Business Overview and History
Spirit Airlines, Inc. (SAVE) is an ultra-low-cost carrier based in Dania Beach, Florida, known for its affordable fares and diverse route network. The company has undergone a remarkable transformation, redefining its approach to air travel by introducing a range of premium offerings to complement its traditional low-cost model.
Spirit Airlines was founded in 1964 as Charter One, a charter airline based in Michigan. The company initially focused on providing charter flights for tour operators. In 1990, the company was purchased by Nedlloyd and was renamed Spirit Airlines. Under new ownership, Spirit transitioned to a low-cost carrier model, offering ultra-low base fares with a la carte pricing for additional services.
In the early 2000s, Spirit faced financial challenges as the airline industry experienced significant turbulence following the 9/11 terrorist attacks. The company was forced to file for bankruptcy protection in 2006, but emerged a year later after restructuring its operations and finances.
After emerging from bankruptcy, Spirit began rapidly expanding its route network and fleet, taking advantage of the growing demand for ultra-low-cost air travel. The company transitioned its fleet to an all-Airbus narrow-body configuration, which allowed for greater fuel efficiency and operating cost savings. By 2015, Spirit had grown to become one of the largest ultra-low-cost carriers in the United States.
In recent years, Spirit has faced various operational and regulatory challenges. In 2017, the company was embroiled in a labor dispute with its pilots, leading to significant flight disruptions. Additionally, Spirit has been subject to increased scrutiny from the Department of Transportation regarding its customer service practices and ancillary fee structures. Despite these challenges, the company has continued to grow, maintaining its position as a prominent player in the U.S. airline industry.
In recent years, Spirit has faced a challenging operating environment, grappling with increased industry capacity, competitive pressures, and the impact of the COVID-19 pandemic. The company reported a net loss of $447.5 million in 2023, with an operating margin of -9.4%. However, Spirit's management team has been proactive in addressing these headwinds, implementing a strategic transformation to reposition the airline and enhance its long-term prospects.
Transformation and New Travel Options
In 2024, Spirit unveiled a game-changing initiative to redefine low-cost travel with the introduction of its new travel options. The company has recognized the evolving preferences of its customers, who are seeking a more diverse range of offerings beyond the traditional unbundled model.
The centerpiece of Spirit's transformation is the introduction of four new travel options: Go Big, Go Comfy, Go Savvy, and Go. These options cater to a wider spectrum of traveler needs, providing customers with the flexibility to choose the level of amenities and service that best suits their preferences and budgets.
The Go Big option offers a premium leisure experience, including a guaranteed "Big Front Seat," checked and carry-on bags, priority check-in and boarding, in-flight Wi-Fi, and complimentary snacks and beverages. The Go Comfy option provides a guaranteed blocked middle seat, a carry-on bag, priority boarding, and a complimentary snack and non-alcoholic drink. The Go Savvy option caters to customers who want a pre-assigned seat and the choice of either a carry-on or checked bag. The traditional Go option remains available for those who prefer to customize their travel experience.
This shift in product offerings aligns with Spirit's goal of becoming a "high-value, low-cost carrier," leveraging its cost advantages to provide a more diverse range of options to its customers. The company believes this transformation will help it capture a broader segment of the leisure travel market, including those who may have previously overlooked Spirit as an option.
Financial Performance
Spirit's financial performance has been impacted by the challenging industry environment. In the 2023 fiscal year, the company reported revenue of $5.36 billion and a net loss of $447.5 million. The operating cash flow (OCF) was negative $246.7 million, while free cash flow (FCF) stood at negative $524.1 million.
For the most recent quarter (Q2 2024), Spirit's revenue was $1.28 billion, with a net loss of $192.9 million. The OCF for the quarter was negative $138.1 million, and FCF was negative $136.2 million. Year-over-year revenue decreased by 10.6% due to a 12.3% decrease in average yield, partially offset by a 2.0% increase in traffic.
Spirit's primary source of revenue is from its passenger segment, which includes both fare and non-fare revenue. In Q2 2024, fare revenue per passenger flight segment was $45.02, down 22.2% year-over-year, while non-fare revenue per passenger flight segment was $63.44, down 9.6% year-over-year. This decrease was attributed to a more challenging pricing environment and the launch of the company's new "no change or cancel fee" policy.
The company also generates revenue from other sources, such as third-party travel agent commissions and other miscellaneous revenue streams. In Q2 2024, other revenue was $27.09 million, up from $22.41 million in the prior year period.
Spirit's total revenue per available seat mile (TRASM) decreased 12.1% year-over-year to 9.05 cents in Q2 2024. On the cost side, Spirit's adjusted cost per available seat mile (Adjusted CASM) increased 2.7% to 10.23 cents, primarily due to higher aircraft rent expense and landing fees, partially offset by decreases in other operating expenses. Adjusted CASM ex-fuel, which excludes aircraft fuel expense, increased 2.9% to 7.36 cents per ASM.
Geographic Performance
Spirit primarily operates within the United States, with approximately 85% of its revenue derived from domestic operations and 15% from Latin America and the Caribbean.
Liquidity
As of June 30, 2024, Spirit had $845.4 million in cash and cash equivalents. The company's debt-to-equity ratio stood at 4.34x, with a current ratio and quick ratio both at 0.94. Spirit has a $300 million revolving credit facility, which was undrawn as of June 30, 2024.
To further bolster its financial position, Spirit has been exploring various options, including the potential refinancing or extension of its existing debt maturities. The company is currently in discussions with its bondholders to negotiate the terms for its 8% senior secured notes due in 2025 and its convertible notes due in 2026. Additionally, Spirit is pursuing plans to refinance the fixed-rate debt associated with its owned aircraft.
Guidance and Outlook
For the third quarter of 2024, Spirit expects total operating revenues to range between $1.155 billion and $1.175 billion, with a year-over-year decrease in total revenue per available seat mile (TRASM) of 6.4% to 8%. The company estimates that its capacity will decrease by 0.3% year-over-year, reflecting the impact of the Pratt & Whitney engine issues and the company's efforts to align its network with market demand.
Looking ahead, Spirit expects its capacity to be flat to down low single-digits for the full year 2024 compared to 2023. For 2025, the company's working assumption is that capacity will be down high single-digits year-over-year. Spirit expects the financial benefits of its transformation plan to take more than a year to be fully realized.
The company aims to end 2024 with over $1 billion in liquidity, including unrestricted cash, short-term investments, and available credit facility capacity, assuming they can complete certain liquidity initiatives currently in process.
Risks and Challenges
Spirit Airlines faces several key risks and challenges that investors should be aware of:
1. Competitive Pressures: The airline industry is highly competitive, and Spirit faces intense rivalry from both legacy carriers and other ultra-low-cost airlines. The company's ability to maintain its cost advantage and differentiate its offerings will be crucial to its success.
2. Debt Refinancing: Spirit's upcoming debt maturities, including its 8% senior secured notes due in 2025 and its convertible notes due in 2026, pose a significant challenge. The company's ability to successfully refinance or extend these obligations will be critical to its liquidity and financial stability.
3. Operational Disruptions: The company's operations have been impacted by the Pratt & Whitney engine issues affecting its A320neo fleet, leading to increased aircraft on ground (AOG) and higher costs. Continued disruptions in this area could strain Spirit's financial and operational performance.
4. Regulatory and Compliance Risks: As an airline, Spirit is subject to extensive regulation and oversight by various governmental agencies, including the Federal Aviation Administration (FAA) and the Department of Transportation (DOT). Failure to comply with these regulations could result in fines, penalties, or other adverse consequences.
5. Macroeconomic Factors: Spirit's business is highly sensitive to broader economic conditions, including changes in consumer spending patterns, fuel prices, and overall travel demand. A significant downturn in the economy could adversely impact the company's financial results.
6. Legal and Regulatory Issues: In 2017, Spirit was sued in a class action lawsuit related to fees for ancillary products and services. In June 2023, the company reached a tentative $8.3 million settlement, of which $6.0 million was accrued as of year-end 2023. Additionally, following an IRS audit, Spirit was assessed $27.5 million in back taxes related to the collection of federal excise taxes on optional passenger seat selection charges, which the company is challenging.
7. Labor Relations: On February 27, 2023, the pilots' union ALPA filed a grievance against Spirit claiming the company violated the collective bargaining agreement by excluding pilots from retention award programs. As of June 30, 2024, this grievance is postponed indefinitely.
Despite these challenges, Spirit's management team has demonstrated its commitment to addressing the company's shortcomings and positioning the airline for long-term success. The introduction of the new travel options, along with continued efforts to optimize its cost structure and enhance its operational efficiency, are critical steps in this transformation.
Conclusion
Spirit Airlines is at a pivotal moment in its history, as it navigates a challenging industry environment and implements a strategic transformation to redefine low-cost travel. The company's introduction of new premium travel options, coupled with its focus on maintaining a cost advantage, positions it to capture a broader segment of the leisure travel market and drive long-term value for its shareholders.
While Spirit faces significant risks and obstacles, including debt refinancing, operational disruptions, and a challenging pricing environment, the company's proactive approach to addressing these challenges and its commitment to innovation suggest that it is well-positioned to weather the current storm and emerge as a stronger, more resilient airline. The company's management expects the financial benefits of its transformation plan to take more than a year to be fully realized, indicating that patience will be required as Spirit works to improve its financial performance and return to profitability.
Investors who can navigate the near-term volatility may find compelling opportunities in Spirit's long-term potential as the company continues to execute on its transformation strategy. However, they should remain mindful of the ongoing challenges in the ultra-low-cost carrier segment and the broader airline industry, which may continue to impact Spirit's financial results in the short to medium term.