Spirit Airlines executives suspect their airline is well-positioned to win in a recovery. They're probably right, since low-cost options often thrive during a recession. But Spirit has to withstand the crisis first.
When travelers buy fewer plane tickets, Spirit Airlines typically lowers its prices, offering unbeatable deals — like $19 per one-way ticket — to get customers off the couch and onto its airplanes. It’s the key piece of the low-cost-carrier playbook, and it almost always works.
The strategy even proved useful for Spirit in early March, as many travelers, fearful of Covid-19, rushed to cancel flights on other carriers. For the right price, Spirit briefly proved consumers would jump at bargain fares.
Then it stopped — even for Spirit. By the end of March, Spirit was having as much trouble filing its airplanes as any other carrier.
“As events throughout the nation were canceled, theme parks closed, and travel bans implemented, load factors dropped precipitously,” CEO Ted Christie said Thursday on the airline’s first quarter earnings call.
Not surprisingly, Spirit lost $74.6 million in the first quarter, with revenues falling by about 10 percent. It is now flying 95 percent less capacity than expected, and burning through about $4 million per day. Revenue is effectively zero, factoring in refunds.
This month, Spirit is flying 95 percent capacity less than expected. With demand increasingly slightly, it plans to add a little more flying next month, with capacity expected to fall by only 90 percent, compared to what was planned.
Load factors are climbing a little bit, but business is far from stabilized.
“Yields were very low as we bottomed out,” Chief Commercial Officer Matt Klein said. “They’re still low. We have had the opportunity to begin to test some higher fare levels, which again, for us, are still very low stimulative levels, but definitely off the bottoms of where we were.”
When Will it Get Better?
Spirit executives predicted demand will come back a bit this summer, but said they did know when recovery will begin in earnest. They said they do not expect summer demand to look anything like 2019, when airlines flew full planes at strong yields.
“Given uncertainty of when demand levels will begin to recover, we are taking a conservative view,” Klein said.
Like other low-cost-carriers, including JetBlue Airways, Spirit is optimistic it will win in any recovery scenario, as consumers trade-down to save money. Spirit expects the first group of returning travelers will be passengers visiting friends and relatives, historically a strong segment for the airline. Conventional wisdom suggests business demand will return last, not a problem for Spirit, since it is a leisure airline.
But even the real leisure recovery is not imminent, executives said, noting many customers remain apprehensive about flying, despite the airline industry’s attempts to improve onboard safety.
“It’s going to take some time,” Klein said. “And as things like states and beaches and attractions and other kinds of venues start to open up, we do expect we’ll start to see some more confidence overall in the economy, which will lead to just overall confidence in traveling.”
Domestic travel may come back first, Klein said, but the airline also expects recovery in some international destinations popular among travelers visiting friends and relatives. Spirit has a strong route network in the Caribbean and Latin America, and said it intends to resume all of its international routes, eventually.
Several competitors have said they plan to emerge from the crisis as smaller carriers, but Spirit executives said it’s too soon to know if they will downsize the company.
“Amongst the range of outcomes would be that we’re maybe not growing as much or perhaps, a little smaller for a period of time, and that means we’ll have to make some decisions about rightsizing the airline at that point,” Christie said.
Still, Christie said the airline may find new growth opportunities if it can withstand the worst of the crisis. In recent years, major airport gate and terminal space has been tight, but that may not be a problem in 2021.
“We believe there are plenty of new market opportunities to support our growth, once demand begins to recover, including, perhaps, some opportunities in constrained markets that didn’t exist before,” Christie said.
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Photo credit: Spirit Airlines is finding it tough to stimulate demand in this environment. Pictured is one of the airline's Airbus jets. Spirit Airlines