To the surprise of nobody, Spirit lost a bunch more money in the fourth quarter of 2023. In fact, it lost over $160 million excluding special items for a miserable -12.4 percent operating margin. This is not good, but it was also expected. The question now is… how does Spirit fix itself? The details are sparse, but we know a little more after the earnings call.
JetBlue also presented a turnaround plan this quarter, and while I wanted more details before being able to really judge it, I liked what the airline was willing to say. With Spirit, it wasn’t willing to say much at all.
Overall, it appears the plan is to get paid by Pratt & Whitney for the aircraft that are grounded due to engine issues, try to get utilization up if the government can fix air traffic control issues, and hope for a return of demand in the domestic market. That’s right, all three of these are out of Spirit’s control which is not what I’d consider a turnaround plan.
But there is one thing that Spirit is planning on fixing, and in fact it has already done much of the work it plans to do. I’ll let CEO Ted Christie explain.
In October, we stated we were prepared to make the necessary strategic shifts to enable Spirit to compete effectively, and we began to do just that and are executing on a plan that we believe will provide us a platform for margin health. We are making changes to network construction, peak versus off-peak flying and geographic and market concentration, and we’ll assess the success of various components and make some inevitable adjustments.
Alright, since everything else requires outside parties to grant Spirit’s wishes, let’s take a closer look at the one thing Spirit plans on fixing that it can control. First, there is the talk about peak vs off-peak flying. Yes, that is happening, and we’ve seen it happening for weeks, as we’ve written in Cranky Network Weekly. Let’s look at how things are developing today in terms of seat capacity.
First, you can ignore everything after early April in 2024. That is just a placeholder, and it will be changed significantly before it’s real. But do focus on January and February. Spirit had a little day-of-week variation last year, but it is nothing compared to this year. It is sitting a lot of airplanes on peak/off-peak days, which would seem to counter the goal of increasing utilization. But those flights must have performed terribly, and this is sensible.
From mid-February, it reduced the variation, because we start getting into the early spring break period. The variation disappears almost entirely once you get into March when the peak spring break happens.
Despite these changes, Spirit is still not expecting a good first quarter. It put out guidance for investors that it is again predicting to be between a -12 and -15 percent operating margin for the quarter. Then things will magically turn around and start generating cash in Q2 and Q3. Ok, ok, I suppose it isn’t magic… since that assumption relies on getting paid big bucks by Pratt & Whitney.
That’s right, Spirit is including Pratt’s payments for all those GTF engine issues in its guidance. There will be money coming at some point, but that is hardly indicative of the airline being fixed. That just means it got lucky and will get paid more than it would likely be able to profit flying those airplanes. This will temporarily make the airline look better than it is. But back to what Spirit can control….
While we don’t really know what Spirit is going to do to its network beyond early April, we can look at March to see how different things are year over year. After all, if the airline is, as Matt Klein, Spirit’s EVP and Chief Commercial Officer says, “continuing to make other adjustments to the network that better align our capacity towards markets where the supply-demand trends are more in balance.”
So, let’s take a look, and the first thing I’ll show you might surprise you.
March 2024 vs March 2023 Spirit Airlines Seats
If you’re an airline trying to re-balance your schedule away from where there’s too much capacity, doesn’t it seem rather strange that Florida would be up so much while the rest of the network is down? We do have to remember this is spring break, so it is the peak time, but the devil is in the details on this one.
Spirit Departing Seat Changes by Florida City
It’s really all about Fort Lauderdale. Sure, Fort Myers has seen some bounce-back from the hurricane that roared through just a few months before March 2023, and Tampa has grown as well. But the net number of new seats in Fort Lauderdale is more than the rest of these combined.
While Spirit is actually down, if ever so slightly, in Orlando, it is refocusing its efforts on its home base in Fort Lauderdale where it thinks the opportunity is much greater. The idea isn’t necessarily about running away from Florida, just Orlando. And even then, Spirit isn’t exactly running away. It’s just sashaying slowly.
If we look outside of Florida, how about taking a peek at the biggest gainers and losers year-over-year by aggregate number of seats?
March 2024 vs March 2023 Change in Departing Seats by Origin
The biggest standout is, of course, Las Vegas on the downside. This is actually a drop of over 16 percent, by far the biggest cut among top Spirit cities. But notice what follows… Atlanta and Los Angeles. These are big markets, really big, but Atlanta has had a lot of Frontier competition while Los Angeles has a really high cost problem plus plenty of capacity from many other airlines.
The gainers are LaGuardia, which is only because of temporary slots, but then there’s Charlotte which is a market that Frontier recently jumped in with both feet. After Newark, it gets pretty beachy. Cancún is one I find very odd since on the call, it was mentioned that Cancún still has “material unit revenue declines.” Hopefully that’s not Spirit’s best idea.
But beyond March, it’s all confusing to me. Spirit says Q2 capacity will be up in the low single digits while Q3 will be up in the high single digits. Meanwhile, it says it has 25 airplanes grounded to the start the year, rising to 40 by year-end. By the end of Q2, Spirit will have retired 10 A319s, taken delivery of 7 A320neos along with 8 A321neos. I don’t see how it can be up on capacity with so many airplanes on the ground. It seems like more has to change.
Even if it goes as planned, will this turn the airline around? Not alone, as we’ve already discussed. It needs other things to go right as well. This seems to be in stark contrast to Frontier which has been hard-charging with a plan of its own. And part of that plan seems to be “murder Spirit.“ You can be sure that Frontier isn’t the only one thinking about ways to kill Spirit. I’d imagine pretty much any airline would be happy to sit on the airline in any market for a short time if it means the airline goes away.
The question is, can Spirit last long enough to make the other airlines stop with short-term murder tactics? It has about a billion dollars in the bank, which is ok. But it also has several things it can still put up as collateral to raise money. Spirit said it has $350 million in “hard assets,” about $500 million worth of equity in its fleet, and another $425 million in pre-delivery payments for future airplanes. On top of that, it has around $250 to $300 million it can pull out of the new headquarters building which it built with cash. So there is some runway here, but now it’s just a race to see if it can right the ship before it runs out of ways to raise cash. After all, cash is king in this business.
I’d like to see a more comprehensive turnaround plan from Spirit than what they’ve put forth. I’d also like to see a bigger piece of that plan being something Spirit can actually control. It seems like the network team is doing its job, but that is not enough. More urgency is needed here.
