Spirit Airlines Incorporated Earnings: Redemption at Last

FAN Editor

Spirit Airlines (NYSE: SAVE) shareholders have been through a rough few years. The stock peaked at around $85 in late 2014 — when it seemed the budget airline could do no wrong — but has since lost half of its value. This share-price plunge was driven by a deep unit revenue slump that eroded all of Spirit Airlines’ fuel price savings relative to 2014, and then some.

Back in April, Spirit Airlines stock declined again, after the company announced disappointing guidance for the second quarter. However, Spirit outperformed management’s expectations last quarter, allowing it to hold adjusted earnings per share roughly flat year over year. Additionally, the outlook for the rest of 2018 (and beyond) is getting brighter.

Continue Reading Below

Spirit Airlines results: The raw numbers

What happened with Spirit Airlines this quarter?

Early in the second quarter, Spirit Airlines decided to buy 14 A319 aircraft that it had been leasing. The purchases were completed during the quarter and drove a 20.6% plunge in Spirit’s aircraft rent expense last quarter.

This decision contributed to an incredible 11.3% year over year improvement in adjusted nonfuel unit costs. (To be fair, Spirit Airlines faced an incredibly easy comparison. Adjusted nonfuel unit costs soared 10% in the second quarter of 2017 due to costs related to a pilot dispute.) The addition of more fuel-efficient aircraft also drove a 5% improvement in fuel efficiency last quarter. As a result, Spirit’s total unit costs declined modestly year over year, even though its average fuel price surged 40% from $1.66 per gallon to $2.32 per gallon.

On the flip side, Spirit’s unit revenue performance remained weak last quarter, with total revenue per available seat mile (TRASM) down 6.8% year over year. Still, that was in the upper half of management’s initial forecast range. The net result was that Spirit’s adjusted pre-tax margin declined by 6 percentage points. However, EPS slipped by just $0.01, thanks to strong revenue growth and the benefit of a lower tax rate.

Spirit Airlines also announced the latest updates to its route strategy during the second quarter. It plans to continue adding small and midsize markets this fall, while also embarking on an aggressive international expansion in Orlando.

What management had to say

Spirit Airlines’ management team was pleased with the company’s second-quarter performance, even though the carrier’s pre-tax margin continued declining. “Despite paying materially higher fuel prices, our second quarter earnings results exceeded our expectations due to strong ancillary revenue production and better-than-expected cost performance,” noted CEO Robert Fornaro.

Part of management’s confidence appears to stem from the improving revenue trends the company is seeing. Ted Christie, Spirit’s current president and CFO (and CEO-in-waiting) stated, “Looking ahead to the third quarter, we expect the trend of year-over-year improvement in non-ticket revenue per passenger segment to continue. We believe this, together with a continued strong demand environment, will allow us to deliver solid year-over-year TRASM improvement in the third quarter 2018.”

Looking forward

For the third quarter, Spirit Airlines is planning to expand capacity 24.5% year over year. It expects to return to unit revenue growth at long last, with TRASM on pace to rise 2% to 3%. Management noted that TRASM growth would be even stronger but for weak demand in Cancun related to recent travel warnings, along with an increase in the average length of Spirit’s flights.

Meanwhile, management expects adjusted nonfuel unit costs to fall 3% to 4% year over year. This will partially offset another steep increase in fuel costs, as Spirit Airlines expects to pay $2.33 per gallon this quarter, up from $1.75 per gallon a year earlier.

All in all, Spirit’s forecast implies that its adjusted pre-tax margin is likely to decline by about 2 to 3 percentage points in the third quarter, relative to last year’s 15% result. But after taking the carrier’s rapid revenue growth and the impact of tax reform into account, Spirit Airlines could achieve adjusted EPS growth of 25% to 30% or more.

Spirit Airlines’ unit revenue outlook also bodes well for the fourth quarter. With the carrier’s capacity growth set to slow dramatically in Q4 and beyond, unit revenue growth could accelerate. This will hopefully allow Spirit to stabilize its pre-tax margin by 2019, if not earlier.

10 stocks we like better than WalmartWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, the Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now… and Walmart wasn’t one of them! That’s right — they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of June 4, 2018The author(s) may have a position in any stocks mentioned.

Adam Levine-Weinberg owns shares of Spirit Airlines. The Motley Fool owns shares of Spirit Airlines. The Motley Fool has a disclosure policy.

Free America Network Articles

Leave a Reply

Next Post

Cushman & Wakefield IPO: What Investors Need to Know

You may have seen their “For sale” signs on property, now buy the stock! Global real estate group Cushman & Wakefield (NYSE: CWK) is about to debut on the stock exchange following a big-ticket IPO. Should you bet the house on this new stock? Read on for my take. Continue […]