Spirit Airlines, Inc.

Thank you for standing by. My name is Adam, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Spirit Airlines Q2 2023 earnings 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, press star one again. Thank you. I would now like to turn the call over to Vivian Tavares, Manager of Investor Relations. Please go ahead.

Thank you, Adam, and welcome everyone to Spirit Airlines' second quarter 2023 earnings conference call. This call is being recorded and simultaneously webcast. As soon as it is available, we will archive a replay of this call on our website for a minimum of 60 days. Presenting on today's call are Ted Christie, Spirit'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 duty 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 second 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.

Thanks, Viv, and thanks to everyone for joining us on the call today. I want to start by saying thank you to our entire Spirit team and our business partners for their commitment and dedication in caring for our guests and minimizing the negative impact from the rash of thunderstorms that have plagued us here in the Fort Lauderdale area and across much of our network in recent months. And while our reported DOT operating metrics for the quarter were negatively impacted by all the weather events and a plethora of air traffic control initiatives, our controllable completion factor for the quarter was very good, coming in at 99.7%. Turning to our second quarter 2023 financial performance, Operating margin was 3.3%, about two points below our initial guide. Total RASM for the quarter was strong and well above pre-COVID historical averages. However, demand for the peak summer travel period has not built as we expected, resulting in lower fare levels. We are comparing to a period of exceptionally strong domestic and near field international demand in 2022, while at the same time seeing a dramatic demand shift away from these regions towards long haul international. Inclement weather and ATC disruptions in the peak part of June also contributed to the lower TRASM. These demand and pricing trends and difficult weather continued throughout July and are expected to continue into the fall. However, once the international summer travel season ends and kids go back to school, we expect demand will shift back towards domestic. This should mean a more normal pricing and demand environment for the peak holiday travel periods in the fourth quarter. Before Matt and Scott share further details about our second quarter performance and forward outlook, I want to update you on our issues with the GTF engine that powers our NEO fleet. Last week, RTX shared that Pratt & Whitney had recently discovered a quality control issue during the manufacture of a disc on NEO engines produced primarily between Q4 2015 and Q3 2021. Out of an abundance of caution, Pratt has identified an initial 200 engines for accelerated inspection, and we were told that we had up to 13 engines in this group. The current plan is to begin pulling these engines from service after Labor Day, which will result in seven NEO aircraft being removed from scheduled service. This is above and beyond the current set of aircraft on ground, or AOGs as we refer to them, which as of today sits at seven aircraft. For planning purposes, we are assuming these seven additional aircraft will be out of service post-Labor Day through the end of the year. Matt will discuss this impact in more detail, but the close-in nature of the schedule reduction does have a significant impact on revenue for September. It is worth noting that Spirit is the largest operator of GTF-powered NEOs in the United States, with the highest number of engines produced during the 2015 to 2021 period. Exposure to this issue is very unique and material for us and is having an impact on our margin. We should know by mid to late September how many of the additional 1,000 engines Pratt has identified for inspection are ones we operate. Timing for the engine inspections on the next 1,000 is not yet known, but we believe it likely the inspections will need to be performed before the end of September 2024. Pratt has indicated that some of the 1,000 engines may already be scheduled for removal in 2024, so the net incremental impact may be smaller. However, we will learn more in September. We are still managing through a significant number of unscheduled NEO engine removals due to an assortment of issues previously disclosed and discussed. Throughout the second quarter, we had six and currently have seven aircraft out of service and have assumed the same for the fourth quarter. That said, our maintenance planning team is gaining confidence that by the end of the year we should see this count reduce, at least temporarily, to about four aircraft. And while unscheduled removal should ease as we enter 2024, unfortunately next year we have a large spike in the number of scheduled NEO engine checks as a result of a short time life limited part, which means that we will have the equivalent of at least 10 aircraft out of service during most of 2024. This, of course, doesn't include any additional aircraft we will have to ground as a result of the latest engine issue. This new issue is yet another frustrating and disappointing development. RTX has promised to make the airlines affected by this new NEO engine issue whole. And for now, we intend to take them at their word and use that assumption in our planning. The details and timings of those reimbursements are unknown as of yet. We'll keep you posted as we get further updates.