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spk07: Thank you for standing by. My name is Bailey and I will be your conference operator today. At this time, I would like to welcome everyone to the Spirit Airlines Q1 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, Again, press the star key, followed by the number one. I will now turn the conference over to Vivian Traveris. You may begin.
spk06: Thank you, Bailey, and welcome everyone to Seward Airlines' first quarter 2023 earnings conference call. This call is being recorded and simultaneously webcast. A replay of this call will be archived on our website for a minimum of 60 days. Presenting on today's call are Ted Kersey, Seward's Chief Executive Officer, Matt Klein, our chief commercial officer, and Scott Harrelson, our chief financial officer. Also joining us are other members of our senior leadership team. Following our prepared remarks, there will be a question and answer session for analysts. Today's discussion contains forward-looking statements that are based on the company's current expectations and are not a guarantee of future performance. There could be significant risks and uncertainties that cause actual results to differ materially from those contained in our forward-looking statements, including but not limited to various risks and uncertainties related to the acquisition of Spirit by JetBlue and other risk factors discussed in our reports on file with the SEC. We undertake no duties to update any forward-looking statements, and investors should not place undue reliance on these forward-looking statements. In comparing results today, we will be adjusting all periods to exclude special items unless otherwise noted. For an explanation and reconciliation of these non-GAAP measures to GAAP, please refer to the reconciliation table provided in our first quarter 2023 earnings release, a copy of which is available on our website under the investor relations section at ir.spirit.com. I will now turn the call over to Ted Christie, Spirit's President and CEO.
spk05: Thanks Viv, and thanks to everyone for joining us on the call today. I want to start by thanking all our team members and business partners across the network for their contributions in delivering a high value experience for our guests. Spirit recently had the privilege of being named Value Airline of the Year by ATW and the most affordable airline and number two overall airline in WalletHub's 2023 Best Airline Awards. I am proud of the Spirit family who made these recognitions possible through their hard work, innovation, and commitment to serving each other and our guests. Regarding our merger with JetBlue, as expected in early March, the DOJ sued to block the transaction. The trial date has been set for October 16th, 2023. The creation of a fifth challenger to the Big Four with both low costs and low fares seems to us to be 100% aligned with the government's views on a competitive industry. So, while we are disappointed with the DOJ's decision, we are confident that we can successfully illustrate to the court the significant benefits to both consumers and employees of the JetBlue Spirit merger. Turning now to our first quarter 2023 performance, our adjusted operating margin came in better than expected at negative 6.8%, helped by lower fuel and a strong total RASM performance. Operationally, numerous weather events during the first quarter made for a challenging operating environment, and it was exacerbated by the continued understaffing at various air traffic control centers throughout the country. Lately, we've seen Las Vegas, where we are now the number two carrier, emerge as the newest hotspot as runway construction has driven unprecedented approach and departure configuration changes and ground delay programs, creating significant delays and cancellations. That said, Our team has done an excellent job minimizing the impact to our network and solving for problems within our control. In our mid-March update, we shared that we pulled about a half a percentage point of capacity from the first quarter due to an increase in the number of unscheduled engine removals. Pratt is a long-term partner and is working closely with us to help solve these engine availability issues. Unfortunately, there is no quick fix, but we do expect to see some improvement as we move throughout the year. Before I turn it over to Matt, I want to give some extra kudos to our entire Spirit team. In mid-April, the Fort Lauderdale area experienced severe flash flooding, referred to by meteorologists as a 1,000-year event, requiring a 40-hour closure of the Fort Lauderdale Airport, where we are the number one carrier. As a result of this weather event, Spirit canceled nearly 600 flights and diverted many others, disrupting travel plans for a substantial number of our guests and driving numerous complications for our crews. Despite the significant and outsized disruption to our network, our team was primed and ready to go on Friday morning once the airport reopened. The quick recovery is a testament to the diligent efforts of our entire team, as well as the innovative changes we have put in place to help accelerate recovery operations. I also want to thank the Broward County Aviation Department and the FAA for their assistance in getting the airport up and running as quickly as possible. Matt, over to you.
spk04: Thanks, Ted. I also want to thank the SPIRIT team members for their contributions during the quarter. Load factors on the peak days were quite high, and our team did a terrific job caring for our guests. Turning now to our first quarter revenue performance. Compared to the first quarter last year, total revenue was $1.35 billion, up 39.5%, and total RASM was 10.22 cents. up nearly 24% on a capacity increase of 13%. This was a great outcome and continues a trend of strong top-line revenue production. Load factor increased 3.6 percentage points versus the same period last year. As a reminder, in the first quarter of 2022, we were dealing with fallout from the Omicron variant, which had an adverse impact on flown load factors. So while load factor for the first quarter 2023 was up year over year, it was a bit lower than historic norms for the period. As noted previously, we have been flying more on off-peak days, and we have had less variability in the number of flights operated by day of week since the summer last year. However, given the technology investments we have made, together with network changes, and changing how we flow our aircraft, as well as opening additional crew bases, we are comfortable that we can begin to have a more varied day of week schedule again, while maintaining good operational performance. Beginning in June, we will start to introduce a more varied day of week schedule again, which should fuel improved load factors and benefit unit revenue as well. On a per segment basis, total revenue per passenger increased to over $127, a 12% increase compared to the first quarter of 2022. Passenger revenue per segment increased about 17% to over $57, and non-ticket per segment increased over 8% to a first quarter record of $70. Important to note for the second quarter of 2023, on a year-over-year basis, we will begin to compare our results to a period of unusually robust TRASM performance on a year-over-year basis. In other words, the comparison to last year is not a true reflection of the underlying demand strength we continue to see. It feels like we are returning to a more normalized seasonality period, much like we saw prior to the COVID-19 pandemic. In terms of our network structure, we had reduced our Latin American and Caribbean footprint to under 20% of our capacity for an interim period of time while we were dealing with a fluctuating fleet plan due to issues that Ted previously mentioned. We are now ahead of that curve again from a planning perspective, and that has allowed us to resume our growth in this region. Starting next month, we are back to having at least 20% of our capacity in Latin America and the Caribbean on a monthly basis. Taking all this into account, we estimate total revenue for the second quarter 2023 will range between $1.46 and $1.48 billion, up about 6.5% to 8%. on a capacity increase of 17.7% compared to the second quarter 2022. This equates to a total RASM estimate of down 8 to 9.3% year-over-year. As a reminder, second quarter last year benefited greatly from pent-up travel demand. So while total RASM is down year-over-year, the demand environment does remain very strong. If you were to compare this expectation to the second quarter of 2019, it equates to total RASM being up 11.5% to 13% on a capacity increase of nearly 30%, which is an excellent result.
spk10: And with that, I want to turn it over to Scott. Thanks, Matt. We'll start by covering our Q1 results and some Q2 guidance updates, and then I want to outline a few themes happening in our business today. Our first quarter operating costs were $1.44 billion, with both fuel and non-fuel expenses coming in better than expected. Fuel price per gallon was still up significantly, up 16% year over year. The good news is that we have seen fuel prices decline over the past couple of months, with crack spreads coming down over that period. The current curve implies that WTI will remain roughly flat, so let's hope that crack spreads will continue its downward trend. Total non-operating expense came in higher than estimated due to the periodic valuation of the derivative liability associated with the 2026 convertible notes, driving about $2 million of additional non-cash expense in the quarter. Liquidity at the end of the first quarter was $1.7 billion, which includes unrestricted cash and cash equivalents, short-term investments, and the $300 million of undrawn capacity under our revolving credit facility. During the first quarter, we took delivery of five A320neo aircraft and retired four A319CO aircraft, ending the period with 195 aircraft in the fleet. We are taking delivery of our first A321neo aircraft over the next week with seven more expected before year end. We are excited to be introducing this larger fuel efficient variant of the A320neo family of aircraft into our fleet. Our first A320neo aircraft will enter service, scheduled service in June. We disclosed in our investor update last night that total capital expenditures would be about $360 million with $75 million of that coming from net PDPs. We received updated delivery dates from Airbus recently, and that number is now reduced to $20 million. We will modify the investor update today. So total capital expenditures will be approximately $305 million, of which $20 million of this is related to net pre-delivery deposits, and about $150 million is related to our new headquarter facility in Dania Beach, with the remainder primarily related to engines and spare parts. We are on track to begin phasing in the occupancy of the new facilities in the first quarter of 2024. Looking ahead to the second quarter, there are a couple of items to highlight that are included in our second quarter 2023 guidance. We estimate the flood in Fort Lauderdale earlier this month cost us about $8.5 million of operating income or about 50 basis points on the margin, primarily from lost revenue. And in mid-April, we reached an amended collective bargaining agreement with our flight attendants, represented by the AFA, which adds an estimated $9 million of cost to 2Q and $24 million to the full year of 2023. Taking these items into consideration, for the second quarter of 2023, we estimate our operating margin will range between 4.5% to 6.5%. And this, along with a few other guidance metrics, are noted in the investor update furnished in our Form 8K filing with the SEC, a copy of which can be found on our website at ir.spirit.com. I mention this specifically because we are now providing our guidance in a separate investor update rather than in the body of our earnings release. So with all that said, for clarity, I want to highlight five overall key takeaways. Number one, our utilization has been and will continue to be hampered by NEO engine availability and pilot attrition, both of which should gradually improve throughout the rest of the year. We signed a new pilot contract at the end of last year that put our rates towards the top of the industry, but we have yet to see attrition rates improve to the levels we are expecting. We are disappointed, but we are assuming attrition levels will improve as the year progresses. Number two, Growth during this period of inefficiency has not been as productive as it would be in a normal environment. It is a challenge to improve profitability and recover lost utilization while simultaneously growing with more aircraft. We know that, and it will remain true in the short run. However, the growth opportunities are significant, and once our constraints are remedied, we expect a return to a creative and efficient growth. Number three, Operations are solid, and investments in the operation and changes in our infrastructure and network are paying off. Our ability to handle disruptive activity is much improved, as evidenced by our fast recovery after the sudden airport closure in early April. In the past, this would have been a much more impactful event. Number four, we estimate our full-year CASMX fuel will be about seven cents. CASMX fuels should decline throughout the year as NEO engine availability and pilot attrition improves, and we estimate our CASMX fuel exit rate for the year will be in the high 60s. And number five, we are still on track to be profitable in each of the remaining quarters this year and anticipate we will be profitable for the full year. Given the external constraints on our business, our capacity is heading towards the lower end of our full year 2023 guide of 18 to 20%. Not being able to operate the airline we want to right now is obviously frustrating. In this demand environment and with declining fuel prices, if we were operating at full utilization, the business should be producing double-digit operating margins for the second quarter. We are, however, running a great airline, and I'm proud of the way our team members are taking care of our guests and committed to handling all of the unique curveballs that are being thrown our way. So a big thank you to all of the hardworking Spirit team members. And with that, I'll turn it back over to Ted.
spk05: Thanks, Scott. The outlook for peak summer leisure demand remains strong, both domestically and internationally. Non-ticket revenue per passenger segment is robust, and we anticipate seeing a sequential improvement from the first quarter, and the setup is favorable to have a new record performance throughout the year. With our 235-seat A321 NEO deliveries beginning this month and the A319 retirements well underway, we will be gradually increasing our average gauge, which will drive efficiencies that will benefit our unit costs and fuel burn. Pilot attrition is still too high, but our new deal coupled with the unique benefits to our team members associated with the combination with JetBlue and an improving pipeline and new certificated pilots will, we expect, provide some relief in the coming years. In conclusion, While we are facing several headwinds related to staffing and fleet and have continued to grow our business in what has proven to be a particularly challenging environment, our team is doing a great job managing the volatility and making tactical adjustments to our plan. And although it may take as much as another year to get to normalized profitability, double-digit op margins are in sight, which will provide a base from which we can continue to refine and improve. And with that, Viv, back to you.
spk06: Thank you, Ted. We are now ready to take questions from the analysts. We ask that you limit yourself to one question with one related follow-up. Bailey, we are ready to begin.
spk07: At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. And we will take our first question from Dwayne Finkworth. Dwayne, your line is open.
spk12: Oh, hey, thanks. Good morning. Just on the attrition, Ted, I wonder if you might put some numbers to it. I don't know if you can talk about kind of a monthly attrition rate and what improvement you've seen versus what improvement you were hoping for and what your line of sight is for stabilization there.
spk05: Sure. Thanks, Dwayne. So when we signed our deal, we did anticipate that attrition would begin to mitigate, although we knew it would take some time. And we were pleasantly surprised with the results January, February, and March. We saw sort of an anomaly in April, which put it back into the levels we saw last year. And that's kind of made us be a little bit more conservative in our view, but we don't know if that's a one data point or not. So we're certainly not, we're still very optimistic that the results will come in the way we hope. And I think all you're hearing from us is, you know, it's still an issue. And over the course of this year, we expect it to continue to mitigate and go down. We haven't disclosed, you know, the actual rates, but I can tell you, just like we've said before, it's definitely elevated. We are successfully recruiting the number of pilots we need right now to make the airline run. But you can imagine there's quite a bit of infrastructure and training involved in handling that, that as this improves, we'll be a tailwind to costs.
spk12: Okay. And then maybe one for Matt. Just with respect to the tradeoff between load factor and yield, I wonder if you could backtrack a little bit on the first quarter. Is this an outcome that you anticipated from a load factor perspective, maybe sitting in the beginning of March? Or did you see some resistance in the month of March to high fares and And then I guess the punchline is looking forward, I appreciate your comments about day of week, you know, getting more refined on the schedule out into June. But are we taking more of a kind of load factor active approach here into the second quarter, given the experience of the first? Thanks for taking the questions.
spk04: Yeah, sure, Dwayne. Thanks for the question. Let me just start off by saying just a general statement that demand remains strong. out there. The off-peak period in Q1 performed as we had suggested on our last quarterly call. We talked about this. So this was not a surprise to us at all in what we saw in Q1. And I think it's important to add that spring break was very strong, continuing the trend of peak periods showing both load factor and yield strength. You know, for the rest of Q2, we expect the next month here to be a relatively normal, what we would call shoulder period. But then we'll ramp up, which we expect will lead to a strong Memorial Day holiday and strong June in general. Just for some added detail on that, we are anticipating through normal seasonality, we could see around one week of shoulder period demand in early June between the holiday ending and schools getting out for the summer across the system. As we all know, schools getting out generally then kicks off the peak summer travel season. I would add, though, that by comparison in 2022, that early June shoulder period that normally happens didn't really happen last year. And summer really started a couple weeks early last year from a realized results perspective, a little bit unusual last year, but everything was a little bit unusual probably last year. I'd say the takeaway with all that is that normal seasonality continues to return to the Americas, which is where we're operating, with one caveat. The off-peak periods were a little bit off normal trends, and the peaks are performing so much stronger than normal trends. We expect that to continue Dwayne, through Q2 and Q3. And I give you all that detail because this is the level that we think about this. When you talk about fare versus load factor tradeoffs, we are thinking about and targeting what we know to be shoulder periods. You don't really have a true off-peak, per se, in Q2. And as you know, Q3 doesn't really hit anything like that until you get after Labor Day. So we are targeting periods that we think need more volume. We will target those with lower fares if we need to. The Tuesday and Wednesday situation for us even like post-Easter and May, we would normally have a little bit of Tuesday, Wednesday pull-downs in those shorter periods. So a little bit of a headwind for us there. All of that will be tailwinds in the future, especially once we get past Labor Day, presuming that we'll be able to hold up with these new operating trends that we like to see. So, you know, long answer to your question, but the reality is, you know, we are still seeing some periods that need low fares. We're doing that when we need to, but we expect the peaks to be very strong. We expect the yields there to be relatively healthy as well. Last year was very, very strong, so we'll see if we can catch last year. But in general, the strength is still there. We expect to realize that.
spk12: Thanks. And just maybe one minor question. follow up there, I guess, just on load specifically, longer term, to the extent there is a longer term for Spirit, what is the target load factor that you're driving towards or that you're solving for? And again, thanks to you both for taking the questions.
spk04: Yeah, sure, Dwayne. I wouldn't say there's exactly a target load factor that we're shooting for. Clearly for us, volume, because of our non-ticket and the model in general with non-ticket revenue, Strength, higher loads does obviously help us to some extent, but what we're not going to do is just sell low fares for the sake of selling low fares. We're looking at total revenue production and we always have that in our calculus. When we have off peak periods, we will definitely drive more demand with low fares. But it can be very, very yield dilutive to try to get one more point of load factor in an already a peak period that can have pretty detrimental effects. So, we're thinking about all of that when we think about total revenue generation.
spk02: Thank you. All right.
spk07: And your next question comes from Jamie Baker. Your line is open.
spk03: Hey, good morning, everybody. Actually, just one from me today. So the takeaway feels like many of your current challenges are considered transitory, and I'm sure some of them are. I mean, globally, discount airlines still appear to have the upper hand. But the longer it takes for spirits challenges to get sorted out, you know, during that period, the more SkyMiles members get signed up, the more big three credit cards get issued, the stronger the big three international margins become. You know, I'm confident Spirit can do better and perhaps the merger solves for this, but simply doing better doesn't mean that you restore the pre-COVID margin superiority that you used to enjoy. So I guess I can see a path towards improvement but not a restoration of consistently superior margins to those of the industry. What am I missing?
spk05: Thanks, Jamie. You know, plenty of loaded questions in there. You know, look, and thanks for your expression of confidence. We agree with you that while it is a challenging environment right now, we do have line of sight to addressing the issues that get us back to the margin production we expect. And it's hard to say what the future will be from a normalized perspective when you compare a more legacy product against a low-cost product. You really don't know right now what will happen with the macro economy, what will happen with capacity. What history has told us is that in times of very strong premium demand out, you know, large legacy carriers do relatively outperform. And then in down cycles, low cost carriers tend to outperform. But the good news is that low cost carriers, when they're operating at peak efficiency, are the most resilient models in the business. And that's really what we're pushing towards. You know, I mentioned that double digit op margins are well within sight at this point. That's still not where we would target ourselves. We're usually looking at a number that's more towards the mid-teens level on the op side. And so it's incumbent upon the management team to start to refine the way we get there once we kind of cross the hurdle of getting into the double-digit territory. And I think we have ways to do that. You know, I've mentioned a couple of them on this call and prior, that as our airline matures through this phase, we're going to start picking up real margin points in our fuel burn effectivity. We're moving more and more towards NEO aircraft faster than any of the big four. which relatively will pick up absolute margin points, probably based on our calculations somewhere between one and two relative to where everyone else is today. You couple that with the unit efficiency of the larger gauge airplane in this demand environment where it is basically untapped demand, we should see relative efficiency in the way that our more fixed costs are spread, the cost of the airplane, the cost of the crew on board the airplane, the way that our fixed costs at airports are distributed are charged. And all of those things create margin efficiency, which we expect we will claw back incremental points that way as well. And so, you know, we will be and are tackling those to get us back to the kind of target way we think about things. Will that be the best margin in the business? Don't know. I think that, you know, as I said earlier, I think it's a pretty good season right now to be a legacy carrier, but that's not always true. And so, you know, we'll just have to do what we do best, which we will do, and see how the rest of the industry shakes out.
spk03: Okay, thanks for that.
spk02: I'll yield the floor. Appreciate it.
spk07: Yep. And our next question comes from Savvy Sight. Your line is open.
spk13: Hey, good morning, everyone. This is Matt on for Savvy. First question, I think you just talked about how you're expecting utilization to trend throughout the year. particularly what rates are embedded into that 4Q exit rate and the high sixes?
spk05: I can start. This is Ted, and, Scott, feel free to jump in. So, you know, we've been saying all along we're on a steady march here to a more normalized fleet utilization, which would be, you know, total aircraft divided by block hours and – or, excuse me, total block hours divided by total aircraft. And right now, that fleet number is artificially penalized with the number of aircraft on ground we have in the NEO fleet because of the engine issues, which we expect to start to move in the right direction, but won't be fully remedied by the end of the year based on our current expectations from Pratt. So full utilization in the fourth quarter for Spirit. used to be lower than average utilization for the year. It's a lower utilization quarter, but it's somewhere on a fleet basis in the high 11s, so 11.6, 11.7, 11.8 hours per day, 11.8 hours per day. We're still sort of moving in that direction and expecting it pretty close to that number by the end of this year, but that's artificially limited by the number of aircraft we have on the ground right now, and we're expecting in there to continue to see crew attrition mitigate that'll help us catch back up. So next year we'll still have some recovery in it, but we're definitely moving in the right direction.
spk10: Scott, you want to add anything? No, that's exactly right. Q4 is typically lower, just seasonality is the point there. But like Ted said, we won't be back to full capacity in Q4. Even if we do reach historical Q4 levels, which are generally lower, we won't be at what we would call, you know, full capacity. So, we would expect that to happen as we enter 2024, but Q4 will be close to historical utilization levels.
spk13: Okay. That's very helpful. Thank you both. And maybe if you could just, on the operational front, maybe provide an update what you're seeing in Florida in terms of ATC there, and then also any additional color on Vegas, how long you expect that to persist. Thanks again.
spk05: Sure, thanks. So the good news is we are seeing some progress in Florida and that's excellent news for SPIRIT given the exposure we have here and how important Florida is to us. In fact, based on the FAA's own data, delay minutes in the first two months of this year versus the first two months of last year are actually down in both the Jacksonville Center and the Miami Center, the two most important routing centers in Florida, which is a positive trend. I suspect some of that is related to gently improving staffing, although not fully staffed in those centers. But also the airlines have reacted by having less capacity. So it's beginning to have the effect. So that's the good news. The bad news, however, is that in the Northeast, we're going to have a very challenging setup this summer. And we've seen the FAA voluntarily or ask the airlines to volunteer to not operate slot positions in the slot-controlled airports. And I know some of the larger airlines who operate there are partaking in that. We will have a very small presence of doing the same because we're relatively small in that area. But that's going to be a challenge. And I believe I heard JetBlue mention that staffing there is nearly half of what they expect it to be or what it was even in 2015. So that's not a good setup. And then in Las Vegas, When we look at the same data compared to the first two months of 2022 versus 2023, delay minutes are up 1600%. That's not 160%. That's not 16%. That's 1600%, which is driving real problems for the larger airlines in and out of Vegas. And while Vegas, we are the number two airline in Vegas, it represents about 25% of our domestic capacity. So there's runway construction there, which will, move through the summer. And once that's done, we hope that that's a step in the right direction. But we're going to see challenges in and out of Vegas probably through the remainder of the summer. And that kind of leads me to a thought, which is, you know, over the last decade or so that I've been at Spirit, and I imagine even prior to that, and I know most airlines have been doing this, we have been actively lobbying the government for significant investment in the air traffic control system to take the United States back into a premier position and increase efficiency across the network, which is good for the environment because it will reduce fuel burn. It will improve the utilization of slot-controlled airports today. There is room at airports in the slot-controlled areas. It's just that they're restricted because there's not enough airspace, but an improved air traffic control system will improve that. And what that does is free up capacity for low cost carriers, which will stimulate competition. All those things are very much aligned with what they say they're doing, but they're not doing that yet. And so we as a carrier, we're advocating for that. And we said, well, if we can't get better competitive hold on the industry that way, then help us in real estate constrained airports, these large legacy hub airports where The incumbent carrier is very inefficient in the use of their real estate, and we're the opposite of that. And we're saying to the Department of Justice and the Department of Transportation, hey, help us figure out a way to free up some of that real estate so we can enhance competition that way. And we've routinely been told, no, we can't do anything there. So then we go to our third option, which is, well, I guess we need to get bigger because scale is the best way for us to compete with these dominant airlines that control 80% of the capacity in the United States. So we've been getting bigger over that decade, obviously, dramatically so, but it's not happening fast enough. They continue to use the power of their networks to stifle our growth and our effectivity, and it's And it's something that we try to tackle every day. So instead, we did the next best thing, which was we decided we're going to merge with another airline. And they're saying they're going to object to that, too. It's quite frustrating for us around here where we say we're trying to stimulate competition and we've come up with real ideas and it's not happening yet. So as I said in my prepared comments, I think we have a really good path towards a stronger fifth competitor. which will still be half the size of the fourth competitor, but one that can actually start to create competitive balance in the industry. And I think we'll lay out a very successful case. But in the meantime, we will be looking for the government to find ways to improve the air traffic control system and to provide more access for low-cost carriers at constrained airports.
spk02: All very valid points. Thank you, Ted.
spk07: And our next question comes from Stephen Trent. Your line is open.
spk09: Yes, good morning everybody and thanks very much for taking my questions. Just one or two for you actually. So the first, you mentioned that 20 some odd percent of your capacity should be back to Latin America and the Caribbean, I believe. And any high level view on how the weighting of that deployment may have changed versus where you guys were in 2019?
spk04: Yes, Steven, it's Matt. So a lot of our growth from, say, 18, 19 into today, we had our very successful Fort Lauderdale franchise heading to South America, Latin America and the Caribbean out of Fort Lauderdale. Late 18 into 19, we started to grow Orlando South as well. So a lot of the growth initially started in Orlando. And then throughout the last few years, we've really seen a relatively large increase for ourselves. And what you call some of its sort of tourist leisure, like Cancun, and other growth has been in what we would call VFR traffic, which to some extent you can call Puerto Rico, both tourist and VFR. So we've really grown a lot in Puerto Rico as well. And we're continuing that growth with some new routes actually starting next month and into the summer as well. So we're excited about all that. The advanced bookings look strong there for us as well. And it really continues along where we do well and our model works great. Low cost, lead the low fares, and it's great, especially for VFR traffic, so we can create travel opportunities for people that may otherwise not have them.
spk09: Appreciate that, Matt. And, you know, really also appreciate your guys' comments on the regulatory situation. I'm just curious, in that regard, I know you reached an agreement with the pilots. You're still seeing some attrition. do you think that it's going to be necessary for regulatory-related steps to help soothe the situation? I know there was kind of a proposal out there to raise the retirement age of pilots and this kind of thing. And, you know, anything else you think that the regulatory side could help in terms of pilot supply? Thank you.
spk05: Sure, Stephen. This is Ted. Yeah, so on that front, obviously the airlines have been – advocating for some changes there. And I think you mentioned one of them, which is a move in the retirement age, which would really act as a short-term buffer as, you know, retirements in the industry are going to be peaky here for the next two or three years. But the other has to do with the way that training and experience is gained for pilots. And there's some discussion about, you know, the minimum of 1,500 hours, how you achieve those 1,500 hours. Are certain hours worth more than other hours? You know, so if you spend time in a dual-engine airplane, for example, or you spend time in a simulator or you're doing things, are those hours potentially worth more than if you're flying a single-engine airplane? Those types of debates are out there and going on, and I think that we're certainly supportive of that kind of thing because we see that there is tremendous demand for people who want to be professional pilots. I think that that is absolutely happening. The career is a very attractive career, and there are now considerably more avenues for private individuals, not members of the military, because we are seeing considerably less pilots come out of the military than we used to have, for private individuals to gain their certification and become a certificated commercial pilot, but it still takes a while, and it's expensive. And so there are ways for the government to ease that, either in the speed at which they gain their certification, or allowing the application of 529 programs for pilots who want to use that to gain their experience. There's a number of things that we believe and are being advanced at the government level will help the industry because, again, at the end of the day, what we're really talking about is competitive fares for travelers. We as an industry are limited today on how much capacity we're deploying. You're seeing it in small communities. where regional providers are actively cutting capacity because there are no pilots to serve. And so getting more pilots would be good for the consumer, it would be good for fare levels, and it would be great for us because we can continue to expand and probably expand to those markets that are now vacated, which is a tremendous opportunity going forward.
spk02: That's super helpful. Really appreciate that, Ted.
spk07: And our next question comes from Connor Cunningham. Your line is open.
spk08: Everyone, thank you for the time. Just around your growth as we think about next year, a lot of these constraints feel a bit stickier. I know that some of them are a bit of a one-time item, but just maybe it would be helpful if you could provide some context on how fast you plan to be growing as you exit 2022. I mean, again, like when I think about your original capacity plan, you know, in August of last year, it's basically half the size of what you wanted to grow, so you lost a fair bit. So just trying to understand your growth algorithm as we think about 2024 and beyond. Thank you.
spk05: Sure, Connor. I'll start. Scott, you can correct me where I'm wrong. So I disagree with you that the constraints are sticky. I think, you know, the horizon by which you consider them may be the debate. But over time, our fleet will get remedied. You know, we will have a full utilization of the fleet probably over the next year. And and when we do that, that fleet will be the most fuel efficient and the youngest fleet in amongst the youngest fleet in the world, which will provide us with significant benefit on the maintenance side and the reliability side. So I do think that that's that's obviously an active constraint right now. It's one that's very frustrating for us. But I think that that does get remedied because that's purely engineering and throughput in that side of the business. And those guys are experts at solving that problem. The secondary constraint is labor. And, you know, clearly we've all learned that the pandemic was a generational disruption in that regard. And I don't think any of us did a good job at forecasting the impact of that. And we're all reaping the benefits of choices that had to be made during there to preserve the vast majority of jobs, to keep the industry healthy, to have capacity available for people who wanted to travel when there was limited or no demand. All of those things are now bearing fruit. And it's working its way through the system. Supply and demand will eventually intersect. There is a considerable number of people who want to be professional pilots. We see it in the number of people who are filing for their licenses. They need to work their way through the system, which will take some time. We have a lot of pilots retiring. They're reaching the maximum age, which is a downward pressure on that. But again, that will rectify. And once it does, those two constraints are lifted. Don't know exactly when they happen, but I don't think they're sticky.
spk10: Yeah, maybe a third component of that, Connor, is supply chain and really in regards to aircraft. You know, obviously we've talked about delays in deliveries, and they've been relatively small. I mean, we're talking, you know, over the 22 to 24 period, about 10 aircraft get moved out of that period. So it does help smooth deliveries a bit. I mean, we'll take 24 deliveries this year and plan for, you know, 37 deliveries next year, of which, you know, 23, 24, those would be A321. So we'll still see significant capacity growth next year in terms of fleet size and a return to utilization. So the numbers, you know, we haven't given yet, but it will be considerable, you know, as we think about next year. But supply chain will help smooth deliveries, and that will, you know, kind of give us a little bit of a reduction as we think about next year, smoothing into 25 and 26. But All those three things together, a return to full utilization, whatever we call full utilization at that time, and a return, you know, or at least a predictable supply chain of aircraft will be a component. As well as, you know, we talked about the 319 retirements. Those will also be, you know, in our calculus as we think about capacity growth. But all that sort of yields a capacity growth of some significant number next year. Okay.
spk08: That's helpful. And then I'm still, Matt, maybe this is to Matt, I'm still a little surprised on the implied unit revenue guide for the second quarter. I mean, I totally get the comp issue. That makes a lot of sense. But relative to some of your peers, you're underperforming a bit. So I was just curious if you could, you know, unpack that a little bit more. I know Dwayne talked about the load factor, but just is there anything else within the network that we should be aware of that is kind of impacting the second quarter specifically? Thank you.
spk04: Yeah, I think I touched on it earlier. Really, these shoulder periods are a little bit weaker than we've seen in the past. The peaks have been very strong. So we're comfortable with all that. We recognize that our guide is a little bit below what others are talking about. Some of that is still the way that we have the network set up by day of week. So there is still a little bit of a drag. in there for that. Last quarter, for example, in first quarter, some of the drags we had out there, we had predicted be about one and a half points of TRASM drag and actually came out to be just about right on top of that number we calculate. And that has to do with some of the things Ted mentioned too with the Jacksonville Center constraints that we've seen in there. Day of week flying is still not exactly where we would like it to be. These will all become tailwinds for us as we think they will be by the time we get to the end of this year into next year. So we're still dealing with that a little bit. Overall demand just remains strong. And really last year, part of what we're looking at here is we're comping our own incredible strength last year as well. So we took a very large step up in unit revenue production as well as capacity growth last year. So we are comping a period that is incredibly strong. I mean, I'm not 100% updated for other airlines that reported this morning, but our top line growth versus second quarter of 19 is going to be up 45%. versus second quarter 19. So we are growing. The revenue's there. It looks, in this one metric, it looks like we're behind the industry year over year. But if you go back to pre-COVID to today, we're performing very well.
spk05: I think that last point, this is Ted, that last point that Matt made is one of the most important ones. It's difficult to precisely calculate, but coming out of the Omicron variant, which really depressed Q1 last year, Q2 screamed. And where did it scream? Florida. Because nobody was going international yet. And where are we biggest? Florida. And I think we reap the benefits of that, which we're thrilled about, by the way. So New York, the Northeast, those things didn't do very well last year in the second quarter, and they're probably going to do better. So I think that what you're seeing is the abnormalities of the exit of COVID starting to work its way into normal seasonality. which is why you got to smooth it a little more than just year over year. Okay.
spk02: Appreciate it. Thank you.
spk07: And your next question comes from Helene Becker. Your line is open.
spk00: Thanks very much, operator. Hi, everybody. Thanks for the time, team. Can you say how much of, this is for Matt, how much of second quarter is already booked?
spk04: Helene, we don't comment on that. We never have historically, and we're not going to start today as well. Sorry about that.
spk00: No, that's quite all right. So my second question then is if you can talk about the number of aircraft that were grounded during the quarter because of engine issues. And if you get the sense that Pratt says, well, we'll just give you an engine this week and kind of to keep you quiet. And then when you complain loudly again, they give you another one, as opposed to really having a plan for delivering as they're supposed to.
spk10: Yeah. Hey, Elaine. Good question. So, it's been volatile through the quarter and to date, you know, in the second quarter. It's bounced around from sort of three aircraft to six aircraft. And we work with Pratt on forecasting, you know, the fly forward to see what engines we expect. Obviously, we have our own FOD issues occasionally that may drive something and turn times of engines that are in the shop, those exiting. So all those variables create volatility in the number. But we're probably going to be looking at five, six aircraft as we think about heading into the summer. We'll see what what happens after the second quarter. But it's going to be something that's not a quick fix, as we mentioned in the prepared comments. It's going to continue through the summer into the fall and the end of the year. So we'll probably, you know, be dealing with this for the next, you know, sort of seven, eight, nine, ten months. And we'll have to see where both throughput of shop visits and production from Pratt ends up, and we'll have to see where we end up.
spk00: Okay, thank you very much. And since I got shut down on my first question, can I ask about the new corporate headquarters and how we should think about the spending for that, you know, where that shows up? Is that included in numbers you've already given us? And what percent of it is complete?
spk10: Yeah. So, Helene, from a CapEx perspective, we'll spend about, you know, $150 million or so. And we're probably, sorry, this year in CapEx, to clarify. And we're probably, you know, 60% spent and developed on the property. We'll spend in total, including what we've already spent, which is we bought land in 2019 of, you know, 40 something million, and we'll spend some know this year as well so we're probably in uh put a 200 million ish probably a little more than that actually um and we'll spend some that'll spill over into 2024 but the total cost is you know probably in the 275 280 range and we spent you know you know 60 70 of that today and we're probably on a completion of the facility in a similar number okay that's very helpful thank you
spk07: And our next question comes from Mike Lindenberg. Your line is open.
spk01: Oh, hey. Good morning, everyone. Hey, Matt, I have a question just on distribution through Google Flights, the price guarantee program. I did see that you're one of the few airlines that seems to be testing it out, I guess. Any early reads, and I guess maybe just a bigger – question here is that we are seeing a lot of different alternative forms of of being able to sell tickets and it's you know given your low cost it does seem like these platforms that are out there may be lower cost than than anything except i guess other than direct um what are your thoughts on it and just maybe the evolution here um any color would be great yeah sure mike
spk04: So just to be clear, the product you're referring to on Google with their guarantee, that's something that Google is doing on their own through their own algorithms and their own analytics. So we are not specifically participating in that guarantee. That is something that Google is doing on their own. But it leads into your second part of your question there, which is about having – this NDC new distribution capability distribution of our product and our content. And partners like Google are very good partners in that. And they're ingesting our content. And they're not the only ones. There's a lot of progress that we've made on this topic. This has been something that's been going on for seven, eight years of a journey. And a lot of other airlines are starting to talk about this in terms of progress that they've made recently. We made all this progress really before COVID and through COVID. So we're very comfortable with understanding how this new distribution capability works. And it's great for us because it gets more of our product out in front of our customers further in advance of travel. So whether the customer wants to, say, for example, add that big front seat to their itinerary up front, It's not necessarily that they add it right away, but the fact that they're introduced to it or that they see it more often leads to better take rates later on. Better take rates will then lead to better blended rates, as we call it, or the price of the service charge down the line. So more engagement leads to more volume, which should lead to better yields, which leads to overall better revenue production. That's the idea. And we think it's great that other airlines are starting to catch up on that because the more ubiquitous this becomes for the industry, just the better distribution is overall for customers.
spk01: Matt, it's sort of along those lines. If I were to go back, I don't know, 15, 20 years, it would seem that the majority of what was purchased was purchased at the first point, you know, 90%, 100%. Maybe you bought a soda on an airplane and, you know, a bag of chips. For you guys today, like what percent of your revenue is actually purchased maybe in that second or third or fourth transaction? That's got to be moving away from that initial, not just ancillary, but I'm thinking things like car rental, hotel, et cetera. That's got to be shifting to the right, right?
spk04: Well, Mike, yeah, Mike, it is. We don't. We don't talk about the metrics publicly that you just brought up, but you bring up a great point, and you're following on to it perfectly. That's exactly how we think about distribution. And the more engagement – look, this is why – we're not the only ones. This is why apps are important. The more engagement you have with your airline-specific app, just the more that you're introducing product to the customer. And that's why we've spent a decent amount of investment in getting our technology up to speed and really improving from where we were, say, five, six years ago to today from a technology perspective for guest-facing technology is night and day from where it was. And we do think it's important, and we do expect there to be a lot more improvement on that front as we move forward. We still, as great as our progress has been, we still have a lot of opportunity to still capture there. Great.
spk01: Thanks. Thanks for answering my questions.
spk07: And the final question will come from Dan McKenzie. Your line is open.
spk11: Oh, hey, thanks for squeezing me in. My last two questions really sort of put a fine point on some of the ones that were asked before. And, you know, just going back to the release and the outlook for improving margins throughout the year, Is it really just utilization and cost-driven, or is there some network normalization that can contribute to RASM and margin improvement as well? And I guess in the past, you shared that the network this summer was going to be suboptimal just given the air traffic control understaffing in Florida. You guys have addressed that. You talked about Latin America, but I guess just higher level, I'm wondering where the overall network stands. what kind of revenue penalty, if any, is embedded in the second quarter outlook? And if the network evolves to get planes where you want them, if that's going to help you drive better unit revenue later this year.
spk05: Sure, Dan. This is Ted. I can kick off. Matt, you feel free to offer anything. But I think you're right. We're definitely seeing improvement in, at least as it relates to Florida. And we're getting closer on a percentage basis to to pre-pandemic network percentages in and out of Florida. However, given the demand strength of Florida, we probably want to do more. And so we still are artificially limiting ourselves in and out of Florida. It's probably another point on the margin right now, by the way. And so it won't get better immediately because we're going to watch how things operate throughout the course of the summer in the peak. And then we head into the fall, and if we have good signs, that'll allow the network team to start to relax a little bit more in and out of Florida. So there's definitely still room to go there. You heard Matt mention about Latin America. We are excited about opportunities that continue to evolve there, and that will be a tailwind to us as well. So to the first part of your question, margins improving throughout the course of the year, which is our current view, it is a mix of utilization, improving the overall marginal throughput of the business because you're getting just a better spread on unit cost and unit revenue. And that's some of it. But the rest of it is continued optimization of all the things that kind of hammered us during COVID, which was, you know, throttling the network in certain geographies and inserting a lot of buffer in the system to make sure that we had the ability to recover while we were deploying new technology and new processes in our scheduled planning process. So a lot of block pad and a lot of turn pad and a lot of crew buffer in and out of tougher geographies that, again, as we learn more and deploy the right systems and processes, which appear to be working, we can start to relax some of that and you gain more efficiency that way. So it's sort of all in there. We think utilization is amongst the biggest lever, but those other things are meaningful too.
spk04: Yes, and one thing I would add to that too is in order to try to run even more efficiently, especially maneuvering through some of the air traffic control issues this summer, we're We took an approach to extend our stage. Our stage had kind of shrunk in a little bit for about six months or so, and we're pushing that stage back out so we can produce the capacity, produce the available seat miles on less departures should help us overall from navigating through air traffic control a little bit better. So that's an example of something that you know, we don't talk about that much, but that's an example of trying to find more creative solutions to some of the constraints that are hampering us and hampering the industry for that matter.
spk11: Yeah, very helpful. And, you know, staying on that point here of, you know, double digit margins in the path back there, you know, you guys have done a great job today detailing the, you know, the transitory issues in a resolution, but Yeah, just going back to an earlier question, you know, is it possible to put some loose brackets around, you know, how transitory they are, you know, three to six months transitory, one to two years, you know, and, you know, are the pieces there to get you to your double-digit margins next year?
spk05: So we don't know for sure, and that's part of the frustration because they are somewhat outside of our control, you know, most notably on the fleet side, but we are encouraged to by what our partners are doing to remedy the issue. Although, as Scott mentioned earlier, we expect the fleet to continue to have penalty throughout the course of the summer at the levels we're seeing right now, and it really won't start to improve until probably the third or fourth quarter. But the reason for that delay is that we are seeing significantly more engines input into the shop, and those should start to spit out in the fall and winter of this year, which, assuming all of that executes well, then we can start to gain in some confidence and probably do a better job at bracketing it for you. But based on the current plan, we should expect, you know, improvement through this year and into 2024 on that side. On the pilot side of things or the, you know, the broader staffing side of things, we're just going to have to digest a little bit more intel before we can call it for sure. We've only had our new deal in place here for about three and a half months. And We do have a looming transaction with JetBlue, which we think will be highly accretive to all constituents, our team members, the consumer group, and our shareholders. And when that uncertainty is removed, I think that's going to be a natural stimulus for any staffing challenges we face. And so there's probably some of that in there as well. So I wish I could put exact terms to it, but it does feel like it's over the next year or so. as we claw our way back.
spk11: Perfect. Thanks so much for the time, you guys.
spk07: And there are no further questions at this time. I will hand the call back over to Ms. Vivian Traveris.
spk06: Thanks, Bailey. And thank you, everyone, for joining the call today. Please contact Investor Relations at investors.relations at spirit.com if you have any further questions. And we look forward to talking to you next quarter.
spk07: This concludes today's conference call. You may now disconnect.
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