
I think that's the best way to think about it.
I see.
Going back to the scrip more upside on the ancillary side of the business to come can you elaborate on that and related to this.
Another you LCC last night concluded that premium revenue is.
A really good way to go.
And is that something that youre, taking a second look at or willing to take another look at.
Sure So I can start with.
The second piece in terms of premium revenue onboard. So we do have a big front seat product.
And.
It's something that we've had for a long time as part of our product and since we've been in <unk>. It's been there on the aircraft and it's something that we know we know that customers. One that's why we still have it on the aircraft. We go through frequent reviews to make sure that it's still the right decision.
When we think about total profitability because we didn't have that product on board. We would have a couple more seats on the aircraft, which drug which can drive cost.
Cost benefit and it depends on how you view the revenue production.
On the aircraft.
Obviously, we have the product on the aircraft because we like it we think it's the right thing for us to do and as long as we do our job properly from a revenue management perspective it.
Definitely as accretive to the bottom line, which is why the products on the aircrafts overall in terms of non ticket and where we think theres more to come and we've talked about this for a little while and we're starting to see traction happen now with our.
Sort of relaunched revamped loyalty program, our partnership with our Cobranded credit card partner Bank of America.
And a couple of other partners that we have there is working very well, we're starting to see traction take place there on a new program. So we think there's we think there's benefits there and we also know that as we just continue to get better and better at our ability to analyze the data and think more real time, we're just getting continually better at our revenue management.
Processes and our merchandising of the product just continues to improve.
On online so that's where we have the confidence to see it what we're seeing happen in the second quarter gives us a lot of confidence we're going to beat the record. We just set in Q1, and then we'll see where we go from there.
Very good yes, I actually have purchased that that big front seat a number of times. It's a great product I guess, what I was wondering at what the premium revenue as if you'd be if you'd.
Look at expanding that.
So that is all that is all part of of what we do today and Dan. What you. Just said is an exact example of why we have the product because weather, whether you were going on their trips for leisure or for business. That's why that products. There is to make sure that we can capture a premium revenue.
When that premium revenue, what's the flying spirit.
Thank you Dan.
One more question.
Our next question comes from the line of Chris.
Plus from Johanna International.
Good morning, everyone. Thanks for getting me on here, so I'll keep it to one question so.
Scott you and peers have had two or so years here to look at your cost would say.
Microscope, which I'm guessing also included.
Deep dive look at your network operations given that what have you learned with respect to your ability to get ahead of situations that may stress your network, perhaps more than planned and I guess.
Perhaps said another way is there a plan in place to structurally address the stretch stress points.
On the network and related cost and can you do that or we're changing your approach to utilization effectively changed the DNA of how your airline operates thank you.
Sure Chris So.
Start.
Scott can add a little bit, but I think I think the point you make is a good one which is why we've tackled the issue the way we have so.
The way that we're thinking about the problem, which is as the network expands and the airline gets bigger the best way to create resiliency is to structure. It in a way that actually makes it more replaceable and recoverable in the event of disruption disruption happens all the time it would be weather in Texas, there might be weather in the Midwest, Obviously, Florida has had its issues.
More recently.
But being able to to to adapt to it and recover from it is the challenge that we face and so the solution is to make the airline more out and back that means airplanes leave from where they depart and they eventually return to that same city within a flight or two.
And once you do that.
Enhanced network with more crew bases cruise actually naturally start to follow that same pattern. They start to follow much more out and backs. So when you have an isolated issue in Florida, Youre able to kind of remove the Florida flying without disrupting the rest of the Midwest and the northeast and in.
In the West Coast, and we of course have been making those changes over the last decade.
And learning from them, but but obviously these these enhancements will continue to move through the system. So we're optimistic as I said before that there are going to work extremely well they will do it in ways, where we're just we're sort of maintaining the cost that's in the infrastructure today, just redistributing, where we where we spend it.
And making the business more resilient.
The problem, we tackled so Scott, yes, and the only other thing I would add Chris is really the <unk>.
We mature as a company historically, we would drive the lowest cost we could and that would be sort of one singular outcome I think the advancement of our thought process really drives a fourth dimension to that which is a range of outcomes or the risk to the outcomes. So what ted's talking about becomes more of a predictability of that outcome.
And our resiliency in the business. So that's sort of a fourth dimension is what we've added over time and we feel good about where the network sits or ability to predict to recovery.
And those things so I think that's an important element that stability of the cost structure that we've added over the near term.
Great. Thanks for the time.
Great. Thank you everyone for joining us today, and we will see talk to you soon.
This concludes today's conference call. Thank you for participating you may now disconnect.
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Yes.
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