US discounter Spirit Airlines is bracing for a greater first-quarter loss than previously anticipated due to how it is accounting for $150-$200 million in compensation from Pratt & Whitney (P&W) for its grounded Airbus A320neo-family aircraft.
Spirit disclosed in a 15 April filing with the US Securities and Exchange Commission that, rather than offsetting Spirit’s other operating expenses during the three months ending 31 March, compensation from P&W affiliate International Aero Engines will be accounted for as “vendor consideration… and will be recognised as a reduction of the purchase price of the goods and services acquired from [International Aero Engines] during the period”.
The credits will go toward cost of engine maintenance, as well as engine purchases and short-term rentals.
“This accounting treatment will result in delayed recognition of a significant portion of these credits in the company’s consolidated statement of operations because they will be initially recognised as a reduction to the cost basis of capitalised maintenance and/or spare engines,” Spirit says.
Only $1.6 million of credits with International Aero Engines will be recognised in the first quarter, rather than the $38 million Spirit had previously expected.
As a result, the carrier now expects a first-quarter operating loss of $216 million and a net loss of $148 million, compared with previously anticipated losses of $203 million and $137 million, respectively.
The ultra-low-cost carrier (ULCC) forecasts $1.3 billion in total operating revenue during the period, flat with its previous guidance, and an operating margin of negative 13.5%-14.5%.
On 26 March, Spirit entered into an agreement with International Aero Engines to provide Spirit a monthly credit through year end as compensation for the grounding of “nearly all” the Airbus A320neos powered by PW1100G geared turbofans (GTFs) in its fleet.
The ultra-low-cost carrier (ULCC) has previously said it expects an average of 25 aircraft will be grounded at any given time in 2024, and that an average of 40 jets will be grounded during the fourth quarter.
The Florida-based ULCC had been anticipating such a package for several months as its fleet has been among the hardest-hit by component defects resulting from problems with a powder-metal manufacturing process. The issue requires more than 1,000 engines be removed from wings for inspections and part replacements.
The final total provided by International Aero Engines will depend on the “number of days accumulated in 2024 in which Spirit aircraft are unavailable for operational service due to GTF engine issues”, Spirit said on 29 March.
The carrier has framed the engine maintenance credits as an initial round of compensation, with more to follow for “aircraft that remain unavailable after” 31 December.
‘WORST IS OVER’
Spirit has made a series of financial manoeuvres to right itself following the collapse of its proposed acquisition by rival low-cost carrier JetBlue Airways, which prompted some industry analysts to sound alarms over the carrier’s apparently shaky financial health in the deal’s absence.
Earlier this month, the carrier said it was deferring delivery of new A320neo-family jets that had been scheduled for delivery in 2025 and 2026, and also plans to furlough 260 pilots starting on 1 September.
”These actions, along with other actions it took late in 2023 and earlier in 2024 to raise additional capital, significantly improve Spirit Airlines’ short- and mid-term liquidity outlook,” says Steve Segal, a mergers and acquisition attorney in Buchalter’s Denver office. ”A strong summer travel season would also help shore up the balance sheet and add optimism for a return to profitability.”
Xavier Smith, director of research, energy and industrials at AI research start-up AlphaSense, told FlightGlobal earlier this month that Spirit’s financial distress was likely overstated to begin with.
“Since they got left at the altar and that merger was cancelled, I actually think that the worst is over for this company,” he says. ”I am anticipating this company to be in retrench and survive mode, and that these actions will lead them closer to profitability.”
Smith believes that the likelihood of Spirit’s bankruptcy and liquidation is low – especially if it continues to cut costs. To that end, it will likely continue trimming its workforce.
“I think they’ll be getting rid of a lot of workers that they had in anticipation of growth they’re no longer going to have,” Smith says.
Along with other ULCCs competing for domestic market share, Spirit has signalled that it will be shifting its network strategy away from oversaturated markets, such as popular vacation destinations in Florida, “toward markets that need their services”.
“As they shift into some other markets, we will see some more strength in their profitability, as well,” he says.
Spirit estimates that, by the end of the first quarter, it will hold $1.2 billion in cash and equivalents, including $300 million of liquidity. The carrier will discuss its first-quarter financial results during a call with investors on 6 May.
