Spirit Airlines, Inc. (NYSE:SAVE) has faced a tumultuous period, navigating through industry challenges and internal restructuring. The company reported an annual net loss of $447.5 million on annual revenue of $5.36 billion in its most recent fiscal year. Its annual operating cash flow stood at -$246.7 million, while free cash flow reached -$524.1 million.

In the first quarter of 2024, Spirit reported a net loss of $142.6 million on operating revenues of $1,265.5 million. The company's operating margin for the quarter was -16.4%, compared to -8.3% in the prior year period. Spirit generated a pre-tax loss of $157.1 million in Q1 2024.

The airline industry has undergone significant changes in the post-pandemic era, with the profits of the entire U.S. airline industry now concentrated in just two major carriers. This has created a challenging environment for smaller, non-legacy airlines like Spirit to restore profitability.

Spirit's management team has been actively working to address these industry dynamics and strengthen the company's financial position. In the first quarter of 2024, the company terminated its merger agreement with JetBlue Airways, a move that provided it with greater flexibility to execute its standalone plan.

Business Overview

Spirit Airlines is a leading ultra-low-cost carrier (ULCC) in the United States, offering affordable air travel to value-conscious customers. The company's all-Airbus fleet is one of the youngest and most fuel-efficient in the industry. Spirit serves destinations throughout the U.S., Latin America, and the Caribbean, with a focus on providing a low-cost, unbundled travel experience.

The company's business model is designed to deliver low fares and a great experience to its guests. Spirit competes primarily on total price, allowing customers to see all available options and their respective prices prior to purchasing a ticket. This transparency illustrates that Spirit's total price, including optional add-ons, is lower on average than other airlines.

By offering guests unbundled base fares, Spirit gives them the power to save by paying only for the à la carte options they choose, such as checked and carry-on bags and advance seat assignments. The company records revenue related to these options as non-fare passenger revenue, which is recorded within passenger revenues in its statement of operations.

Spirit uses low fares to address underserved markets, which helps it to increase passenger volume, load factors, and non-ticket revenue. The airline also has high-density seating configurations on its fuel-efficient, all-Airbus fleet and a simplified onboard product designed to lower costs. High passenger volumes and load factors enable Spirit to sell more ancillary products and services, which in turn allows it to reduce fares even further.

Financials

Spirit's operational and financial performance in the first quarter of 2024 was impacted by a variety of factors. The company was negatively affected by adverse weather and air traffic control-related delays, particularly along the Eastern Seaboard and in Florida, as well as civil unrest in Haiti. Despite these challenges, Spirit's system-wide controllable completion factor for the quarter, excluding events outside its control, was 99.9%.

On the financial front, Spirit reported a negative operating margin of 16.4% in the first quarter, compared to -8.3% in the prior year period. The company generated a pre-tax loss of $157.1 million and a net loss of $142.6 million on operating revenues of $1,265.5 million. In the first quarter of 2023, Spirit had reported a pre-tax loss of $141.6 million and a net loss of $103.9 million on operating revenues of $1,349.8 million.

Spirit's Adjusted CASM ex-fuel, which excludes aircraft fuel expense, special charges, loss (gain) on disposal of assets, and a litigation loss contingency adjustment, was 7.67 cents in the first quarter of 2024, compared to 7.22 cents in the prior year period. The increase was primarily due to higher salaries, wages and benefits, as well as increased aircraft rent expenses.

Liquidity

As of March 31, 2024, Spirit had $1,178.6 million in liquidity, which includes unrestricted cash and cash equivalents, short-term investment securities, and funds available under its revolving credit facility. The company has been actively managing its liquidity position and exploring various financing options to support its operations.

In the first quarter of 2024, Spirit took delivery of four aircraft under direct operating leases, three aircraft under sale-leaseback transactions, and purchased one spare engine with cash. As of March 31, 2024, the company had a fleet of 207 A320 family aircraft.

During the first quarter, Spirit made $69.3 million in debt payments (principal, interest, and fees) on its outstanding aircraft debt obligations. The company also received $30.4 million in pre-delivery deposits on flight equipment, net of payments, and capitalized $5.7 million in interest for future deliveries of aircraft and spare engines.

Outlook

For the second quarter of 2024, Spirit expects its operating margin to range between -11.0% and -9.0%, or between -8.5% and -6.5% when adjusting for the difference between estimated AOG credits to be earned and the estimated AOG credits to be recognized through earnings. The company estimates fuel cost per gallon will average $2.80, with total operating expenses ranging between $1.460 billion and $1.465 billion.

Looking ahead, Spirit's capacity plans are heavily influenced by the ongoing Pratt & Whitney engine availability issues. The company estimates it will have an average of about 25 AOG aircraft in 2024, finishing the year with around 40 AOG. Based on this assumption, Spirit anticipates year-over-year capacity for Q3 2024 will be up high single digits, while Q4 2024 is expected to be down low single digits. For the full year 2024, the company's capacity is now estimated to range between flat and up low single digits versus 2023.

For 2025, Spirit's working assumption is that capacity will be down high single digits compared to 2024, as the company continues to grapple with the Pratt & Whitney engine availability challenges. The company intends to provide further updates on its capacity plans as it gains more visibility on the engine situation.

Risks and Challenges

Spirit Airlines faces several key risks and challenges that could impact its future performance. The ongoing Pratt & Whitney engine availability issues have had a significant negative impact on the company's operations and financial results, and the long-term resolution of this problem remains uncertain.

The highly competitive nature of the airline industry, particularly in the ultra-low-cost segment, poses a constant threat to Spirit's profitability. The company must continually adapt its business model and product offerings to stay ahead of its competitors and maintain its cost advantage.

Macroeconomic factors, such as fluctuations in fuel prices and changes in consumer demand for air travel, can also significantly affect Spirit's financial performance. The company's reliance on ancillary revenue streams, which can be sensitive to changes in consumer behavior, adds an additional layer of risk.

Furthermore, Spirit's ability to successfully execute its standalone plan and navigate the industry's evolving dynamics will be crucial to its long-term success. The company's efforts to reshape its product and strategy, as well as its ongoing cost-reduction initiatives, will be closely watched by investors and analysts.

Conclusion

Spirit Airlines is navigating a challenging period, facing industry-wide pressures and internal operational challenges. The company's management team has taken decisive steps to strengthen its financial position and position the airline for long-term success, including terminating its merger agreement with JetBlue and implementing a standalone plan.

While Spirit's short-term financial performance has been impacted by factors beyond its control, the company's focus on cost efficiency, network optimization, and product innovation could pave the way for a turnaround in the coming years. Investors will closely monitor Spirit's ability to execute its strategic initiatives and adapt to the changing industry landscape.