Q2 2024 Spirit Airlines Inc Earnings Call
Thank you for standing by. At this time, I'd like to welcome everyone to the Spirit Airlines second quarter earnings conference call. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star one on your telephone keypad.
Please ask only one question, followed by one follow-up question. Thank you. I'd now like to turn the call over to DeAnne Gabel, Senior Director of Investor Relations. Please go ahead.
DeAnne Gabel: Thank you, Adam, and good morning and welcome, everyone, to Spirit's 22nd Quarter 2024 Earnest Conference Call.
Speaker Change: Presenting on today's call will be Ted Christie, our CEO , Matt Klein, our Chief Commercial Officer,
Speaker Change: and Fred Cromer, our CFO. Also joining us for the call are other members of our senior leadership team including our Chief Transformation Officer Rana Ghosh.
Speaker Change: Ted will open the call with an overview of Spirit's quarterly performance and strategic direction. Matt will then provide details about the drivers of our revenue performance and current demand environment. And Fred will discuss our cost performance, liquidity profile, and forward outlook.
Unknown Executive: Matt will then provide details about the drivers of our revenue performance and the current demand environment. And Fred will discuss our cost performance, liquidity profile, and forward it out. Ted will provide a few closing comments before we begin our question and answer session. Various risks and uncertainties are 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 them. Like most other airlines worldwide, Spirit was impacted by the IT outage on July 19th.
DeAnne Gabel: Ted will provide a few closing comments before we begin our question and answer session.
Speaker Change: Today's discussion contains forward-looking statements that are not based on the company's current expectations and are not a guarantee of future performance.
DeAnne Gabel: There could be significant risks and uncertainties that cause actual results to differ materially from those out contained in our forward looking statements, including, but not limited to, various risks and uncertainties discussed in our reports on file with the SEC.
DeAnne Gabel: We undertake no duty to update any forward-looking statements, and investors should not place undue reliance on these forward-looking statements.
DeAnne Gabel: In comparing results today, we will be adjusting all periods to exclude special items unless otherwise noted.
DeAnne Gabel: For an explanation and reconciliation of these non-GAAP measures to GAAP, please refer to the reconciliation tables provided in our second quarter 2020 for earnings release.
DeAnne Gabel: A copy of which is available on our website under the investor relations section at ir.spirit.com. And with that, I'll turn the call over to Ted Christie.
Ted Christie: Thanks, DeAnne, and thanks to everyone for joining us on the call today.
Ted Christie: During the quarter, we announced that Fred Cromer joined the team as our Chief Financial Officer. Many of you who follow the industry know Fred has a wealth of airline industry experience and will be a great asset to Spirit. I am delighted to welcome him to the Spirit team. Thanks, too, to Brian McBenemy for agreeing to serve as our interim CFO prior to Fred joining.
Ted Christie: I also want to acknowledge and say thank you to all our Spirit team members. In addition to the challenging revenue environment, it has been challenging operationally as well, and our team has done a great job managing through the difficulties.
Unknown Executive: But despite the disruption, by midday Sunday, our team had most of the network stabilized. It was a Herculean effort by all members of the team in operations and technology to return to normal operations so quickly, and I extend my sincerest thanks to all of them for their dedication. Needless to say, it is a priority, and we are focused on securing the best outcome for the business as quickly as possible, while staying focused on driving performance and implementing our new travel options and elevated guest experience. Moving on to our second quarter 2024 financial results, we reported an adjusted net loss of $158 million.
Ted Christie: It was a Herculean effort by all members of the team and operations and technology to return to normal operations so quickly, and I extend my sincerest thanks to all of them for their dedication.
Ted Christie: We are going to focus this call on our Q2 results, our liquidity, our forward outlook, and the new travel options and guest experience enhancements we announced recently that we expect will help drive improved performance.
Ted Christie: Needless to say, it is a priority, and we are focused on securing the best outcome for the business as quickly as possible, while staying focused on driving performance and implementing our new travel options and elevated guest experience.
Ted Christie: Moving on to our second quarter 2024 financial results, we reported an adjusted net loss of $158 million.
Ted Christie: The elevated level of industry capacity continues to make it very difficult to drive yield improvement for the most price-sensitive leisure travel segment.
Ted Christie: While frustrating, these conditions validate that we are on the right path with our transformation strategy to redefine low fare travel with new, high-value travel options that allow guests to choose an elevated experience at an affordable price. We believe this plan will place us on the path to profitability.
Speaker Change: As the industry has recovered from COVID, the imbalance in the recovery between the full-service large network carriers and smaller low-cost carriers has become the narrative. I would like to dispel some of the untruths about why that is.
Ted Christie: First, the low fare model is not, quote, broken, or, quote, obsolete.
Unknown Executive: In fact, they are boasting about selling more of that product. As we shared last quarter, we've done extensive research, reviewed the competitive set of products, and surveyed guests that have flown with us and those who have not. Based on those inputs, we will soon be introducing new products and services. We will still offer the quality low-fare products many of our guests prefer, but we will also provide guests with the opportunity to choose a premium leisure experience with more space, flexibility, and amenities at an affordable price.
Speaker Change: In fact, they are boasting about selling more of that product.
Speaker Change: In doing so, we are redefining Spirit as a high-value, low-cost carrier, offering a broader array of products, including a more premium leisure travel experience at an affordable price.
Ted Christie: As part of our transformation, we will offer four travel options that all include the flexibility of no change or cancellation fees.
Ted Christie: We will still offer the quality low fare products many of our guests prefer, but we will also provide guests the opportunity to choose a premium leisure experience with more space,
Unknown Executive: And we can do all that because we still have and expect to continue to have amongst the lowest costs in the industry. The actual rollout of these offerings will happen very quickly. The new travel options will go on sale on August 16th.
Ted Christie: flexibility and amenities at an affordable price. And we can do all that because we still have and expect to continue to have amongst the lowest costs in the industry. We are not abandoning our low-cost position but rather we are leveraging it.
Unknown Executive: With that, here's Matt and Fred to share more details about our second quarter performance and outlook. Matt, over to you. And to all those on the front line, as well as everyone behind the scenes that keep our network flowing, even when faced with unusual circumstances, thank you. Non-ticket revenue per segment declined 9.6%, down nearly $7 year-over-year to $63.44 for the full quarter.
Speaker Change: Total rosin for the second quarter was 9.05 cents, a decrease of 12.1% year-over-year.
Ted Christie: We also experienced downward pressure on non-ticket revenue per segment.
Ted Christie: Non-ticket revenue per segment declined 9.6%, down nearly $7 year-over-year to $63.44 for the full quarter.
Matt: As planned, during the second quarter, we eliminated charges for change and cancellation. We estimate that these changes contributed to a little more than half of the second quarter year-over-year decline in non-ticket revenue per segment. Go Big and Go Comfy are designed for guests who desire a premium leisure experience. All travel options will be available for sale beginning on August 16th. As I've said before, making adjustments to better align our capacity with markets where the supply-demand trends are more in balance is a continuous exercise.
Ted Christie: However, we believe these changes will result in a larger funnel of consumers willing to include us in their considerations set for air travel, which over time will lead to higher overall revenue.
Ted Christie: Ancillary revenue is and will continue to be an important part of our strategy as we move forward. However, given the product offerings and merchandising changes we are implementing going forward, you will see us report only total revenue per passenger segment.
Ted Christie: As part of our Go Forward strategy, we will offer four travel options.
Ted Christie: Our current big front seat product is already known as the best value in the sky for a premium domestic 2x2 seating configuration.
Ted Christie: And we will still offer a fully unbundled Go option for those guests who prefer to add only those options they want for their travel experience.
Ted Christie: So, while we will still offer a la carte ancillary items for purchase, the majority of the most popular items will now be included as part of the bundled travel options that the guest selects.
Ted Christie: We are offering more day-of-week markets. In July 2024, less-than-daily routes have increased nearly 140% year-over-year, which allows us to expand our route options at a lower risk profile.
Ted Christie: We are scheduling fewer flights on off-peak days of the week than on peak days. The variance between daily flight schedules for peak and off-peak days of the week will be more pronounced in the off-peak and shoulder periods for the remainder of this year.
Ted Christie: Other network changes include introducing new routes and suspending many others. In the third quarter of this year, as compared to the third quarter last year, we will have suspended 42 routes and introduced 77 new ones.
Matt: We are offering more Day of Weep Marks. Unfortunately, as we sit here today, the benefit of these changes is muted by an oversupply of industry capacity for the existing level of leisure demand. As exciting as the prospects are, we acknowledge that we have a lot of work ahead of us to return Spirit to a state of financial health. For the second quarter, non-fuel costs were up 4.6% year over year on 1.7% more capacity, primarily due to expenses related to increased flight volume, inflationary pressures related to wage and labor costs, increased market share at high-cost airports, and a higher mix of aircraft financed under operating lease.
Ted Christie: This phenomenon is exacerbated as we move into the off-peak period for the fall travel season which begins around mid-August when many schools go back into session.
Speaker Change: As other carriers have already shared, the setup for Q3 revenue production is not favorable.
Ted Christie: Our aircraft on ground, or AOG, projections for the full year average in 2024 have improved, and 2025 forecasts are slightly better than our previous estimates.
Speaker Change: Based on Pratt & Whitney's latest forecast for AOGs, the projection is that we will start 2025 with about 35 AOGs, and that number will continuously escalate throughout 2025, ending the year with about 67 AOGs.
Ted Christie: Our working assumption for 2025 is that capacity will be down high single digits year over year.
Ted Christie: Thanks Matt. It's an exciting time to be joining the Spirit team and I look forward to being part of this new era for Spirit.
Speaker Change: As exciting as the prospects are, we acknowledge that we have a lot of work ahead of us to return Spirit to a state of financial health.
Speaker Change: I'll begin with a brief recap of our second quarter financial performance and third quarter outlook before discussing some balance sheet and liquidity items.
Ted Christie: For the second quarter, non-fuel costs were up 4.6% year-over-year on 1.7% more capacity.
Ted Christie: Primarily due to expenses related to increased flight volume, inflationary pressures related to wage and labor costs, increased market share at high-cost airports, and a higher mix of aircraft financed under operating leases.
Ted Christie: Year-to-date through June 30th, Pratt & Whitney has agreed to issue us approximately $94 million in credits, of which we have recognized $75 million within the Statement of Cash Flows.
Ted Christie: Operating margin for the second quarter was negative 13 percent. Had we been able to recognize all of the AOG credits earned during the quarter, our operating margin would have been negative 10.7 percent.
Ted Christie: This is clearly a disappointing result, and unfortunately, based on our revenue projection for the third quarter, it's going to get worse before it gets better. We understand the drivers underlying this performance and are working as expeditiously as possible to change course, but there's not a quick fix.
Unknown Executive: We understand the drivers underlying this performance and are working as expeditiously as possible to change course, but there's not a quick fix. We estimate it will take more than a year before we realize the full financial benefits of our transformation plan and for industry capacity to come more into balance with demand. These cost savings initiatives include the suspension of recruiting and onboarding pilots and flight attendants in 2024, offering voluntary unpaid leaves of absences for flight attendants, right sizing overhead and non-crew operational positions, reducing discretionary capital spend, and the difficult but necessary decision to right size our pilot group, resulting in the furlough of approximately 240 pilots and the downgrade of about 100 captains effective September. When those efforts were blocked by the I got it.
Ted Christie: In addition, we expect to see modest pressure on expenses and CHASM-X fuel related to the cost of implementing our transformation plan.
Ted Christie: There will also be some continuing pressure on Chasm X fuel related to the introduction of our Go! Comfy product, which will block six seats from every departure.
Ted Christie: On a run-rate, go-forward basis, once all the changes are implemented, we anticipate our CHASM-X will settle in the $0.08 range, maintaining our position among the lowest cost producers in the U.S. industry.
Ted Christie: We remain on target to achieve our previously discussed annual run rate savings of about $100 million, of which we expect to achieve approximately $75 million before year-end 2024.
Ted Christie: We ended the second quarter 2024 with $1.1 billion of liquidity, which includes unrestricted cash and cash equivalents, short-term investments, and the $300 million of available capacity under a revolving credit facility.
Ted Christie: Of note, during the second quarter, we extended the maturity of our $300 million revolving credit facility to September 30, 2026.
Ted Christie: Subject to certain conditions, including extending or refinancing, are senior secured notes due 2025. Please refer to our 10-Q filing for additional details.
Ted Christie: Successfully extending or refinancing our senior secured notes remains one of our top priorities and we will provide updates on our progress when appropriate. We will continue to aggressively manage our costs to maintain our position as a low-cost leader in the industry and make every effort to maintain adequate liquidity.
Ted Christie: Nonetheless, as we move through the period, we must consider every possible avenue available to us to find incremental revenue, cost savings, and market opportunities.
Ted Christie: The chatter in the market about Spirit is notable, but we are not distracted. We are focused on refinancing our debt, improving our overall liquidity position, deploying our new reimagined product into the market, and growing our loyalty programs.
Ted Christie: We know the road is bumpy and uncertain, and especially challenging for many of the smaller airlines, and particularly so for Spirit, given the competitive dynamics in the markets we serve and the magnitude of impact from the GTF engine issues.
Speaker Change: In this business, size does have its advantages, which is why over the last two years, we took decisive steps to improve our competitive positioning.
Ted Christie: When those efforts were blocked by the federal government and courts, we quickly and decisively pivoted, investing in a new strategy to improve our competitive positioning by diversifying the products we offer. We are excited to be implementing the first stages of our new strategic direction.
Ted Christie: Hey, good morning, everyone. Fred, my first question, can you just give us an updated rundown on the unencumbered asset base you have available today?
Ted Christie: Hey Andrew, it's Ted. I'm going to jump in here. Obviously Fred's on his third week, so I'll give you a view. We still have unencumbered assets north of half a billion dollars. In addition to, we own around 50 airplanes that have equity value, and we've estimated in the past that that's somewhere in the neighborhood of half a billion dollars as well.
Matt: And then, you know, Ted or Matt, just given the product changes, any way you can help us understand how you think about, kind of, I guess, how this new pricing strategy that you have compares versus the old and kind of any potential changes that you have to make to, or is that to any of your systems? Just curious how that's going to evolve over the next, you know, year plus. Yes, sure, Andrew. This is Matt.
Speaker Change: I guess kind of how this new pricing strategy that you that you have compares versus the old and kind of any potential changes that you have to make to resonate to any of your systems just just curious how that's going to evolve over the next year plus
Matt: So everything that we merchandise and sell here at Spirit is demand-based. So, for the most part, a lot of the experience we've had in the recent past with selling a la carte options but also our bundled service offerings, which we've been doing for quite a number of years, gives us some advantage in knowing already how to think about the positioning of products like that. What's most exciting for us now is we're going to be able to make the merchandising and purchase experience for our customers significantly quicker for them as they move through Spirit.com and also through the Spirit app.
Ted Christie: Yes, sir. Andrew, this is Matt.
Speaker Change: some advantage in knowing already how to think about the positioning of products like that. What's most exciting for us now is we're going to be able to make the merchandising and purchase experience for our customers.
Matt: And then over time, we're also going to be including in our distribution strategy the ability to market these products through third parties as well, which we think is going to be a real game changer for Spirit because today, our big front seat product, and in the future, the go big product that includes other offerings, as well as the new go comfy product, will be distributed through third parties over time. That's going to open up a whole new segment of customers for us that don't know about the product today or haven't been exposed to the product today in normal shopping.
Ted Christie: significantly quicker for them as they move through spirit.com and also through the Spirit app.
Ted Christie: And then over time, we're going to also be including in our distribution strategy the ability to market these products through third parties as well, which we think is going to be a real game changer for Spirit because today, our big front seat product, and in the future, the Go Big product that includes other offerings, as well as the new Go Comfy product, will be distributed through third parties over time. That's going to open up a whole new segment of customers for us that don't know the product today or haven't been exposed to the product today in normal shopping.
Speaker Change: Got it. That makes sense. Thank you, Matt. Sure.
Mike Linenberg: So we think that's going to make quite a difference for us, and our systems are prepared internally, and we're working with our third party partners externally to get that product disseminated as well. Our next question comes from the line of Mike Linenberg with Deutsche Bank. Your line is open.
Speaker Change: Our next question comes from the line of Mike Linenberg with Deutsche Bank. Your line is open.
Unknown Executive: Another question here on the capacity now being flat to down, low singles versus the prior, and yet the aircraft on ground improved from 25 to 20. It can't be just the blocking of six seats per departure, Matt. What else is driving that capacity?
Mike Lindenberg: Just a question here on the capacity now being flat to down, low singles versus the prior. And yet, the aircraft on ground improved from 25 to 20.
Mike Lindenberg: It can't be just the blocking of six seats per departure, Matt. What else is driving that capacity? Is it utilization? Is it, you know, changes in the network?
Matt Klein: Yes, sure, Mike. It's largely driven. It is utilization, but think of it as the off-peak days a week that I had mentioned.
Mike: In, say, last year, for example, if you look at the month of September, a day of week like Wednesday was about 80% flying on Wednesday relative to a peak day of week.
Mike: and this year it's um it's it's closer to 65% so some of these off-peak days we're just we're just trimming them down as a result of some of the supply situations and how demands coming in so a big piece of the of that is what I just mentioned there with some extra day of week trims we expect that to be through the shoulder and off-peak periods
Mike: through the rest of the year. And this is exactly why we're introducing new products like this, is because we have to have broader reach, and we have to go get new customers, people that haven't experienced Spirit in the past.
Speaker Change: And that will help fill in, not just the peak days of the week, but certainly will help us fill in the off-peak days of the week, but we have to give it some time for it to take hold.
Unknown Executive: Is it utilization? Is it, you know, changes in the network? Great. And then just my second question, Fred, welcome back to the airline industry. Great to hear from you.
Fred Cromer: Great. And then just my second question, Fred, welcome back to the airline industry. Great to hear you. Just on this $186 million, can you just go into the details on it, this PDP financing? What airplanes are we talking about here tied to this? Thanks for taking my questions.
Unknown Executive: Just on this $186 million, can you just go into the details on it, this PDP financing, what airplanes are we talking about here tied to this? Thanks for taking my question. Okay, thank you. Thanks very much.
Fred Cromer: Thanks for the welcome. It's great to be back, especially here with Spirit. To answer your question specifically, look at the near-term order book. 36 of those aircraft now come out of our order book, and we'll direct lease those.
Speaker Change: going forward. So the PDPs associated with those come back to us. And we also avoid the PDP burden going forward because those are now direct lease aircraft.
Speaker Change: Okay, thank you. Thanks very much
Speaker Change: Our next question comes from the line of Dan McKenzie with Seaport Global. Your line is open.
Ted: Ah, yes, thanks. Hey Dan, it's Ted, my favorite topic. So I'll do my best to address it. Meanwhile, Pratt has made progress in reconfiguring new delivery engines with revised parts that no longer have the flaw with regard to the power metal. So that's beginning to bleed into your new delivery, and whether or not that, Hmm. Yeah, understood. Okay. The second question here is on the credit card processing agreement. Per the 10 Q this morning, it looks like there's a September 20th date in it for a 200 million deposit into a compensating balance arrangement. And that's a term that I don't think I've seen before, but it sort of looks like a soft credit card holdback.
Dan Mckenzie: Yes, thanks.
Dan Mckenzie: A couple questions here. First is on the deliveries. Is Airbus continuing to deliver aircraft with Pratt & Whitney engines that are going bad shortly after delivery? And then if so, have they provided any kind of timeline for when they can start to deliver planes that have reliable engines?
Speaker Change: Hey Dan, it's Ted. My favorite topic, so I'll do my best to address it.
Dan Mckenzie: Pratt has made progress in reconfiguring new delivery engines with the revised parts that no longer have the flaw with regard to the powered metal so that's beginning to bleed into your new deliveries.
Speaker Change: and whether or not that
Speaker Change: abates
Speaker Change: Any early removal risk or eliminates it remains to be seen.
Speaker Change: But that is a step in the right direction. The larger issue is that they are still experiencing
Speaker Change: issues from a supply chain and production perspective on those parts.
Speaker Change: that are backing up the MRO.
Speaker Change: And so the time to...
Speaker Change: to take an engine off wing and get it all the way through a heavy visit.
Speaker Change: and back on wing is north of 400 days and that's why the worldwide system is backed up and why you're you're showing you're seeing us for example expecting north of 60 AOGs next year there's simply not enough spares in the system and there's not enough throughput yet
Speaker Change: on the MRO side.
Speaker Change: Like, there's a September 20th date in it and a $200 million deposit for a compensating balance arrangement. That's a term that I don't think I've seen before, but it sort of looks like a soft credit card holdback. I'm just wondering if you can just elaborate a little bit on that. Is that at risk of being a hard credit card holdback at some point?
Speaker Change: No, it is just purely a deposit account at the parent bank of our credit card processor, so it's unrestricted cash and reported as such on the balance sheet.
Speaker Change: And yes, there is a date in that agreement with Elevon that aligns with our plans for our negotiations with the existing bondholders and their advisors to find a solution for the 2025 loyalty notes.
Speaker Change: Obviously, we're in regular contact with those guys and as those negotiations with our bondholders mature, we will be continuing to update them on the status of that.
Speaker Change: I see, okay, thanks for the time you guys.
Speaker Change: Our next question comes from the line of Duane Finnegwerth with Evercore ISI. Your line is open.
Jake Gunning: And I'm just wondering if you can just elaborate a little bit on that, is that at risk of being a hard credit card holdback at some point? Hey, good morning. This is Jake Gunning on for Duane.
Unknown Executive: Given the blocking of the middle seat and the various cost puts and takes, do you have an idea about how to think about total ex fuel expense into the fourth quarter? Okay, and then just given the margin projections for the third quarter, do you have any insight into what percent of the network is above breaking point? Yeah, that's, Jake, that's just a question that we're not going to address right now. We think of the network overall; it lives as one large ecosystem.
Jake Gunningham: Hey, good morning. This is Jake Gunningham for Duane. Just given the blocking of the middle seat and the various cost puts and takes, do you have an idea about how to think about total ex-fuel expense into the fourth quarter?
Speaker Change: Well, I think, you know, for the fourth quarter, we haven't given a full guide. For the third, you know, we've got, you know, the numbers are out there. You can kind of do the math and arrive at it.
Speaker Change: You know, the block middle seat, you know, you're talking about six seats coming out of inventory. So, that provides some natural pressure to unit costs. I think Fred, in his comments, indicated that once everything sifts its way out,
Speaker Change: You know, meaning we're out of kind of the utilization issues associated with the Pratt & Whitney engines today, with, you know, some of the near-term headwinds that we're experiencing, and
Fred Cromer: and dealing with, you know, that I can kind of outline some some comments on that as well. We're sort of targeting an eight cent chasm carrier from an XFUEL perspective. The block middle seat is a very marginal component of that so it's not it's not a material inflator to cost and in fact the changes that we announced here
Speaker Change: from a product perspective don't move the unit cost needle very much at all the combination of all of those things it's probably about four percent
Speaker Change: but we're expecting...
Speaker Change: significant uplift in unit revenue.
Speaker Change: that will take time.
Fred Cromer: for us to develop over the coming, and I think as Fred indicated, probably more than a year for things to kind of really take hold. But we do expect that unit revenue benefit to be 15 plus percent. So the impact of this.
Fred Cromer: reinvention, this reimagination of the brand is clearly margin accretive which is why we believe it's the right answer.
Speaker Change: Okay and then I'm just given the margin projections for the third quarter do you have any insight what percent of the network is above the break-even?
Speaker Change: Yeah that's Jake that's just a question that we're not going to address right now we think of the network overall it it lives as one one large ecosystem so it's just something that we're not going to address on a root by root basis
Ted: So it's just something that we're not going to address on a route by route basis. Okay. Our next question comes from the line of Jamie Baker with J.P. Morgan. Your line is open. Good morning, Jamie. It's Ted. I'll start and then maybe we can have either Matt or Rana jump in as well.
Speaker Change: Okay, thank you.
Speaker Change: My next question comes from the line of Jamie Baker with J.P. Morgan. Your line is open.
Jamie Baker: Oh hey, good morning. Just a couple of questions on the pivot to an improved travel experience. You know, I guess my first question is...
Jamie Baker: You know how do you get the message across to consumers? You know when I think about the industry rolling out basic economy
Speaker Change: That was pretty time-consuming and a pretty steep learning curve, but I'm not sure that that establishes precedent. Just wondering how long you envision the new products taking to gain traction with a customer base that is
Jamie Baker: You know unaccustomed to many of these, you know, these these new categories these new options. Thanks
Ted: But I did see your discussion on the analogy between the implementation of the basic economy and one of your notes. I thought that was an interesting comparison. I think things are a little different here. And the reason that I believe that is true is, first of all, we haven't spent any money or time telling the spirit story in the past. That simply has not been the case.
Ted Christie: Good morning, Jamie. It's Ted. I'll start and then maybe we can have either Matt or Rana jump in as well. But I did see your discussion on the analogy between the implementation of basic economy in one of your notes. I thought that was an interesting comparison. I think things are a little different here.
Speaker Change: and I think that that will have an outsized impact of traditional marketing. In addition to that, as we're developing that message, and as I said in my comments, we appointed a brand new ad agency and executor, Tom Russ's world-recognized, who's helping us think through how we do that in the best possible way.
Speaker Change: and how we do it in the most cost-efficient but effective way. So we have a real shot there. In addition to that, Matt alluded to it.
Matt Klein: that the way that our products are currently configured and sold, the leverage that we get out of third-party distribution is muted today.
Matt Klein: when compared to the way they will eventually be merchandise and sold. To be direct about it, we have a product that simulates a business class product but it's not sold that way on the GDSs and the OTAs. If you sort by business class we do not arrive.
Ted Christie: So, over time, as we work with those partners, that will change. And that's a natural and significant change in, we think, the size of the population that will consider us. So, a few thoughts from me. I'm going to turn it over to Matt and let him jump in as well.
Matt Klein: Yeah, Jamie, one very large difference between, and I recognize also your analogy there, one large difference is that when basic economy was introduced our competitors actively tried to not really sell that product.
Matt Klein: and it wasn't something they really wanted to put out to market.
Matt Klein: This is the opposite. We are very excited to put this out to market. We can't wait to get the word out there, and we know it's going to be received very well. We're very excited about, as Ted mentioned, about what we're doing from an advertising perspective and go out there and tell our story.
Ted: And so I hope that makes sense, and we can't wait to get started. I think Matt made an interesting point as well, Jamie, that I wanted to add on to. When basic economy was introduced, let's not forget, they were taking things away from the consumer.
Unknown Executive: We've let price drive the discussion. And so, what will be completely different is what we will be doing exactly. So, it will be harder to advertise that. We're actually making things and adding things to the product. This is something for people to get excited about. And I just, yesterday when we, or the day before yesterday, put out the release associated with it. We hosted an entire company town hall that was attended by the entire business online. And We had probably 400 people in our training facility, and the energy in the building was palpable.
Jamie Baker: Yeah, so harder to advertise that we're actually making things and adding things to the product This is something for people to get energized about and I just yesterday when we or day before yesterday we put out
Speaker Change: The release associated with it, we hosted an entire company town hall that was attended by the entire business online, and we had probably 400 people in our training facility, and the energy in the building was palpable. I mean, I was honored and humbled to be a part of this organization that's ready to embrace change.
Unknown Executive: I mean, I am honored and humbled to be a part of this organization that's ready to embrace change, that understands the challenges we face but knows that the products and services that we're implementing are going to be a real value add. That's great. Thanks, team. Appreciate it. Hey, good morning, everyone.
Matt Klein: that understands the challenges we face but knows that the products and services that we're implementing are going to be a real value-add.
Matt Klein: and we had over 13,000 people dialed in watching this so you can you know for a fact the spirit team is ready to go and that's important you got to get alignment around your group to deploy these products so we're excited to see how it transpires.
Matt Klein: So Ted, you need to go on a late-night...
Speaker Change: Talk show surrogate. Remember when David Newman did that?
Speaker Change: different circumstance, but I'll be looking for you on a TV screen soon. Just a quick follow-up.
Speaker Change: Low cost, no frills is embedded in your managerial DNA, if you will, and I get it, blocking middle seats isn't exactly rocket science, but I want to ask this delicately.
Speaker Change: Do you think you have to bring in any outside talent?
Speaker Change: to really crack the premium code. It just seems far afield from what your current bench...
Speaker Change: is accustomed to.
Speaker Change: I appreciate the delicate nature of the question, Jamie. By the way, if you want to do the late night circuit, you can play drums and I'll play guitar. Is that fair?
Speaker Change: But look, we're talking about the shift from being just low cost and low fare to delivering value with low costs.
Speaker Change: And yes, we are bringing in outside assistance to help us think about that. I mentioned that we have a new ad agency. We also have a strategic brand advisor that's helping us thinking about how we deliver that.
Speaker Change: And, as I said earlier, this is a reinvention and a reimagination that nobody around here is fighting. In fact, they're actually pushing for.
Speaker Change: So, yes, we have DNA around low cost, and I'm glad for that, because that's going to be a part of what we do. What's different is that we can give our team, the front line, the management team, all that the tools they need to deliver value. And that's where we think we're going to be a game changer.
Speaker Change: That's great. Thanks team. Appreciate it.
Speaker Change: Our next question comes from the line of Savi Sith with Raymond James. Your line is open.
Matt: Matt, can I ask a little bit more of a near-term question that I was kind of curious about, what you're seeing, you know, is your exit rate, I appreciate that. And just on the leasing move that you just did, it just seems like then the order book has been monetized and nothing more, and should we expect leasing revenue to build as these get put on lease? And all forward obligations on those airplanes are now air-capped.
Savi Sith: Hey, good morning everyone. Matt, can I ask a little bit more of a near-term question? I was kind of curious if you're seeing, you know, is your exit rate
Savi Sith: as you kind of exit through this quarter, if that is showing any kind of improvement, either because the industry is adjusting capacity or you're being a little bit more aggressive on adjusting your capacity over in those off-peak periods.
Matt Klein: Hey Savi, so I would say right now around around some of the more shorter periods we're not necessarily seeing outsized advanced load factor benefit yet.
Savi Sith: But, as we're moving through the booking curve, as we get closer and closer to the shoulder and off-peak periods, we're starting to see some of the clawback.
Speaker Change: So we're not, say, we're not up year-over-year on advanced loads right now, but the clawback is happening, and that's why we're continuing to make some adjustments close in.
Matt Klein: The rapid nature of some of the moves that we're seeing in the industry overall does seem to be helping to move some traffic around.
Matt Klein: So, if trends hold, as we've seen for the last year, the amount of close-in demand will be there. And then, with our new structure and the way we're handling peak off peak, it should be able to push more onto the right days of the week.
Matt: I appreciate that and just on the leasing move that you just did, it just seems like then the order book has been monetized and nothing more and should we expect leasing revenue to build as these get put on lease?
Matt Klein: Hey Savi, it's Ted. I'll take that. I wouldn't describe it as the order book being quote monetized. This was a structured transaction to basically do a form of a sale-leaseback on 36 airplanes in the forward delivery. So we just pre-financed them.
Speaker Change: and the PDPs as a result of that were refunded to us.
Matt: and all forward obligations on those airplanes are now air-capped, so that's a notable
Matt: So that's a notable working capital pickup over the next couple of years as well. I mean, we're talking north of $300 million, so that's an extreme benefit to the company going forward. And then the remaining 52 aircraft in our delivery stream, we did work on a structured way to basically get those PDPs advanced as well, with certain conditions that they will be repaid over time. But those airplanes remain in our order book and under our control.
Matt: working capital pickup over the next couple of years as well. I mean, we're talking north of $300 million. So that's an extreme benefit to the company going forward. And then the remaining 52 aircraft in our delivery stream, we did work on a structured way to basically get those PDPs advanced as well, with certain conditions that they will be repaid over time. But those airplanes remain in our order book and under our control.
Unknown Executive: It's just we reached a conclusion that that is liquidity enhancing in the near future. Okay, and I misunderstood the way that was structured. So that makes sense.
It's just we reached a conclusion that is liquidity enhancing in the near term.
Speaker Change: And I misunderstood the way that was structured, so that makes sense. Appreciate it. Thank you.
Speaker Change: Our next question comes from the line of Connor Cunningham with Melius Research. Your line is open.
Unknown Executive: I appreciate it. Thank you. Hi everyone.
Speaker Change: Hi everyone, thank you. If you do some quick math on the 15% increase in unit revenue expected from the initiatives, I think it puts the new product opportunity at over a billion dollars. Is that correct? And if you could just help
Unknown Executive: Thank you, frame up the revenue puts and takes from, you know, I assume you're going to lose some non-ticket revenue, but that gets secreted up to just any thoughts around the opportunity as when it's at full run rate. Thank you. Sure, I can I can start, Matt, you feel free to jump in.
Unknown Executive: frame up the revenue puts and takes from, you know, I assume you're going to lose some non-ticket, but that gets secreted up. Just any thoughts around the opportunity as when it's at full run rate. Thank you.
Unknown Executive: But I think you know, ballpark, you know, your math is probably about correct, especially by the time we get to the landing zone, which, as I described earlier, is still a year or more out. But it will, it will accrue over that. Okay, that's helpful. Thank you. And I'm not so great at math.
Unknown Executive: Sure I can I can start Matt you feel free to jump in but I think you know ballpark you know your math is probably about correct especially by the time we get to the landing zone which which as I described earlier is still a year or more out but it will it will accrue over that time
Unknown Executive: And yes, we are experiencing some of the non-ticket headwind immediately. In fact, as Matt outlined.
Speaker Change: The elimination, change, and cancel fees, some of the other benefits that we extended from a flexibility perspective to our guests like credit vouchers and credit shell flexibility and the change in the check bag from 40 to 50 pounds, all of those.
Speaker Change: are a natural headwind to unit revenue and to ancillary revenue, I think in the near term as much as 4%.
Speaker Change: So that's a now problem that comes back to us over time.
Unknown Executive: And so you can sort of think about that sort of crossing the streams over the next year or more as the benefits of the re-imagined product.
Speaker Change: the the widening of the funnel and getting access to new to new guests, the benefit associated with load factor. All of those things start to offset the headwinds we're experiencing in the near term from an ancillary perspective. Matt, you want to add?
Unknown Executive: Yes, sure. Conor, I think your calculation is a little bit rich there. We hope your billion-dollar number is right. It's going to be a little bit below that. But one thing to keep in mind, one thing to keep in mind is...
Speaker Change: is part of our loyalty program. And I think we talked about it last quarter. I'll mention it again. A lot of our loyalty we've had historically is because we had very low fares. And that was something that is what people are looking for. And the unbundled model was revolutionary and the optionality that we offer for our guests.
Speaker Change: is exactly what they've wanted.
Speaker Change: But over time, in order to really build up a loyalty program, it has to be more relationship-driven. We have to have loyalty that is coming back to spirit, not just for low fares. They want to come back to spirit for the experience and they want to come back to spirit for a program that is also more reflective of who we're going to be in the future also.
Ted: So, we haven't really announced any changes for the loyalty program yet, but we are in works on things with that as well. And that is a piece of how we think about things moving forward, and that takes time to build. So, as Ted just mentioned, some of the unit revenue improvement, it'll be there, and it'll take a little bit of time to get there.
Unknown Executive: It's an ongoing process to get everything in place.
Unknown Executive: Okay, that's helpful. Thank you. And I'm not so great at math, so I appreciate you checking that. But um, in the press release you mentioned
Speaker Change: your liquidity target of over a billion, but then you kind of caveated it, assuming that your initiatives close, that you're currently in process of working on. I assume that's the product changes, but could you just clarify what you're trying to message there? Thank you.
Unknown Executive: Sure, Connor. No, we're talking about a few transactions that were already in discussions on that, you know, I think in the initial question that was asked by Andrew about what is the basket of
Speaker Change: unencumbered and and and other assets that have equity value in them and we're looking at a few aircraft related transactions that that are underway that we feel you know confident we will get done and those are included in that in that number
Unknown Executive: So I appreciate you checking that. But, um, in the press release, you mentioned, Thank you. Good morning, everybody.
Speaker Change: Gotcha. Thank you. Yep.
Speaker Change: Our next question comes in the line of Stephen Trent with Citigroup. Your line is open.
Stephen Trent: And thanks for taking my question. I was curious about CrowdStrike. I appreciate what you guys disclosed about that incident. You know, can you tell us whether you are having any sort of conversations with them? You know, with respect to the losses you incurred as a result of their outage?
Stephen Trent: Good morning everybody and thanks for taking my question. I was curious on CrowdStrike. I appreciate what you guys disclosed on that incident. You know, can you tell us whether
Stephen Trent: You are having any sort of conversations with them, you know, with respect to...
Unknown Executive: Thanks, Stephen. What was interesting about the impact Spirit had is that we are not a customer of CrowdStrike. So this was an issue with regard to one of our third-party software providers. And so, to the extent that we have service level agreements with that provider, we will be in discussions with them about it. And they may be in discussions on the back end with their relationship with CrowdStrike. But this is not a promise of something happening in 25 or 26 with vague descriptions about what it might look like.
Speaker Change: the losses you incurred as a result of their outage?
Unknown Executive: Thanks, Stephen. What was interesting about the impact spirit is we are not a customer of CrowdStrike, so this was an issue with regard to one of our third party software providers.
Unknown Executive: and so to the extent that we have service level agreements with that provider we will be in discussions with them about it and they may be in discussions on the back end with their relationship with CrowdStrike.
Speaker Change: Okay, makes sense, helpful. And if I may, I know across the space you have other airlines also making big moves with their domestic product. You know, are you seeing any...
Speaker Change: spillover, for example, with customers migrating over to your side of the fence from some competitor changes, and when you look at your booking curve, or is it just way too early to say at this point?
Speaker Change: Well, I think that may be too early to say. We did acknowledge that we are seeing, for the first time since 2023, some year-on-year load factor improvement, which we think at least is partially attributable to some of the flexibility we've granted in the second quarter.
Speaker Change: But I think one of the benefits associated with this deployment for us, at least vis-à-vis the rest of the competition, because I have heard other people talking about changes in their product, is we're doing it right now.
Unknown Executive: Like this is not a promise of something happening in 25 or 26 with vague descriptions about what it might look like
Unknown Executive: We're actually deploying this thing in the next two weeks, which is why we were so careful about the design, why we were careful about the way we were going to do it, the research we did, and acknowledged we were getting pressure from our constituents to disclose what we were going to do, and we felt the right time to do it was when we were going to do it, which is happening right now. So we're actually interested and excited to see whether or not we are successful at capturing share as a result of having a new product in the market faster than anyone else. That, coupled with our low-cost structure, makes us a high-value play, and I think that that's the advantage that we're going to have and that we're going to exploit.
Unknown Executive: We're actually deploying this thing in the next two weeks, which is why we were so careful.
Unknown Executive: about the design, why we were careful about the way we were going to do it, the research we did, and acknowledging we were getting pressure from our constituents to disclose what we were going to do, and we felt it was the right time to do it was when we were going to do it, which is happening right now. So we're actually...
Unknown Executive: interested and excited to see whether or not we are successful at capturing share as a result of having a new product in the market faster than anyone else. That coupled with our our low cost structure makes us a high value play and I think that that's that's the advantage that we're going to have and we're going to exploit.
Unknown Executive: Okay, I appreciate the color. Thank you. Yep. How do I just want to get a sense of your long-term plan, kind of as we get to the end of 2025, where you see the mix of fair and nonfair revenue kind of settling out? Got it. Very helpful. And then maybe if I could just squeeze in a follow-up, you guys, I think you kind of outlined some of these new initiatives and products very well. Could you, you know, as they get implemented, talk about sort of the best case scenario of when you get back to profitability, or at least sort of the steps to getting there? I will now turn the floor over to DeAnne Gabel for closing remarks.
Unknown Executive: Okay, I appreciate the color. Thank you.
DeAnne Gabel: Our next question comes from the line of Tom Fitzgerald with TD Cowen. Your line is open.
DeAnne Gabel: Hi everyone, thanks very much for the time.
Unknown Executive: I just want to get a sense of, you know, with your long-term plan, kind of as we get to the end of 2025, where do you see the mix of fair and non-fair revenue kind of settling out?
Unknown Executive: Hey Tom, it's Matt. As I said in my prepared remarks, we're only going to be reporting on total revenue per passenger segment moving forward.
Unknown Executive: Okay, okay, fair enough. Thanks. And then how can you comment on how those 77 new markets are performing just so far versus expectations? Thanks again for the time.
DeAnne Gabel: Yeah, sure, Tom.
DeAnne Gabel: All right.
DeAnne Gabel: I think one thing that's important to note, as opposed to talking about specifically those 77 new routes and how we move the network around, wherever we see opportunities, one thing that we're doing, you've heard me talk about in the past, is about Latin America and the Caribbean.
Speaker Change: So, we used to be around 15% of our network was in that region. We had moved that up to 20%. Sometimes of the year was even a little bit over 20%. Now we're back down to that 15% number right now. There's a lot of capacity in that region, the near international plus.
Speaker Change: We've been very careful there and we're making sure that we're evaluating everything we're doing with the network. But that's an example of how when we need to move things around, we will. And that's just an example of that.
DeAnne Gabel: And our final question comes from the line of Ryan Capozzi with Wolf Research. Your line is open.
Ryan Pozian: Hey, good morning, guys. Thanks for squeezing me in here. Ryan Pozian for Scott. Could you just discuss sort of your early CapEx plans for next year, as well as other sources and uses of cash? And then do you have any kind of minimum liquidity targets as we look out to next year?
DeAnne Gabel: We're going to have to refine for you, Ryan, the 2025 CapEx expectations. You know, we usually give you guys a view on that once we get close to the beginning of the year. So I wouldn't expect that our non-aircraft related CapEx is going to be dramatically different than our run rate. And given that we're...
Speaker Change: We've just moved considerable aircraft in the forward part of our delivery to a third party. That changes the PDP-CAPEX kind of discussion as well. So we've got to kind of do some math on that and get back to you on that, which we will do as we get closer to year end.
Unknown Executive: Got it. Very helpful. And then maybe if I could just squeeze in a follow up, you know, you guys have
Unknown Executive: kind of outline some of these new initiatives and products very well. Could you just, you know, as they get implemented, talk about sort of the best case scenario of when you get back to profitability, or at least sort of the steps to getting there?
DeAnne Gabel: Sure. So, look, we recognize that, you know, we're in a tough position today, and I don't think we're anywhere but heads up about that issue. And so the way I would think about margin repair at Spirit is I think you've got to divide it into a few baskets.
DeAnne Gabel: so that we can start to build our way back to profitability. The first is that in the current quarter, there are a number of both unique-to-spirit and one-time items.
Speaker Change: that are hitting us from a margin perspective.
Speaker Change: is the proud issue. You know, the mere accounting of the credits we receive and then are able to report on the income statement is about a point and a half of the margin. But in addition to that, we previously disclosed that the inefficiency associated with removing aircraft from service and not being able to fully adjust
Speaker Change: The business is another couple of points. So we've really got Pratt-Head wins in the near term of around 3.5%.
DeAnne Gabel: In addition to that, we...
Speaker Change: are exiting the remainder of the company's 319 fleet. In fact, the last two aircraft in service will go back to their lessors at the beginning part of next year. As a result of terminating that fleet type and returning those aircraft, we have a one-time accrual in the current quarter that actually hits us at about two points on the margin.
DeAnne Gabel: So, that's another couple of points there.
Speaker Change: We talked about the CrowdStrike IT outage, that actually was about a point on the margin for us.
DeAnne Gabel: this quarter, and then as we start to roll out the reimagined spirit.
DeAnne Gabel: We are incurring expenses in the near term that, first of all, don't have the revenue benefit associated with them yet, but also are somewhat one-timey in nature. I'm talking about training of our personnel. I'm talking about IT-related reconfiguration and e-commerce platform changes. I'm talking about some airport-related expenses, both material...
Speaker Change: that has to be delivered to introduce the new product as well. Things like that, and actually it adds about a point, excuse me, a couple of points of headwind in the near-term quarter.
Speaker Change: And then, as we just talked about in detail, the change in the ancillary model from the removal of change and cancel fees and a few of the other things, like the 50-pound bag and that sort of stuff, is in the near term.
Speaker Change: a headwind of three to four points before it starts to benefit. You add all that up and you're 10 to 11 points of margin headwind in the near quarter.
DeAnne Gabel: Additionally, but the benefit is we expect
Speaker Change: longer term as I said earlier Bravo to deliver somewhere in the neighborhood of around or what we call internally but like our reimagined spirit
Speaker Change: a neighborhood of around 15 points of incremental unit revenue. And that will come with some additional unit cost pressure I discussed earlier of around three to four points. So we're talking 10 plus.
Speaker Change: points of margin benefit associated with that. And then really the last lever, which is the one that's the hardest to predict.
Speaker Change: the most difficult to kind of quantify but we think potentially has the biggest
Speaker Change: a potential swing, is today we acknowledge that we're in a supply-demand imbalance.
DeAnne Gabel: and and.
Speaker Change: We are moving to to make changes to that. We're already talking about the fact that we deferred a number of aircraft out of the near term. In fact, next year, we're actually getting smaller. Some of that, obviously, as a result of the.
Speaker Change: of the Pratt issues, but nonetheless Spirit is contributing to that and we're hearing other airlines making similar adjustments and as the market starts to return to a more balanced
Speaker Change: supply and demand market. We should see natural tailwinds to unit revenue and margin. So you combo all of those three things together and you can build your way
DeAnne Gabel: back to a profitable answer, most notably over that window of time, which will take some time. You're getting more EBITDA, and you're starting to cash flow, which is really where we want to be. So I wouldn't put an end zone on it right now. It's definitely, you know, a year plus.
Speaker Change: But those are the factors that will drive it.
Unknown Executive: Super helpful, thank you.
Unknown Executive: I'll now turn the floor over to DeAnne Gabel for closing remarks.
DeAnne Gabel: Thank you Adam. I just want to say thank you everyone for joining us today and if you have any questions please feel free to reach out to Investor Relations or Media Relations.
DeAnne Gabel: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Unknown Executive: and Matthew Klein. Thank you. Thank you.