Spirit Airlines Is Betting on Its Recession-Resilient Low-Cost Model: Will It Work This Time?

Earnings season for airlines in the age of coronavirus means one thing: There are very few numbers that executives are excited to talk about. Spirit Airlines on Thursday was no exception. The ultra-low-cost airline reported that its total operating revenue for the second quarter was $138.5 million, a decrease of 86 percent year over year.

But the airline is betting its low-cost structure could help it when the airline industry begins to recover.

“We expect the rest of the summer to remain challenging for us and the industry,” CEO Ted Christie said in an earnings call. “However, when demand for leisure travel rebounds and stabilizes, as evidenced by our June results, our leading low-cost structure positions us well to be among the first to return to profitability.”

Spirit’s cost structure might make it well-suited to handle a situation like the current pandemic.

“History has shown in a multitude of past recessions that low-cost airlines outperform the market,” Christie said. “Some have questioned the sustainability of the low-cost model, be it because of utilization, density or lack of hubs. The facts and economic realities favor our model during periods such as this.”

Chief Financial Officer Scott Haralson said that the company has reached an agreement with Airbus to defer some of its 2020 and 2021 aircraft deliveries and corresponding pre-delivery deposits.

Haralson said that the airline’s daily cash burn trended from about $9.5 million in April to about $1.5 million in June. Executives noted that their cash burn in June included a one-time principal payment of nearly $50 million related to an amendment of their PDP financing facility in conjunction with their Airbus deferral agreement. Christie said that without this, they would have achieved nearly zero average daily cash burn for the month of June.

On top of its significant drop in revenue in the second quarter, Spirit suffered a net income loss of $144.4 million during the period.

Given current demand trends and operation levels, the company expects to see a daily cash burn of $3 to $4 million in the third quarter. On an available seat miles (ASM) basis, third-quarter capacity is also estimated to be down.

“On an ASM basis, July capacity is estimated to be down 18 percent year over year, August down 35 percent and September down 45 percent year over year,” chief commercial officer Matthew Klein said. “This equates to third quarter capacity being down 32 percent compared to the third quarter last year.”

The top priority of the airline is to conserve cash and enhance their liquidity position, Christie said. He said that during the month of April, they reduced their schedule and only operated around 50 flights per day due to the highly suppressed demand environment, and continued to operate this minimum schedule in May. However, they “increased flying in June as a result of encouraging, albeit tenuous signs of demand rebounding,” Christie said.

Visting friends and relatives (VFR) travel could also be a big part of the recovery. 

“In the international markets where we have re-instituted service, visiting friends and relatives are a big part of the demand segment, and we expect it to be so with other destinations once they open,” Klein said. “As such, we anticipate we will add back service to our VFR markets first and broaden our service as more tourism-oriented destinations come back online.”

Correction: An earlier version of this story misspelled the name of Spirit Chief Financial Officer Scott Haralson.