Spirit Airlines, Inc. (NYSE:SAVE) Q2 2023 Earnings Call Transcript

Spirit Airlines, Inc. (NYSE:SAVE) Q2 2023 Earnings Call Transcript August 3, 2023

Operator: Thank you for standing by. My name is Adam, and I’ll be your conference operator today. At this time, I would 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. [Operator Instructions]. Thank you. I would now like to turn the call over to Vivian Taveras, Manager of Investor Relations. Please go ahead.

Vivian Taveras: 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 a replay of this call on our website for a minimum of 60 days. Presenting on today’s call are Ted Christie, Spirit’s Chief Executive 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 related to 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. For an 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.com. I will now turn the call over to Ted Christie, Spirit’s President and CEO.

Ted Christie: Thanks, Viv, and thanks to 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 while our reported DOT operating metrics for the quarter were negatively impacted by all the weather events, and a plethora of air traffic control initiatives. Our 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 3.3%, about 2 points below our initial guide.

Total RASM for the quarter was strong and well above pre-COVID 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 TRASM. These demand and pricing trends and difficult weather continued throughout July and are expected to continue into the fall. However, once the international 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. Before Matt and Scott share further details about our second quarter performance and forward outlook, I want to update you on our issues with the GTF engine that powers our neo fleet. Last week, RTX shared that Pratt & Whitney had recently discovered a quality control issue during the manufacturer of a disc 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 scheduled service.

This is above and beyond the current set of aircraft on ground or AOG as we refer to them, which as of today sits at seven aircraft. 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 will discuss this impact in more detail, but the close-in nature of the schedule reduction does have a significant impact on revenue for September. It is worth noting that Spirit is the largest operator of GTF-powered neos 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 is having an impact on our margin. We should know by mid to late September, how many of the additional 1,000 engines Pratt has identified for inspection are ones we operate.

Timing for the engine inspections on the next 1,000 is not yet known, but we believe it likely the inspections will need to be performed before the end of September 2024. Pratt has indicated that some of the 1,000 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 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. RTX 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’ll keep you posted as we get further updates.

Matt, over to you.

Matthew Klein: 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 $1.43 billion, up 4.8% year-over-year. Total RASM was $10.03, a decrease of 10.7% on a capacity increase of 17%. Load factor was 82.9%, down 3.1 points year-over-year. Compared to Q2 2019, total RASM was up 9.6% 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 remain strong, and on a per segment basis increased 2.9% 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. In addition, demand did not build into the peak summer period as we had anticipated, leading to lower fares across the network.

When we look at our second quarter revenue guide compared to flow in 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 a general regional demand impact. Ted mentioned earlier that we had to make a significant change to our September schedule due to issues regarding the GTF engines for Pratt & Whitney. We received the update on the last day before we put our September scheduled event. 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 flying 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 schedule. This results in an operating schedule 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 AOG issue will penalize revenue production in Q3 by approximately 1.5%, which is on top of the lost revenue for the original neo AOG issue, which we estimate reduces revenue by nearly 6%. So we do expect to smooth out our schedule 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 carry forward 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 $1.32 billion down 3.2% to down 1.7%, 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.

Scott Haralson: Thanks, Matt. After briefly discussing our Q2 results and Q3 guidance, I’ll share a few details about our recent fleet changes. Our second quarter operating costs were $1.39 billion. Nonfuel operating expenses came in at the better end of our expectations at $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 a fuel price per gallon for the second quarter of $2.62, slightly higher than estimated guide of $2.60 per gallon. On a year-over-year basis, lower fuel expense driven by a 39.1% decrease in average fuel prices, offset increases driven by more flight volume, additional aircraft rent and inflationary wage pressures.

Total nonoperating 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, it excludes any potential change in the mark-to-market adjustment. Liquidity at the end of the second quarter was $1.5 million, 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 A319neos, took delivery of five A320neos and delivery of our first A321neo 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, 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 have been at full fleet utilization by Q4. The recent frat news results in even less aircraft in our fleet being available for operations. And this means we will likely be overstaffed and carry 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 now isolate the AOG issues and look at the core airline.

The core airline that is excluding AOGs, should be back to full utilization by Q4 and is expected to be closer to run rate margin in CASM ex production. The drag on margin caused by the AOG aircraft should be viewed as neutralized due to RTX 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 2024, piling up deliveries in 2024. In addition, it has been widely expected that these delays would continue beyond 2024. We also had some decisions regarding a few of our A319neo orders and option aircraft 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 de-risk 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 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 A319, these changes slower growth in the near-term and provide us a consistent level of deliveries for the back half of the decade. Number two, we up gauged all of our A319neo orders to A321neos 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. 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 as most beneficial to Spirit. At the time we made these decisions, we estimated these fleet changes would produce the 2024 growth rate in the high teens. However, that was before learning about the latest neo engine issue. It will 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 5.5% to negative 7.5%.

We estimate fuel cost per gallon will average $2.80 with total operating expenses ranging between $1.39 billion and $1.40 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.spirit.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, our airport staff, the operations control center staff and the other operation support personnel have been the ultimate professionals, and I wanted to give them a quick shout out. So now I’ll turn it back over to Ted for closing remarks.

Ted Christie: 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 acknowledge 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 and are 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 penalizing utilization.

Labor, weather and infrastructure issues have been volatile and unpredictable. But 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 than 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 full utilization in peak Q4. In fact, if we weren’t burdened with aircraft being pulled from service due to GTF 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 are making tactical changes to our network post the Labor Day holiday, including more variation between peak and nonpeak 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 A319s, revising the pace of our aircraft deliveries beginning in 2024 through 2029 and up gauging more deliveries to the A321 variant should all drive fuel and other cost efficiency benefits in 2024 and beyond and allow us to deliver growth more in line with expected demand growth.

In conclusion, the dynamics of the airline business are constant. One thing that I have 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. Frustrations aside, our team is doing a great job adjusting as necessary, and I strongly believe our expected 3Q 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 tailwinds and a considerable advantage against the rest of the industry. And now back to Vivien to begin the Q&A session.

Vivian Taveras: Thank you, Ted. We are now ready to take questions from the analysts. We ask that you limit yourself to one question with one related follow-up. Adam we are ready to begin.

Q&A Session

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Operator: [Operator Instructions]. Your first question comes from the line of Conor Cunningham with Melius Research. Your line is open.

Conor Cunningham: Ted just comment of shifting day of week, it’s been a big theme this — just ignoring the potential fair impact. But just — when you think about operational stress on the system, when you add more [Technical Difficulty].

Ted Christie: Hey, Conor, you’re — sorry, Conor, you’re cutting in and out, but I think you asked about day and week variation and the operational effect of that, is that right?

Conor Cunningham: Yes. Sorry about that part.

Ted Christie: Okay. No problem. So you’re right. I mean one of the things 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 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 things that are most effective and some of the things that we did that weren’t having as much of an impact. And so we believe that while 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.

Conor Cunningham: Okay. And then on the GTF issue, you mentioned that perhaps talking about making a whole. I’m just — 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.

Ted Christie: No problem. Yes, it’s still early. This all developed quite quickly on us. As we said, we had to make quick changes to September, which is not favorable at all. But one thing I will say about Pratt, we’re a long-standing 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’ve always honored their commitments. And so we expect that to be true. They’ve intended to make us whole on this issue, and that is our expectations. But coming to the details of what that will look like and how it will take form, it’s still too early to tell.

Operator: Your next question comes from the line of Duane Pfennigwerth with Evercore ISI. Your line is open.

Duane Pfennigwerth: Hey, good morning. Thanks. Ted, your 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 talk about 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 yields? So I assume it was kind of late in the quarter issue? And any color on the markets where that was kind of felt most acutely, maybe Caribbean, et cetera?

Ted Christie: Sure, Duane. Thanks. I’ll give just a brief intro, but I’m going to let Matt coloring around the edges. I think some of the points you made, and we used the words intentionally drive home as we saw was very acute. We feel like it’s isolated and noticeable and ties nicely with 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 long-haul international, which is obviously considerably outperforming this year. And our strategy 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?

Matthew Klein: Sure, Duane. I can — one perfect example, I think, as you touched and talked about Caribbean there for a second, is Cancun 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 power and sold out flights basically every day. And then less than two months later, we saw in June, which is still a very strong time for Cancun reverse with unit revenues, in some cases, down very high double-digit numbers percent change year-over-year. And that’s all happening within the same quarter, and that’s 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 in Cancun. So some of that could be explainable, but not to the level that we actually saw. And the industry has added some extra capacity there, too. So it’s always about supply and demand. But in this case, the demand just fell off. And as we talk about yield and think about June, but then also into the third — end of June, and then into the third quarter. We took a position that we had been seeing really for the last 15, 16, 17 months of the demand will be there and 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. And really, we just — we held out a little bit too long expecting to see those yields come in.

Once you make an adjustment to that, then you are sacrificing yield for volume, and then you need to see the volumes come in. So we are anticipating and starting to see the volumes come in. They’re just at lower yields than what we’d 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 more normal as we get out of the summer into the fall, and then especially at the peak periods in the fourth quarter.

Duane Pfennigwerth: Any themes on the originating city aspect to that demand change? Or did you see sort of variation depending upon what region of the country you’re originating from?

Matthew Klein: No, not really, Duane. It feels like it’s spread. I mean being heavily East Coast oriented, has an effect on some of the demand where that demand decides to go, because as you would expect, Transatlantic, Europe is not too far away from the East Coast, relatively speaking. So there was an impact with that. But in general, we saw impacts, but East Coast really took it probably the most.

Duane Pfennigwerth: That’s great. I really appreciate that color. And then just on the engine issue, and this may be impossible at this point in time. But of this kind of negative 6%, negative 7% margin outlook for the third quarter. How many margin points do you think these specific engine issues are costing you? And to the extent that there’s reimbursement sometime down the road, how would you size that headwind as of today?

Ted Christie: 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 are right now with fleet utilization, which takes into account all the aircraft on ground that we have today, we’re probably missing 7-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 AOGs. And so we’re going to be obviously in discussions about what the impact it’s having on us. And it is unfortunately for us, in the United States, we’re really to stand out here. And so it will be an important discussion that we have with the folks at Pratt and RTX.

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 their commitments. And we have no reason to expect that would change here.

Duane Pfennigwerth: Thank you.

Operator: Your next question comes from the line of Scott Group with Wolfe Research. Your line is open.

Scott Group: Hey, thanks. Good morning guys. So I know there’s a lot of talk about the shift international in days of week. But if I take a step back, is it just possible that we’ve now finally surpassed pre-pandemic domestic capacity. At the same time, corporate demand is somewhat diminished from where it was and legacies are forced to just be a little bit more focused on leisure. So there’s just too much supply relative demand for some of the smaller carriers, and we just sort of reached that inflection point to possible that’s what’s just happening right now?

Ted Christie: Yes, good morning, Scott. So look, I mean, the nuances of establishing what impacts demand are difficult to arrive at as you would expect. But given what we experienced in the latter part of Q2 and 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 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 or in the fourth quarter more closely in. And so I wouldn’t say nothing that we’re seeing right now says that we have a noticeable supply demand imbalance. In fact, if you look at what’s been happening over the course of the recovery from the pandemic, unit revenues across the Board are up.

And admittedly, we’re considerably larger, but the industry is only modestly larger, and it would tell you that there’s, there’s plenty of demand out there. So I don’t know that we see data yet. I mean your supposition would say, is it possible? I suppose anything is possible, right? But it’s entirely possible that right now, there’s an artificial lid on demand, because corporate travel hasn’t returned and because people are fatigued 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 and you’re delayed six hours because of air traffic control initiatives and ground delay programs. So I mean, there’s just as much as there’s always possibilities that there’s changes happening in the demand profile.

I think there’s 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.

Scott Group: 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? And I guess, how much capacity growth you need to have a shot of getting CASM down next year?

Ted Christie: Well, the good news is, and Scott can jump in here after I’m done, is that the primary driver of getting the CASM where we wanted to be 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 in fact drive growth. But as Scott said, we feel that we would be at that in the fourth quarter, excluding the AOGs with Pratt. That will help us get to our expected more expected kind of CASM trajectory, and that should be a tailwind for us. So looking at 2024, it’s a little cloudy right now, because we originally thought we had a pretty good beat on what was happening with the fleet. We made the necessary adjustments, which I think were smart. And then, of course, we just received information two weeks ago that kind of changes that. So what would you add to that?

Scott Haralson: I think that’s right. So Scott, I think it’s about utilization first and foremost for us. I mean we’ve been running a pill for the last few years trying to catch up to the amount of aircraft we’ve 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 let us feel comfortable that we’re able to generate margins that will tell us that we should be growing again. I mean we got to earn that right to grow the airline. So we got a return utilization, return margin and cash reduction. And then we can start to lean forward. But I think 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 skis underneath us, and then we’ll move forward.

Scott Group: Okay. Thank you guys.

Operator: Your next question comes from the line of Jamie Baker with JPMorgan Chase. Your line is open.

Jamie Baker: 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?

Ted Christie: Yes, it is positive. And the attrition numbers are stabilizing in ranges that versus where we were at peaks. And you’ll recall 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 the early part of this year as a result of the deal and give us confidence that as we move forward, we’ve reached some stability. Now, I think 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 the engagement there is really strong. And as a one anecdote. We — like I said, we’ve noticed that there have been pilots leaving us and 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 and are coming back. And I think it has to do with a mix of, obviously, the contract itself. The quality of life that we offer and the combination of those work life balance, benefits, pay and the word of mouth is spreading. So I’m 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 feel, 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 that’s how we work to solve this problem with Pratt.

Jamie Baker: Got it. Thank you. And that leads into my second question, and this is probably one of the most theoretical questions that I’ve asked you over the years. But if you could choose between the GTF issues completely disappearing tomorrow, gone, or having corporate demand immediately recover for the big three and not just to 2019, but back to where it should have been in 2023, which of those would you choose? Can’t have both and have one or the other?

Ted Christie: I can’t have both. Okay. Well, I think my answer would be to have the Pratt issue resolved. It’s localized to us. It makes us stand out. We don’t like it, neither do they by the way. And it’s crimping what drives this business, which is productivity and low cost. So you’re right that having another demand funnel open up would be good for the broader industry. And I couldn’t argue that, that wouldn’t help the whole industry a little bit. But when thinking first specifically about us, I would feel better about having our house in order and our fleet where we want it.

Jamie Baker: Okay. Very helpful. Thank you everybody.

Operator: Your next question comes from the line of Stephen Trent with Citi. Your line is open.

Stephen Trent: Good morning everybody. And thanks for taking my questions. Just quickly, I was wondering, I was intrigued by what you said about Cancun. On your Mexico flow, have you actually seen over the last year or so, any tailwinds in terms of cross-border demand considering that the FAA has not restored Mexico’s Category 1 aviation safety rating and [indiscernible] not linked up yet, et cetera. Just wondering if that’s created any opportunities for you? Thank you.

Matthew Klein: Hey, Stephen, it’s Matt. So we have added a little bit more in Mexico overall. We haven’t really seen a lot of the cross-border sales benefit that you’re discussing or, I guess, asked about. Almost all of our Mexico demand is point of origin in United States. And believe me, well, I’d tell you that I wish we saw more coming out of Mexico. It’s the vast, vast, vast majority for us is a point of origin U.S.

Stephen Trent: Great. I appreciate that, Matt. And just very quickly, when you look at the challenges, I mean, not just you guys, everybody with air traffic control and the other issues out there were storms. Any high level view with respect to longer-term strategy of maybe doing more with crew bases in certain regions versus today? Thank you.

Ted Christie: Sure, Stephen. So you’re right. I mean the whole industry has been very vocal about the challenges we face, and I know weather is a driver of that. And it’s 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 in cancellation. And let me give you like an interesting data point. So pre-pandemic, in the second quarter of 2019, Spirit canceled 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 Easter period because of a storm pattern that moved through Florida.

It was 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 we’re about 30% bigger today than we were in 2019. So we should have expected to see around 900 to 1,000 cancellations in the second quarter of this year. Instead, we canceled 1,700 flights. So weather alone doesn’t describe what’s happening. What’s happening is that the staffing shortages at the variety of different control centers throughout the U.S., which has been widely publicized are limiting their ability to navigate the airlines around the challenges, and it’s putting us into a real bind. So what we’re trying to do and what we’ve done over the course of the last couple of years is 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 crew bases. So it’s been a noticeable shift, and that’s helped the 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 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 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 in 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.

Stephen Trent: That’s very helpful. Really appreciate the color. And thanks for the time.

Operator: Your next question comes from the line of Helane Becker with TD Cowen. Your line is open.

Thomas Fitzgerald: Hi, this is Tom Fitzgerald on for Helane. Thanks so much for the time. First question looks like you’re growing a lot in the third quarter in Phoenix, Charlotte and Los Angeles. I just wanted to get — just curious if you had any color on those markets in particular. And then just as a follow-up, just a quick modeling question. I know the base case assumption seems to be that the regional shift in — the regional demand mix will shift back to something more normal in the fourth quarter. Are you pre-COVID, you’d usually — 4Q revenue would decline a little bit sequentially versus the third. Last year was up. Is it just from a high level, would you expect it to feel like last year it would be slightly up versus the third quarter or still down a little bit. I just appreciate any color there. Thanks so much.

Matthew Klein: Hey Tom, it’s Matt. So your first question regarding Phoenix, Charlotte and Los Angeles. We have seen pretty good success in these cities which is why you’re seeing the growth there. We did pick up an extra gate in Charlotte, and we’ve also picked up extra gates in Los Angeles, and we’re utilizing them. That’s what we do. And we’ve seen growth — our own growth in Los Angeles has been very effective for us. It’s helped build out our presence 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, really. And then in terms of Q4 versus Q3, the answer would be, generally, yes, we’d expect to see trends that you mentioned kind of continue out there. So we would expect to see that kind of growth in Q4.

Operator: Your next question comes from the line of Mike Linenberg with Deutsche Bank. Your line is open.

Michael Linenberg: Hey, good morning everyone. Two questions here. I just — I want to go back to maybe Scott and Jamie’s question just about the big three and the fact that corporate is down and they’ve been allocating more assets into leisure markets. And I’m really curious though, like how much of the capacity or markets that you’re in where you’ve 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.

Matthew Klein: Sure, Mike. It’s Matt. I’ll try to tackle that one. So we have seen from pre-COVID really until now. Our overlap has generally been the same across the industry with a couple of exceptions. One is, as you just noted, our nonstop overlaps with Frontier have increased a bit. But with Southwest, we’ve gone down. So kind of a trade-off there amongst, I guess, you’d say, low fare carriers. And overall, we — generally speaking, we of course, when we decide where to fly and how we pick roots and pick new cities, we’re evaluating the overall landscape, and we’re evaluating what’s going on in general, and we do take into account who is already operating in certain routes because as we put together our forecast, we have a lot of history in understanding how we think the routes will perform and the competitive dynamics, while different city to city generally can help us predict what we think outcomes will be.

So having said all that, in a normal environment, routes that we can target domestically not to sound a little bit 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’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 lower demand profile than what we were all probably anticipating, at least we were anticipating a different demand profile this summer. So generally, I think to answer your question is even though we do see competition and we are growing on top of other people and just like they are on top of us from time to time, generally hasn’t been an issue for us.

This summer, we feel is incredibly unique that we’re seeing some of these impacts. And as we noted, we expect this to flip back as we get into the Fall and the peak holiday periods when just in general, customers just take shorter trips and they’re looking to stay more state side. And we expect that will then turn back into the normal demand patterns that we’re used to all seeing.

Michael Linenberg: Okay. Great. Good answer. And then just thanks for that. And then just second, more of a modeling question. You obviously, a lot of moving parts here with the GTF issue. How should we think about 4Q capacity, your sort of revised capacity number for 2023 and then what does that mean for 2024, especially since you’ve cut back your deliveries for next year, just rough numbers since I know it’s early? Thank you.

Scott Haralson: Yes hey Mike, this is Scott. I’ll take a stab and then Matt can opine too. So looking at sort of the move between second, third and fourth with the reductions that we’ve had from the GTF, the new GTF issues, probably looking at — you probably have a slight reduction in Q3. 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 for Q4, but I would expect somewhat material move north in capacity. And thinking about ’24, I mean, obviously, the news is fresh on the additional GTF issues. So it’s hard to predict where 2024 will look like. But I did mention in the prepared remarks that with the moves we made with Airbus, we expect it 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 ’24.

Ted Christie: And one other point that I’ll make, Mike for the fourth quarter, and 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 and that it was effective, the inspections would be effective in September, we pulled seven aircraft out of service for the month. However, they’re continuing to refine the universe of engines, and it’s 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’ve 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 month.

Michael Linenberg: Okay, very good. Thanks gentlemen.

Vivian Taveras: Adam, do we have any other calls or questions?

Operator: Your next question comes from the line of Dan McKenzie with Seaport Global. Your line is open.

Daniel McKenzie: 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 de-risk the business, has your thoughts about growth beyond 2024, also they’ve also moderated. How should we think about growth longer-term?

Ted Christie: Well, I can start. And Scott alluded to some of these changes in the script. We still see a sizable opportunity. So that hasn’t 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 work that Scott and the treasury team did with Airbus was a cooperative effort between ourselves and the manufacturer to smooth out deliveries, give us 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 one and if we feel like it’s necessary.

So there’s a lot of moving parts in our fleet as is true for every airline. We’re retiring 319s right now. We’re going to get pretty close over the next five or six years to the oldest 320s, believe it or not in our fleet and starting to have to think about what happens with those and whether or not we keep those around. So there’s ups and downs that we’ll deal with, but the opportunity itself still hasn’t changed for us. So it’s just a question of pacing and that sort of thing.

Scott Haralson: No, I think that’s right. I think we smoothed out the delivery stream. So prior to this adjustment, we were having some peaks and troughs that were pretty material. So this allowed us to smooth it out, give us a predictable base and allow us to, as I mentioned earlier, to sort of earn our way into the growth profile again. And we’ll use the lessor community like Ted said, give us some flexibility, we have some ability to extend and or retire early additional aircraft. 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 there is 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.

Daniel McKenzie: Okay. I guess just in terms of an actual 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 around that?

Ted Christie: Well, if you just, I think mathematically roll out the airplanes, it’s less than that now. Certainly, as you get bigger, into the future. And that’s why I say, I think we’re evaluating the pace of things. Scott said it earlier, I think it was a great point. We have to earn our right to deliver the capacity and getting back to full efficiency and starting to deliver the margins we believe that we can is our first step. So this was a good idea to kind of for a lot of reasons, to smooth things out for ourselves and gives us a chance 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 that’s what this kind of recent modification allows us to do.

Scott Haralson: Yes. I think the point there too is that the growth is not an isolated objective, right? We need the returns to be able to justify it. And 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. And so I think that’s just prudent management for us to sort of see the game plan first.

Ted Christie: 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, the dominant oligarchs are outperforming the rest of the industry and that’s not an accident. When you control that much capacity, it’s 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 every day with low cost and low fares, but you can just see from the numbers. And we think the best answer for competition is to create a fifth alternative. And clearly, with that engine, there’s 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 hasn’t 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.

Daniel McKenzie: Yes. Perfect. Second question here, this idea of an artificial lid on demand that you shared due to ATC issues. Is the thought that, that will persist until 2025 when the ATC is expected to be fully staffed? Or I guess, is it just more temporary just sort of tied to some issues today because it’s so severely understaffed?

Ted Christie: Well, admittedly, I’m speaking purely on speculation and anecdote, but I’ve experienced it. So having flown — I fly a lot, and it can be frustrating when you’re stuck at an airport for three, four, five, six hours 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 during the fall or the winter where actually it’s a little bit easier to operate, we’re going to see that type of frustration. I think it happens a lot during this period, which is when everyone is traveling and the weather is bad. But I think it’s just a theoretical impact that I can tell you that first person experience, I’ve witnessed, and it’s very — you can understand how people might say, “You know what, I may not add that third trip to go see my family because I just can’t afford to spend nine hours back and forth waiting”.

Daniel McKenzie: Yes, makes sense. Thanks so much for the time guys.

Operator: Your final question comes from the line of Savi Syth with Raymond James. Your line is open.

Savanthi Syth: Hey, good morning everyone. Just bit of a follow-up in terms of your thinking of 2024, but more so from how much of that pre-GDS, like when you were thinking of high teens, how much of that growth was going to come from utilization? I’m just trying to think about as you’re exiting this year and going 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 just quantify that a little bit more.

Scott Haralson: Yes, hey Savi, this is Scott. Yes, I think you’re spot on with some of that. As we thought about the high teens, it’s really made up of really three things. And they’re both probably in the five to seven points worth of move. But we’ll probably grow the fleet above five points in ’24, you have utilization move year-over-year, which is probably five to seven points worth of impact. And we have average seats for everyone. And that’s probably another five-plus points. And so that gets you in the high teens. And so your point is right, really two of those are less impacted by pilots. But I think we’re — we feel good about our pipeline. We’ve talked about that before, no longer pilot constrained. 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 next batch of GTF issues, but we feel comfortable about the core part of the airline.

Savanthi Syth: Regarding the GTF and like if you do get settled with the Maple, how does that flow through the P&L? Is that a special item and it helps your cash? Or how does that kind of flow through?

Scott Haralson: Yes, Savi, we’re early in the discussions around what that might look like. So difficult to say. It could take a few different forms over different lengths of time. So we would have to figure out what the accounting would be based on the vehicle. But we’ll let you know when that materializes.

Savanthi Syth: Thank you.

Operator: I will now turn the call back over to Vivian Taveras for closing remarks.

Vivian Taveras: 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.

Operator: Ladies and gentlemen, that concludes today’s call. Thank you all for joining. You may now disconnect.

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