Q2 2023 Spirit Airlines Inc Earnings Call
Thank you for standing by my name is Adam and I'll be your conference operator today at this.
Time, and we'd like to welcome everyone to the Spirit Airlines Q2 2023 earnings call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question Press Star one again, thank you.
I would now like to turn the call over to Vivian Tavarez manager of Investor Relations. Please go ahead.
Thank you Adam and welcome everyone to Spirit Airlines' second quarter 2023 earnings Conference call. This call is being recorded and simultaneously webcast as soon as it is available we will archive replay of this call on our website for a minimum of 60 days presenting on today's call are Ted Christie Spirit's chief.
<unk> Officer, Matt Klein, our Chief commercial Officer, and Scott Haralson, Our Chief Financial Officer also joining US 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 to differ materially from those contained in our forward looking statements, including but not limited to various risks and uncertainties really.
So the acquisition of spirit by Jetblue and other risk factors discussed in our reports on file with the SEC. We undertake no duty to update any forward looking statements and investors should not place undue reliance on these forward looking statements.
In comparing results today, we will be adjusting all periods to exclude special items unless otherwise noted.
Explanation and reconciliation of these non-GAAP measures to GAAP. Please refer to the reconciliation tables provided in our second quarter 2023 earnings release, a copy of which is available on our website under the Investor Relations section at IR Spirit Dot Com I will now turn the call over to Ted Christie <unk>, President and CEO .
Thanks, Dave and thanks, everyone for joining us on the call today I want to start by saying, Thank you to our entire spirit team and our business partners for their commitment and dedication and caring for our guests and minimizing the negative impact from the rash of thunderstorms that have plagued us here in the Fort Lauderdale area and across much of our network in recent months and why.
Our reported operating metrics for the quarter were negatively impacted by all the weather events and a plethora of air traffic control initiatives are controllable completion factor for the quarter was very good coming in at 99, 7%.
Turning to our second quarter 2023 financial performance operating margin was three 3% about two points below our initial guide.
Total RASM for the quarter was strong and well above pre COVID-19 historical averages. However demand for the peak summer travel period has not built as we expected resulting in lower fare levels.
We are comparing to a period of exceptionally strong domestic and near field international demand in 2022, while at the same time seeing a dramatic demand shift away from these regions towards long haul international inclement weather and ATC disruptions in the peak part of June also contributed to the lower T RASM.
These demand and pricing trends and difficult weather continued throughout July and are expected to continue into the fall.
However, once the international somewhat summer travel season ends and kids go back to school, we expect demand will shift back towards domestic this should mean, a more normal pricing and demand environment for the peak holiday travel periods in the fourth quarter.
The format and Scott share further details about our second quarter performance and forward outlook I want to update you on our issues with the GTS engine that powers, our Neo fleet last.
Last week <unk> share that Pratt and Whitney had recently discovered a quality control issue during the manufacturer of a desk on Neo engines produced primarily between Q4 2015 and Q3 2021.
Out of an abundance of caution Pratt has identified an initial 200 engines for accelerated inspection and we were told that we had up to 13 engines in this group.
The current plan is to begin pulling these engines from service after Labor day, which will result in seven neo aircraft being removed from schedule service. This is above and beyond the current set of aircraft on ground or eog's as we refer to them, which as of today sits at seven aircrafts.
For planning purposes, we are assuming these seven additional aircraft will be out of service post labor day through the end of the year Matt.
Matt will discuss this impact in more detail, but the close in nature of the scheduled reduction does have a significant impact on revenue for September . It is worth noting that spirit is the largest operator of GTS powered <unk> in the United States with the highest number of engines produced during the 2015 to 2021 period exposure.
To this issue is very unique and material for us and it's having an impact on our margin.
We should know by mid to late September how many of the additional 1000 engines. Pratt has identified for inspection are ones. We operate timing for the engine inspections on the next 1000 is not yet known but we believe it likely the inspections will need to be performed before the end of September 2024.
Brad has indicated that some of the 1000 engines may already be scheduled for removal in 2024. So the net incremental impact may be smaller however, we will learn more in September .
We are still managing through a significant number of unscheduled neo engine removals due to an assortment of issues previously disclosed and discussed throughout the second quarter. We had six and currently have seven aircraft out of service and have assumed the same for the fourth quarter.
That said our maintenance planning team is gaining confidence by the by the end of the year, we should see discount reduce at least temporarily to about four aircraft.
And while unscheduled removals should ease as we enter 2024. Unfortunately next year, we have a large spike in the number of scheduled Neo engine checks as a result of a short time life limited part, which means that we will have the equivalent of at least 10 aircraft out of service during most of 2024.
This of course doesn't include any additional aircraft, we will have to ground as a result of the latest engine issue.
This new issue is yet another frustrating and disappointing development.
Our T X has promised to make the airlines affected by this new Neo engine issue hole and for now we intend to take them at their word and use that assumption in our planning the details and timings of those reimbursements are unknown as of yet we will keep you posted as we get further updates Matt over to you.
Thanks, Ted and a special thanks to all our team members, we carried a record number of guests and everyone involved continues to do a great job managing the high volumes, while navigating the numerous weather and ATC challenges.
I'll start with a brief overview of our second quarter revenue performance and provide some color on the demand environment for the third quarter.
Total revenue for the second quarter was 143 billion.
Up four 8% year over year.
Total RASM was $10 three a decrease of 10, 7% on a capacity increase of 17%.
Load factor was 82, 9% down three one points year over year compared to Q2 2019 total RASM was up nine 6% on a capacity increase of nearly 30% a strong result, but short of our expectations.
On a per segment basis passenger revenue per segment decreased 20% year over year to $57 86.
Non ticket trends remained strong and on a per segment basis increased two 9% or about $2 year over year to a second quarter record of over $70.
Based on trends, we were seeing earlier in the year, coupled with the knowledge of what performed exceedingly well in the summer of 2022, we made the intentional move to increase the number of longer stage flights heading into the peak summer travel period.
In the second quarter in aggregate. These routes performed in line with pre Covid historical averages. However, we were anticipating they would outperform those averages and have results similar to what we had experienced in the recent past.
When we look at our second quarter revenue guide compared to flown results approximately 25% of the revenue Miss was associated with elevated cancellations in the quarter and the balance of the revenue variance was split between longer haul domestic performance as I just described above along with the general regional demand impact.
Ted mentioned earlier that we had to make a significant change to our September schedule due to issues regarding the GTS engines for Pratt and Whitney.
We've received the update on the last day before we put our September scheduled a bed.
This update required us to remove seven available aircraft from the fleet on less than 24 hours notice.
Under normal circumstances, we would select a flame that is expected to have the lowest contribution to the network. However in this situation we had to remove flying that our already built lines of flying could offer up relatively easily since we didn't have time to build out an entirely new scheduled.
This results in an operating schedules that isn't exactly as commercially effective as we would otherwise set out for sale.
We did remove nearly 5% of planned September capacity due to this specific engine removal issue and we expect this new <unk> issue will penalize revenue production in Q3 by approximately one 5% which is on top of the lost revenue for the original Neo <unk> issue, which we estimate.
<unk> revenue by nearly 6% so.
So we do expect to smooth out our scheduled in October but the impact to top line revenue will continue until these issues are resolved.
Turning now to third quarter guidance, we expect the demand trends in the domestic U S. Latin America, and the Caribbean to continue to be weaker than normal throughout the third quarter. As a result of the carryforward of demand shifting to long haul international and very difficult operations throughout the peak due to weather and ATC.
Taking this into account as well as adjusting for the additional out of service aircraft. We estimate total revenue for the third quarter 2023 will range between $1 3 billion and 132 billion down.
Down three 2% to down one 7% with capacity, increasing 13, 7% year over year.
This equates to unit revenue being down 13, 6% to 14, 9% year over year in the third quarter and with that I will now turn it over to Scott.
Thanks, Matt.
After briefly discussing our Q2 results and Q3 guidance I will share a few details about our recent fleet changes.
Our second quarter operating costs were $1 39 billion.
Non fuel operating expenses came in at the better end of our expectations of $994 5 million.
Fuel expense was in line with our guide fuel gallons were modestly lower but average fuel price was higher than estimated compared to when we gave our guide in late April crude oil prices improved crack spreads widened across the board driving our fuel price per gallon for the second quarter of $2 62 slightly higher than estimated guide of two.
<unk> 60 per gallon.
Total non operating expense came in better than we estimated primarily due to a noncash benefit related to the mark to market valuation of the derivative liability associated with the 2026 convertible notes.
As a reminder, when we give our non op guidance that excludes any potential change in the mark to market adjustment.
Liquidity at the end of the second quarter was $1 5 billion.
Which includes unrestricted cash and cash equivalents short term investments and the $300 million of capacity under our revolving credit facility.
During the second quarter. We retired three <unk> hundred 19, <unk> took delivery of five <unk> hundred <unk> and delivery of our first <unk> hundred 21, Neo aircraft ending the quarter with 198 aircraft in the fleet.
We currently estimate that total capital expenditures for the full year of 2023 will be about $255 million.
Looking ahead to the third and fourth quarters, the development of the new Neo disc issue together with our other remaining neo engine availability issues.
Drive lower overall capacity production that harms our efficiency however.
However on a positive note our pilot attrition has reduced and assuming this lower level of attrition continues for the remainder of the year, we would've been at full fleet utilization by Q4.
The recent frat news.
Results in uneven less aircraft in our fleet being available for operations and this means we will likely be overstaffed and carrying more pilots than required for Q4 and into early 2024.
With pilot attrition no longer being a drag on our utilization by the fourth quarter, we can isolate the EOG issues and look at the core airline.
The core airline that is excluding eog's should be back to full utilization by Q4 and is expected to be closer to run rate margin in CASM X production.
The drag on margin caused by the ALG aircrafts should be viewed as neutralized due to rpx's make whole commitment.
Now let me discuss some of the recent changes to the Airbus Order book.
Early this year, we were given delayed aircraft delivery dates for 2023 and part of 2020 for piling up deliveries in 2024.
In addition, it has been widely expected that these delays wood.
Would continue beyond 2024, we also had some decisions regarding a few of our <unk> hundred 19, new orders and option aircrafts that needed to be made.
Airbus has also been clear to us about their own production limitations and backlog of orders that will likely push new order deliveries into 2030 and beyond.
Also in the near term, we need a general slowdown of growth to Derisk, the business and give ourselves a chance to digest the previous few years of growth.
Given all of these things and the fact that our original orders only extended into 2027, we started discussing a broader reevaluation of our future aircraft deliveries at.
At the end of the day, we agreed to make the following changes without changing the total number of commitments.
One we reduced 2024 deliveries by 11 and smooth the remaining deliveries between 2025 and 2029.
Together with our direct lease commitments and the retiring of our <unk> hundred 19.
Number two we have gauged all of our <unk> hundred 19, Neo orders to <unk> hundred 21 needs to be delivered between 2025 and 2029.
And three we moved the timing of our option aircraft decision by one year and smooth the timing of those options are.
A lot of moving parts here all of which we believe are positive to both spirit and Airbus and we appreciate Airbus partnering with us together to make a meaningful agreement, giving us a stable and predictable order book for the aircraft mix. We view is most beneficial to spirit.
At the time, we made these decisions we estimated these fleet changes would produce a 2024 growth rate in the high teens.
However that was before learning about the latest neo engine issue.
It'll be a few more months before we fully understand what the impact may be on our 2024 capacity plans.
Looking ahead to the third quarter, we estimate our operating margin will range between negative five 5% to negative seven 5%.
We estimate fuel cost per gallon will average $2 80.
The total operating expenses, ranging between $1 $39 billion and $1 four zero or $1 billion.
Our third quarter guidance metrics are included in our Investor update published today, a copy of which can be found on our website at IR Dot spirit Dot com.
Before I hand, it back to Ted I do want to recognize our operators. The past few months have been a difficult weather and ATC environment and our crews are airport staff. The operations control Center staff and the other operation support personnel have been the ultimate professionals and then wanted to give them a quick shout out.
So now I'll turn it back over to Ted for closing remarks, Thanks, Scott, Although we made progress on improving our operating margin in the second quarter of 2023, we are clearly still underperforming our potential and face a challenging Q3, we acknowledged that some of this is due to decisions we made coming out of the pandemic.
In hindsight slower growth would have been more ideal during and coming out of the pandemic. This was largely impossible for us due to the pace of our contracted deliveries that coupled with high pilot attrition issues have been contributing factors in our struggled to return to full fleet utilization.
It is possible that we are being overly conservative with how tight we are willing to run the network with the intention of supporting operational reliability, but at the cost of Penalising utilization labor weather and infrastructure issues have been volatile and unpredictable.
We are optimistic that some of our learnings over the past few years will help productivity in the back part of 2023 and full year 2024.
Pilot attrition rates in June July and indications for August are trending better than we expected which is great.
It also means that for Q3, we could have flown more hours on the peak days then we scheduled and has resulted in a missed opportunity nonetheless, assuming our pilot attrition rates stay where they are or improve further our growth is no longer constrained by pilots, which bodes well for our core fleet, achieving achieving full utilization in Q4.
In fact, if we werent burdened with aircraft being pulled from service due to GTS issues. We believe we could achieve full utilization on our entire fleet by year end.
We believe we missed out on some passenger volume in June and July holding out for higher yields that did not materialize and we have revised our approach for the fall not surprisingly accurately predicting the new normal demand levels post pandemic has been challenging we.
We are making tactical changes to our network post labor day holiday, including more variation between peak and non peak day of week flying which in this demand environment. We believe is the revenue and margin maximizing answer.
The fleet decisions, we have made including the early retirement of the <unk> hundred 19, revising the pace of our aircraft deliveries beginning in 2024 through 2029 and up gauging more deliveries to the <unk> hundred 21 variant should all drive fuel and other cost efficiency benefits in 2024, and beyond and allow us to deliver growth more in line with it.
Expected demand growth.
In conclusion, the dynamics of the airline business or a constant one thing that I've learned over my two plus decade career is that things in the airline industry can change quickly and often sometimes the answer is to pivot and sometimes the better answer is to stay the course. The current setup is simply not favorable to a domestic focused airline, especially while still operating.
With some lack of efficiency and productivity I believe these things will change in our favor and we are taking steps now to be positioned to capitalize on frustration. Aside our team is doing a great job adjusting as necessary and I strongly believe our expected <unk> performance is an anomaly.
Most important for us as we trend towards a normalized utilization rate, we expect our cost structure to return to industry, leading levels and provide us margin tailwind and a considerable advantage against the rest of the industry.
And now back to Vivian to begin the Q&A session.
Thank you Ken we are now ready for any questions from the analysts we ask that you limit yourself to one question with one related follow up Adam we are ready to begin.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Your first question comes from the line of Conor Cunningham with <unk> research your.
Your line is open.
Okay.
This comment of shifting Dave we could spend a big seamless.
Okay.
Ignoring the potential fair impactful.
When you think about operational stress on the system when you add more.
Okay.
Hey, Conor your estimates.
Sorry, counter you're cutting in and out but I think you asked about day a week.
Variation in the operational effect of that is that right.
Yes, yes, sorry about okay no problem.
So youre right I mean, one of the things that.
That we implemented as a result of our learnings from 2021 here was that we started to smooth the airline out a little bit more because it is easier for particularly airport ops.
Two to understand and schedule the airline but that is only one of the many things that we've implemented as part of our.
Operational enhancement package and I alluded to that in my comments that we have quite a few things that we've done to make our operation run and I think it's been having a nice effect and so as part of the learnings from that we're looking at and things that are most effective and some of the things that we did that work having as much of an impact and so we believe that while we.
We're not going to stress the airline too much going from peak to off peak. There is some opportunity for us to drive some of that which will help unit revenue and we think it helps the margin at the end of the day, particularly in the off peak period.
Okay.
And then on the GTS issue you mentioned.
Perhaps talking about making.
I know you.
Expect that to play out is that I mean, I think alliance talked about maintenance credits just any thoughts there would be helpful. Thank you.
No problem, yes, it's still early.
This all developed quite quickly on us as we as we said we had to make quick changes to September which is not.
Not favorable at all.
But one thing I will say about Pratt where a longstanding customer. This is a storied institution in the United States one of the biggest industrials in the history of the United States and we've had a long standing partnership with them and they've always stood by their customers and they are always honor their commitments and so we expect that to be true.
They are intended to make us whole on this issue and that is our expectations, but coming to the.
The details of what that will look like and how it will take form it is still too early to tell.
Your next question comes from the line of Duane <unk> with Evercore ISI. Your line is open.
Yes.
Hey, good morning. Thanks.
Could you comment about holding out for yield was kind of interesting.
I think there was a line in the press release about an acute reduction in demand can you can you talk about.
When you.
When you first saw that kind of acute reduction in demand.
Is it sort of the other side of the coin of maybe holding out for yield. So I assume it was kind of a late in the quarter issue.
And any color on the markets, where that was kind of felt most acutely maybe caribbean et cetera.
Sure Duane Thanks, I'll give just a brief intro, but im going to let Matt color on around the edges I think some of the points you made and we use the words intentionally drive home. What we saw was very acute and we feel like it's isolated and and noticeable.
And ties nicely with what we've what we've witnessed and now heard people talk about.
Rapid and.
Distinct shift away from domestic and near field International which was very strong last year to.
To long haul international which is obviously considerably outperforming this year.
And our strategy around around handling yield.
Clearly was patterned off of what we were seeing over the last 12, plus months and that did not play out well towards the end of June , but Matt what would you add about geography and that sort of thing sure Duane.
One Perfect example, I think as you talked about Caribbean there for a second as Ken Kun would be an example of some of the abruptness that occurred during the quarter for US is April .
Within the same quarter April we saw incredible demand strength pricing pricing power and sort out flights basically every day and then less than two months later, we saw in June which is still a very strong time for Ken Kun reverse.
Our unit revenues in some cases down very high double digit numbers a percent change year over year, and that's all happening within the same quarter and Thats, how abruptly things kind of moved and we have a couple of other examples like that but that's probably the biggest example.
And having said that our capacity is up a little bit and Ken kun. So some of that could be explainable, but not to the level that we actually saw in the industry has added some extra capacity there too. So it's always about supply and demand, but in this case the demand.
<unk> fell off and as we talk about yield and think about June but then also into the end of June and then into the third quarter.
<unk>.
The demand the demand will be there it will come in and the yields will be impressive and that just stopped relatively quickly. It's not that it went completely away. It's just that it stopped at the same pace that we had seen.
Really we just we held out a little bit too long or expecting to see those yields come in.
Once you make an adjustment to that then you are sacrificing yield for volume that you need to see the volumes come in so we are anticipating and starting to see the volumes come in Theyre just at lower yields that will be like to normally see for third quarter.
We have described this as an acute situation and we are expecting to see demand trends here in the domestic U S. But also near field international as well as U S territories bounce back and look and look more normal as we get out of the summer into the fall and that especially at the peak periods in the fourth quarter.
<unk>.
Any any themes on the originating city aspect to that demand change where did you see sort of variation depending upon what region of the country you're originating from.
No not really Duane it's feels it feels like its spread I mean.
B being being heavily east coast oriented.
Sure. So we think the easiest way to think about.
The margin impact of.
This issue is really driven by our utilization and productivity and given where we're where we are right now with fleet utilization, which takes into account all of the.
The aircraft on ground that we have today, where we're probably missing seven plus margin points as a result of that broadly speaking now some of that can be attributed to.
Some of our own restrictions, which we alluded to before about how we're running the airline but the vast majority of it is because we have <unk>.
And so.
We're going to be obviously in discussions about what it what the impact it's having on us and it is.
Unfortunately for us.
In the United States, where really the standout here.
So it will be.
An important discussion that we have with the folks at <unk>, but as I said earlier, we've got a very strong partnership with them they've always stood by us and they've always honored our commitments and we have no reason to expect that would change here.
Thank you.
Your next question comes from the line of Scott Group with Wolfe Research. Your line is open.
Hey, Thanks, Good morning, guys. So I know, there's a lot of talk about this shift.
National and days of week, but.
And if I take a step back is it just possible that we've now finally surpassed pre pandemic domestic capacity at.
At the same time corporate demand is somewhat diminished from where it was in legacies are forced to just be a little bit more focused on leisure. So there's just too much supply relative to demand for some of the smaller carriers and we just sort of reached that inflection point is.
It's possible that switch is happening right now.
Okay.
Good morning, Scott, So look I mean the.
The nuances of establishing what impacts demand are difficult to arrive at as you would as you would expect but given what we experienced in the latter part of Q2 and what we're what we're seeing here in Q3, we wouldn't describe it that way we would describe it as.
Clearly a shift in demand geographically.
And and so we think that that move probably costs us 400 basis points on the margin this quarter.
And we don't expect that that will repeat.
Next summer.
Sure in the fourth quarter more closely in and so.
I wouldn't I wouldn't say, there's nothing that we're seeing right now says that we have a.
A noticeable supply demand imbalanced in fact.
You look at what's been happening over the course of the recovery from the pandemic unit revenues across the board are up.
And and admittedly, we're considerably larger but the industry is only modestly larger and it would tell you that there is there is plenty of demand out there. So I don't I don't know that we see data yet I mean, your supposition would say is it possible.
I suppose anything is possible right.
It's entirely possible that right now there is an artificial lid on demand.
Because corporate travel Hasnt returned and because.
People are fatigued with.
With the operations that we've all been dealing with over the last.
Year, and a half and it becomes exhausting when you sit at an airport on your delayed six hours because of air traffic control initiatives in ground delay programs. So I mean, there are there is just as much as there is always possibilities that there's changes happening in the demand profile I think theres just as many that say it's possible that we're seeing some things that are artificially living demand.
So again, we're more focused on what we saw in the second quarter and what we're expecting here in the third and we think that that's what's driving the disconnect in our performance.
Okay that makes sense and then just given the merger and I guess the uncertainty of the merger.
How do you plan for capacity growth next year, what are your initial thoughts I.
I guess, how much capacity growth you need to have a shot.
Shot at getting CASM down next year.
Well the good news is and Scott can jump in here. After I'm done is that the primary driver of getting the chasm, where we wanted to do is getting the productivity of the existing assets to where we want it to be so that's not necessarily about I mean, obviously that drives growth because utilization will will in fact drive growth but.
As Scott said, we feel that we would be at that in the fourth quarter, excluding the <unk>.
With Pratt that'll help us get to our expected more expected kind of CASM trajectory and that should be a tailwind for us. So looking at 2024 is a little cloudy right now because we originally thought we had a pretty good bead on what was happening with the fleet, we made the necessary adjustments, which I think are smart.
And then of course, we just received information two weeks ago that kind of changes that so what would you add to that I think thats right. So Scott I think it's about utilization first and foremost for us I mean, we've been running uphill.
<unk>.
Last few years trying to catch up to the amount of aircraft we have been delivering.
And with the changes in the Airbus delivery stream that we negotiated I think put us in a pretty good spot to try to navigate all of the different variables that are moving.
And then let us feel comfortable that we're able to.
To generate margins that that will tell us that we should be growing again, I mean, we got to earn that right to grow the airlines. So we got we got a return utilization return margin and cash production.
And then we can start to lean forward, but I think we.
We want to make sure we can digest the capacity we've taken over the last few years get utilization to where it is.
And kind of get our skus underneath us and then we'll move forward.
Okay. Thank you guys.
Your next question comes from the line of Jamie Baker with Jpmorgan Chase Your line is open.
Hey, good morning, everybody. Thanks for the color on pilot attrition just wondering if you have any year on year numbers that you could share also is the new contract, having the desired effect of increasing applications.
Or is it merely slowing attrition either way it's obviously.
Positive yes.
Yes, it is positive and.
And the attrition numbers are.
Our stabilizing in ranges that versus where we were at.
We were at peak and Youll recall on our on our Q1 earnings call in April we alerted that we were seeing some alarming attrition levels and as a result, we pulled some capacity from the summer.
Those ended up being the anomaly. So we're now at levels that are much more akin to what we were experiencing in.
Obviously, a new contract does create stickiness for existing pilots.
Our recruiting team is doing a fantastic job at navigating.
The environment and we're having great success at attracting new pilots as well.
Full classes every time.
And and the engagement there is really strong.
<unk>.
One anecdote.
We like I said, we've noticed that there have been.
Highlights, leaving us in a number of other lower cost airlines going to the majors, we've now experienced.
Numbers of what we're calling boomerang pilots, where they've left us gone to another airline coming back.
The combination of those work life balance benefits pay.
<unk>.
And the word of mouth is spreading.
So I.
Im encouraged by all of that we can't rest on our laurels.
We've established new programs that give our pilots much more touch time and concierge type field.
And it's working.
And so for now that gives us some confidence that it will no longer be the limiter.
And it really comes down now to fleet and Thats, how we saw that's how we work to solve this problem with Pratt got it well and that leads into my thank you and that leads into my second question and this is probably one of the most theoretical.
But I've I've asked you over the years, but if you could choose <unk>.
Between the GTS issues completely disappearing tomorrow gone or.
Having corporate demand immediately recover for the big three.
And not just in 2019, but back to where it should have been in 2023.
Which of those would you choose you can't have both.
One of your other I can't have both.
Well I think my answer would be to have the fraud issue resolved okay.
We.
And it's crimping, what drives this business, which is productivity and low costs.
So youre right that having another demand funnel open up would be good for the broader industry and I couldn't argue that that wouldn't wouldn't help the whole industry.
A little bit, but when thinking first specifically about us I would feel better about having our.
Our house in order and our fleet, where we want it okay very helpful. Thank you everybody.
Yes.
Your next question comes from the line of Stephen Trent with Citi. Your line is open.
Morning, everybody and thanks for taking my questions.
Yes.
I was wondering I was intrigued by what you said about.
Over the last year or so any tailwind in terms of cross border demand considering that.
Yeah.
Our longer term strategy, maybe doing more with our.
Crew bases in certain regions versus today.
Sure Stephen.
So youre right.
Whole industry has been very vocal about the challenges, we face and I know.
Weather is a driver of that and it certainly appears to be noticeable that there has been a shift in the weather patterns, but we don't believe that the weather patterns really fully.
Account for the changes and what we're experiencing from a level of disruption delay and cancellation.
Let me give you an interesting data point, so pre pandemic in the second quarter of 2019.
<unk> cancelled about 700 flights.
For weather.
And if you'll recall, which you may not but in the very early part of this of the second quarter of 2019, we had a very difficult.
Very noticeable and it turns out it was the first indication of some of the challenges that the JAK Center control Center was having.
So what we're trying to do and what we've done over the course of the last couple of years as we've done exactly what you suggested we've put significantly more investment into things that previously were just easier to run.
So adding crew bases has turned out to be one of the bigger wins for us in fact.
And we've added since 2019, I think we've added maybe four or five grew basis. So it's been.
A noticeable shift and that's helped our scheduling team create a little bit more ease of recovery.
And that's just one example of a variety of different things that we've done to insert buffer to create recoverability we've reduced the.
The average line days for our crews they used to go out on average around four days and now they go on average around two days.
And that makes it easier to recover there all of this.
<unk> is intended to make the operation easier to recover and more reliable, but it doesn't come for free and so we like the other airlines are doing our best to lobby with the department of transportation and the FAA to put the necessary infrastructure in place.
And the air traffic control system. So we can start to run more efficiently, which will drive lower cost and lower fares, which is really the best answer for the country.
That's very helpful really appreciate the color and thanks for the time.
Okay.
Your next question comes from the line of <unk> Becker with TD Cowen Your line is open.
Hi, This is Tom Fitzgerald on for Helane. Thanks, so much for the time.
Just a question looks like Youre growing a lot in the third quarter and Phoenix, Charlotte and Los Angeles I just wanted to get I was curious if you had any color on both those markets in particular.
And then just as a follow up just a quick modeling question.
The base case assumption seems to be that the regional shifting the regional demand mix will shift back to something more normal in the fourth quarter are you pre COVID-19 you would usually <unk> revenue would decline a little bit sequentially versus the third last year was up is that just from a high level would you expect it to be like last year would be slightly up versus the third quarter.
Hey, Tom It's Matt. So your first question regarding our Phoenix Charlotte in Los Angeles, we have seen pretty good success in.
In these cities, which is why which is why youre seeing the growth there we did pick up an extra gate in Charlotte.
Also picked up extra of gates in Los Angeles.
Out on the West coast, a little bit more it makes us more relevant in general in Los Angeles, which then helps the overall, Los Angeles revenue generation and brand awareness out there.
And Phoenix is just another leisure destination in the country that it's time for us to start doing a little bit more work there.
And then in terms of Q4 versus Q3, the answer would be generally yes, we would expect to see trends.
Trends that you mentioned kind of continue out there. So we would expect to see that kind of growth in Q4.
Yes.
Your next question comes from the line of Mike Lindenberg with Deutsche Bank. Your line is open.
Hey, good morning, everyone two.
Two questions here I, just I want to go back to.
Maybe Scott Jamie's question just about.
The big three and the fact that corporates down.
They've been allocating more assets until leisure markets and I'm really curious though.
How much of the capacity.
Or markets that you're in where you have seen.
Other low fare carriers.
Adding capacity and whether or not you sort of have a sense of.
Sort of versus 2019, how much in your markets low fare competition or capacity is up.
Because it does seem like when you look at a lot of the different route changes that have made of late it does seem like a lot of the low fare carriers are all targeting the same markets and in many cases they are going after the same customer how much of that is a factor or maybe it's not maybe it's not much of a factor I'm just curious about your take on that thanks.
I'll try to tackle that one so we have seen from pre COVID-19 really to know our overlap has generally been the same across the industry with a couple of exceptions.
<unk> is one is as you just noted our our nonstop overlaps with frontier have increased a bit.
Generally speaking we of course, when we decide where to fly and how we pick routes and pick new cities.
So having said all of that in a normal environment routes that we can target domestically.
Not to not to sound a little arrogant about it but a lot of times it doesn't matter who's already there if our forecast play out and we think that we're going to grow markets, which is what we do.
It generally doesn't turn into a big issue.
The issue that we've that we're seeing right now is with this move towards international long haul traffic.
Some of the.
Competition right now inside the U S is competing for what might be lowered lower demand profile than what we were all probably anticipating at least we were anticipating a different demand profile. This summer.
Holiday periods when just in general.
Customers, just take shorter trips and Theyre looking to stay more state side and we expect that we'll then turn back into the normal demand patterns that we're used to seeing.
Okay, Great. Good answer and then just thanks for that and then just second more of a modeling question.
Obviously, a lot of moving parts here with the.
The gtx.
The DTF issue.
How should we think about <unk> capacity.
But with the increase in utilization, we would expect Q4 to be a good bit higher than Q3.
We haven't finalized the exact capacity schedule.
So more material move north and capacity and thinking about 'twenty four I mean, obviously the news is fresh.
The additional DTF issue. So it is hard to predict our 2024 will look like but I did mentioned in the prepared remarks that with the moves we made with Airbus we expected to be in the high teens. So the expectation is a lot of that growth will be muted by the engine issues hard to know if we're going to be.
In the single digits or flat or.
Low teens hard to tell at this point, but my guess would be somewhere in the single digits for 'twenty four.
One.
One other point that I'll make Mike.
For the fourth quarter.
I said it in my prepared remarks.
Pratt had indicated that we were going to see up to 13 engines. In this initial allotment and given the tight time frame in that and then it was effective the inspections would be effective in September we pulled seven aircraft out of service for the month. However, they are continuing to refine the universe of engines in its entirely.
Possible that we may see some benefit associated with that which means that our exposure in the initial allotment of 200 could go down and if that's true.
That would give us more opportunity in October November and December with productive airplanes and given that what we just talked about with pilots. We definitely have those available ready to fly. So we don't know yet it's all kind of in the soup and we're just going to have to update you as we learn more over the course of the next months, Okay very good thanks gentlemen.
Okay.
Adam do you have any other calls.
Questions.
Okay.
Your next question comes from the line of Dan Mckenzie with Seaport Global Your line is open.
Oh, Hey, thanks, good morning, guys.
Picking up on that last point.
The uncertainty around 2024 is pretty understandable.
But going back to the script and the need to slow down growth and Derisk. The business has your thoughts about growth beyond 2024 also.
They have also moderated how should we think about growth longer term.
Well I can start and Scott.
Alluded to some of these changes in the script, we still see a sizable opportunity. So that hasnt changed I think what we're alluding to as far as the near term is that we continue to grow pretty notably on a fleet basis throughout the course of the pandemic and haven't been able to use them.
We just haven't been able to get the utilization, where we wanted it to be so taking a chance to digest those airplanes and get them up in the air and efficient will help the unit cost story, which helps the margin story. So the the work that Scott and the Treasury team did with Airbus was was a cooperative effort between ourselves and the manufacturer to smooth.
That deliveries give us some more certainty into the latter part of this decade, where airplanes are going to be very very difficult to get your hands on.
And allow us to use the lessor community to supplement that when and if we feel like it's necessary. So theres a lot of moving parts in our fleet as true for every airline were retiring 319 right now.
We're going to get pretty close over the next five or six years to the oldest 300 <unk> believe it or not in our fleets and starting to have to think about what happens with those and whether or not we keep those around so.
There is ups and downs that will deal with.
But the but the opportunity itself still hasnt changed for us or it's just a question of pacing and that sort of thing.
I think thats right I think we've we smooth out the delivery sings of.
Prior to this adjustment we were having some some peaks and troughs that were pretty material.
So this allowed us to smooth it out give us a predictable base.
And and allow us to as I mentioned earlier, the soda earn our way into the growth profile again.
And we will use.
The lessor community reluctance that gives us some flexibility.
We have some ability to extend or retire early additional aircrafts. So this gives us a good base to maneuver with as we think about going forward I think the long term story is still the same we think theres opportunity for us to continue to grow and so what was the best fleet mix and platform for us to do that and I think we set ourselves up well for that.
Hum.
Okay.
I guess just in terms of a natural growth rate are we thinking that longer term target that growth target is still call it low double digits or does it.
Mid double digits any sort of perspective.
Active around that.
Well if you just.
Mathematically rollout the airplanes, it's less than that now.
Certainly as you get bigger.
Into the future and Thats why I say I think we're evaluating the pace of things we see.
As Scott said it earlier I think I think it was a great point, we have to earn our right to deliver the capacity and getting back to full efficiency.
It is starting to deliver the margins. We believe that we can is our first step. So this was a good idea to kind of.
<unk>.
For a lot of reasons to smooth things out for ourselves and gives a chance to to kind of prove all of that.
And we have the right team here to execute to it but we need to get the job done and I think thats. What this this kind of recent modification allows us to do.
Yes, I think the point there too is that the growth is not an isolated objective right.
We need the returns will be able to justify it. So while we think that will be the case, we do need to make sure that we're doing that before we deploy the capital.
So I think that's just prudent management process.
<unk> and we haven't commented a lot on.
The pending transaction with Jetblue, but.
As you can see from the results that have happened across the industry really here.
Dominant olive <unk> are outperforming the rest of the industry.
And that's not an accident.
When you control that much capacity its very difficult to compete especially with the diversity of revenue sources the strength of their loyalty programs. The strength of their credit card programs, we do our best to fight that everyday with low cost and low fares, but you can just see from the numbers and we think the best answer.
And clearly with that that engine, there is going to be unique growth opportunities.
And that's the case, we intend to make.
And I think that's going to be the best answer if it doesn't work and we're stand alone we still feel good about our prospects, but it's not to say that the recent experience hasnt shown that there are some challenges out there and I think we're just doing what we would you would expect us to do as management, which is to be a little bit prudent make sure. We're pursuing the growth in the right way.
Well admittedly I'm speaking purely on speculation an anecdote, but I've experienced it so.
Having flown Oi fly a lot.
Because of.
Ground delays and all the things happening and I think that may be making people make.
Different buying decisions.
And so I don't know how long that persists clearly during the summer it's at its peak, we don't anticipate that.
Theoretical impact that I can tell you that first person experience I've witnessed and it's very.
I may not add that third trip to go see my family because I, just cant afford to spend nine hours back and forth waiting.
Yeah makes sense. Thanks, so much for the time guys.
Okay.
Your final question comes from the line of Savi Smith.
With Raymond James Your line is open.
Hey, good morning, Alan.
I just add.
Then I have a follow up.
Thank you you have 2024, but more so from.
How much of that.
Pre GDS like when you were thinking as high teens, how much of that growth is going to come from utilization I'm just trying to think about.
Exiting this year and Brian into next year, you might not need as many kind of training and hiring costs and your utilization improves so that should be a pretty good tailwind, but I'm trying to.
Quantify that a little bit more.
Yeah, Hey, Savi. This is Scott, yes, I think you're spot on with some of that as.
As we thought about the high teens, it's really made up of really three things in there and they are both probably.
In the five to seven points worth of move, but it will probably grow the fleet about five points in 'twenty four.
Utilization move year over year, which is probably five to seven points worth of impact and we have average seats variable and thats, probably another five plus points and so that gets you in the high teens.
And so your point's right.
Really two two of those.
Are less impacted by pilots.
But I think we're we feel good about our pipeline and we've talked about them for no longer pilot constrained. So so now this is just getting the airline humming again, so I think we're in a good spot. Unfortunately, we do have to deal with the.
The next batch of.
Of GTS issues, but we feel comfortable about the core part of the airline.
Regarding the GTS.
If you do get a settlement that may call, how does that flow through the P&L that a special item and it helps your cash or how does that kind of flow through.
Yeah Savi, we're early in the discussions around what that might look like.
So difficult to say that it could take a few few different forms.
Over over different lengths of time.
So we would have to figure out what the accounting would be based on the vehicle.
We'll let you know when that materializes.
Okay. Thank you.
I will now turn the call back over to Vivian <unk> for closing remarks.
Thank you all for joining us and for your participation today, please contact investor or media relations. If you have any further questions. We look forward to talking to you soon have a great day.
Ladies and gentlemen that concludes today's call. Thank you all for joining you may now disconnect.
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Okay.
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