Spirit Airlines' transition from a private to public company in 2011 continues to pay off, allowing the Miramar, Florida-based carrier to renegotiate aircraft leases at more favorable rates and reduce aircraft expenses by acquiring new airliners on better terms.
"Since we've gone public, the company's credit position has improved materially and we've started to recognize the benefit in our [aircraft] ownership expenses," Spirit chief financial officer Edward Christie tells investors during a 20 May analyst call. "The ownership expense we are seeing is down about 5% on a per unit basis."
Savings on aircraft leases should help the low-cost carrier further improve its cost advantage over other carriers, executives say. Spirit's cost-reduction strategy also calls for capacity growth of 15% to 20% annually and improved operational reliability and fuel efficiency.
At 10.09 cents, Spirit's cost per available seat mile (CASM) in 2012 was lower than all other US carriers. During that year, other low cost US airlines reported CASM between 10.37 cents and 12.85 cents, while legacy airlines had unit costs of between 13.22 cents and 14.97 cents.
Spirit's CASM excluding fuel should decline another 1% year-over-year in 2013 and could decline 1.5% to 2% by 2015, the airline predicts.
SAVINGS FROM FLEET RENEWAL
Much of the savings will come from changes in the airline's fleet and its aircraft lease rates.
Spirit currently operates 29 145-seat Airbus A319s, 18 178-seat A320s and two 218-seat A321s. But the airline is fast replacing aircraft and adding new aircraft at better lease terms.
Already this year Spirit has taken delivery of at least two used A319s and two new A320s.
Spirit also has an order with Airbus to acquire 50 A320neos, and it has another 50 current-generation A320s on order, according to the airline and Flightglobal's Ascend Online database.
The A320s have build dates through 2018 and the A320neos will be manufactured between 2019 and 2021, according to Ascend.
The airline says it will use new aircraft on a number of some 400 domestic routes that have become economically viable as Spirit's costs decline.
Christie notes that A320s leased today cost Spirit 5% less per available seat mile than they did before the initial public offering. And the A320s have 23% more seats than A319s, giving the airline a CASM savings of 10% to 12% over the smaller aircraft.
In addition, Spirit has the option to convert A320neo orders to A321neos. The extra seats on the larger A321neo can save Spirit 4% per available seat mile compared to the A320neo, Christie says.
Christie also expects Spirit's average fuel costs to decline, noting that A320neos should be 15% more efficient than the current generation A320s. Also, new aircraft will have eight-foot high sharklets, which should provide 2% to 3% more fuel efficiency over models without sharklets.
Fuel expenses account for more than 40% of Spirit's costs.
And as Spirit grows, it will realize efficiencies of scale and declining average employee costs as it hires younger, less expensive workers. The airline says each new aircraft will dilute unit costs .1%.
Spirit is also seeking to modify lease terms on some A319s acquired in 2004, 2005 and 2006, during the airline's transition from a private to public company, Christie notes.
Spirit's financial position has since improved, allowing it to renegotiate and extend leases on those aircraft with savings of up to 19% per available seat mile.
"We see this as a clear opportunity for us to adjust some of the ownership expense for those aircraft," Christie says, adding that the carrier already has an "agreement in principle" to extend the terms of some of those leases.
CONTINUING EVOLUTION TO LCC
Michael Boyd, chairman of aviation consulting firm Boyd Group International, says Spirit's fleet changes are the latest step in the airline's transformation from a financially-struggling legacy carrier to one of the industry's most profitable airlines.
Ten years ago, the words "strong finances" and "Spirit" did not go in the same sentence Boyd says.
But times have changed. "The legacy costs that they had back in the day - they are erasing those costs," Boyd adds. "Their costs of capital and cost of leases and [cost of] virtually everything will go down."
Though it has the US industry's lowest costs, Christie says Spirit's CASM isn't comparable to other carriers because Spirit leases all its aircraft, while all other US airlines except Virgin America own a portion of their fleet.
Airlines and annual reports. Data as of the end of 2012.
As a result, all Spirit's aircraft ownership expenses - which are just lease payments - are included in its CASM, while other carriers' CASMs include only a portion of aircraft ownership expenses. Christie projects Spirit's CASM would be 9.9 cents if, like US Airways, it owned about a quarter of its aircraft. CASM would decline to about 9.5 cents if it owned 75% of its fleet, a level similar to Southwest Airlines and Delta Airlines, he adds.
Spirit Airlines 20 May analyst presentation and 2012 annual report