Spirit's Save-the-Airline Plan

Is this a ULCC anymore?

Dear readers,

While on a family vacation (it's August!), I made the mistake of peeking at Spirit’s second quarter earnings. United CEO Scott Kirby warned us about the upcoming carnage, but I’m struck by the magnitude of Spirit’s troubles, and so rather than hopping in the pool again, I feel compelled to go through them with you and to offer some analysis about management’s plan to save the airline.

Let’s start with second quarter numbers: Spirit lost $192.9 million, with an adjusted operating margin of -11.9 percent. TRASM decreased 12.1 percent year-over-year on 1.7 percent more capacity, with total revenue per segment (that's fare plus ancillary revenue) down 15.3 percent compared to the second quarter of 2023.

"This is clearly a disappointing result," Spirit’s new CFO Fred Cromer told analysts. "And unfortunately, based on our revenue projection for the third quarter, it's going to get worse before it gets better."

It’s now August, which means that in many parts of the United States, we’ve already reached the post-summer travel shoulder period. Spirit’s third quarter guidance calls for adjusted operating margin to be 26 to -29 percent. Even when Spirit adds in credits from Pratt & Whitey, the projected adjusted margin is -24.5 to -27.5 percent.

The Pratt & Whitney engine trouble is still an issue, but there’s more. Many airlines, including Spirit, got aggressive with capacity during the post-pandemic revenge travel period, and airlines are selling far too many seats, particularly in economy class. People are spending less on ancillary products as well. As CEO Ted Christie put it: "The elevated level of industry capacity continues to make it very difficult to drive yield improvement for the most price-sensitive leisure travel segment."

Spirit last week put forth a go-forward plan. But unlike JetBlue, which has some decent assets — the Boston and New York hubs, plus a strong brand, and a premium cabin customers like — I'm not sure what Spirit has to offer. As executives try to save the airline and capture new customers, they're pushing it upmarket, adding both a real first class, and an economy section with a blocked middle seat. That may help revenue, but it's subpar for unit costs, and what's a ULCC without ultra-low costs?

On the bright side, management probably bought itself some time. Executives said it'll take at least a year before they know if this plan works, which could mean that they can remain on the job until next August.

Here are the things I found most interesting from the earnings call.