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Spirit warns of cost creep, reliability woes as Q2 profit jumps

Spirit Airlines forecasts higher costs and more cancelled flights for the rest of 2019, though it aims to reconfigure schedules to account for challenging weather as it expands to new markets.

The warning comes as the airline reports earning $114 million in second quarter net profit, up from $11 million in the same period last year. Spirit reports $1 billion operating revenue for the second quarter ending 30 June, up 19% year-on-year from $852 million.

During the second quarter the airline spent $6 million to rebook passengers following operational disruptions caused by an April storm, Spirit chief executive Ted Christie says during an earnings call on 25 July.

Reducing the number of pilots held in reserve while increasing aircraft utilisation amid network expansion backfired during the second quarter ending 30 June, says Christie, who in January succeeded Robert Fornaro as chief executive.

“In developing our summer 2019 plan, we tried a few things to improve overall efficiency and profitability,” Christie says. “Admittedly, we were over-aggressive in our assumptions about weather disruptions this year which, when coupled with our changes, exacerbated the level of flight disruptions we’ve been experiencing.”

Looking ahead to the third quarter, Spirit estimates its total revenue per available seat mile (RASM) could change 1% to negative 1% year-on-year. Cost per available seat mile (CASM) excluding fuel for the third quarter is expected to rise 7-8% compared with the third quarter of 2018.

In the fourth quarter, the airline projects CASM excluding fuel could rise 3.5-4.5% year-on-year. For 2019, CASM excluding fuel could rise 4.5-5.0%, diverging from the company's past estimate that CASM could rise 2-3% compared with 2018.

The Miramar, Florida-based ultra-low-cost carrier will optimise crew and flight schedules after the end of the summer season on Labor Day.

“While we are not satisfied with these results, we have a firm understanding of the inputs driving the cost pressures," Christie says. "We are confident the refinements we are making will set us up well for 2020.”

GROWING PAINS

The airline is adjusting its forecast in part to account for the mixed performance of cities added to its network in 2019, including Burbank, Charlotte and Nashville. It serves the Caribbean and aims to eventually begin service to Canada, but Christie says "we are primarily a Florida airline, and that will not change".

Spirit's RASM rose 5% to 9.4 cents, up from 9 cents in the second quarter of 2018. The airline's adjusted CASM excluding fuel and special items rose 4.6% year-on-year, from 5.17 cents to 5.41 cents.

Aircraft fuel expense increased in the second quarter 2019 by 7.6% year-on-year from $246 million to $265 million because of increased fuel consumption on routes added since 2018.

Operating expenses surged 14% year-on-year from $743 million to $849 million.

New markets that Spirit entered since 2018 had mixed results, with RASM increasing slower than expected on some routes. But Christie says the airline is generally pleased with growth looking ahead to 2020.

The airline on 25 July adjusted its capacity growth forecast to 14.5% for 2019, down from its previous year-on-year guidance of 15%.

Spirit's fleet consists of 135 Airbus aircraft, including two A320s the airframer delivered during the second quarter. The carrier expects to take delivery of 10 additional A320neo-family aircraft by the end of 2019, four aircraft in 2020 and nine in 2021.

In response to the quarterly report, Deutsche Bank analyst Michael Lindenberg downgraded Spirit's rating from buy to hold.

JPMorgan aviation analyst Jamie Baker says in an investor note that "Spirit’s ability to control its cost structure, at least in the near term, has been called into question".

Source: Cirium Dashboard