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spk15: Thank you for standing by. At this time, I'd like to welcome everyone to the Spear Airlines second quarter earnings conference call. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star one on your telephone keypad. Please ask only one question, followed by one follow-up question. Thank you. I'd now like to turn the call over to Deanne Gable, Senior Director of Investor Relations. Please go ahead.
spk05: Thank you, Adam. And good morning and welcome everyone to SPIRIT's second quarter 2024 earnings conference call. Presenting on today's call will be Ted Christie, our CEO, Matt Klein, our Chief Commercial Officer, and Fred Cromer, our CFO. Also joining us for the call are other members of our senior leadership team, including our Chief Transformation Officer, Rana Ghosh. Ted will open the call with an overview of SPIRIT's quarterly performance and strategic direction. Matt will then provide details about the drivers of our revenue performance and current demand environment, and Fred will discuss our cost performance, liquidity profile, and forward outlook. Ted will provide a few closing comments before we begin a question and answer session. Today's discussion contains forward-looking statements that are not 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 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 tables provided in our second quarter 2024 earnings release, a copy of which is available on our website under the investor relations section at ir.spirit.com. And with that, I'll turn the call over to Ted Christie.
spk03: Thanks, Deanne, and thanks to everyone for joining us on the call today. During the quarter, we announced that Fred Cromer joined the team as our chief financial officer. Many of you who follow the industry know Fred has a wealth of airline industry experience and will be a great asset to Spirit. I am delighted to welcome him to the Spirit team. Thanks, too, to Brian McBenemy for agreeing to serve as our interim CFO prior to Fred joining. I also want to acknowledge and say thank you to all our Spirit team members. In addition to the challenging revenue environment, it has been challenging operationally as well, and our team has done a great job managing through the difficulties. Like most other airlines worldwide, Spirit was impacted by the IT outage on July 19th, But despite the disruption, by midday Sunday, our team had most of the network stabilized. It was a Herculean effort by all members of the team in operations and technology to return to normal operations so quickly. And I extend my sincerest thanks to all of them for their dedication. We are going to focus this call on our Q2 results, our liquidity, our forward outlook, and the new travel options and guest experience enhancements we announced recently that we expect will help drive improved performance. Before we get into the results, I want to note that we are engaged in productive conversations with the advisors of our bondholders to address the upcoming debt maturities. Because those conversations are ongoing, we are not going to go into detail or take any questions on this topic or speculate on potential outcomes. Needless to say, it is a priority and we are focused on securing the best outcome for the business as quickly as possible while staying focused on driving performance and implementing our new travel options and elevated guest experience. Moving on to our second quarter 2024 financial results, we reported an adjusted net loss of $158 million. This is a disappointing result that was largely driven by weak revenue results. The elevated level of industry capacity continues to make it very difficult to drive yield improvement for the most price-sensitive leisure travel segments. While frustrating, these conditions validate that we are on the right path with our transformation strategy to redefine low fare travel with new high value travel options that allow guests to choose an elevated experience at an affordable price. We believe this plan will place us on the path to profitability. As the industry has recovered from COVID, the imbalance in the recovery between the full service large network carriers and smaller low cost carriers has become the narrative. I would like to dispel some of the untruths about why that is. First, the low fare model is not, quote, broken or, quote, obsolete. Quite the opposite. Our larger, higher cost brethren have introduced products and services that mirror what we currently offer and in doing so have figured out ways over the last few years to more effectively compete for low fare traffic. In fact, they are boasting about selling more of that product. What has not happened until now is our introduction of new products and services that can provide us the ability to more effectively compete for some of their higher yielding traffic while maintaining a low cost structure. This doesn't mean we are going to be the travel choice for the corporate traveler. However, our combination of diversified product options coupled with our cost structure will make us the high value travel option for our guests. As we shared last quarter, We've done extensive research, reviewed the competitive set of products, and surveyed guests that have flown us and those who have not. Based on those inputs, we will soon be introducing new products and services. In doing so, we are redefining Spirit as a high-value, low-cost carrier, offering a broader array of products, including a more premium leisure travel experience at an affordable price. As part of our transformation, we will offer four travel options that all include the flexibility of no change or cancellation fees. We will still offer the quality low fare products many of our guests prefer, but we will also provide guests the opportunity to choose a premium leisure experience with more space, flexibility, and amenities at an affordable price. And we can do all that because we still have and expect to continue to have amongst the lowest costs in the industry. We are not abandoning our low-cost position, but rather, we are leveraging it. We will also debut other travel-enhancing options, such as designated priority check-in and a new boarding process designed to prioritize our Go Big guests, Free Spirit Gold and Silver members, Free Spirit World Elite MasterCard holders, and active duty U.S. service members. The actual rollout of these offerings will happen very quickly. The new travel options will go on sale on August 16th. However, the adoption and acceptance of these changes by the marketplace will take time, and that means we need patience from our constituents and adequate liquidity to navigate the puts and takes of the environment. Fred will comment more on that later. To help us reframe how travelers perceive the Spirit brand as we enter this new chapter, we have engaged Tombris as our new marketing agency of record. Tombrus has a strong track record and was named the 2024 Ad Age Independent Agency of the Year. We are confident they are the right strategic partner to bring our transformed offerings to market. With that, here's Matt and Fred to share more details about our second quarter performance and outlook. Matt, over to you.
spk04: Thanks, Ted. I, too, want to thank the entire SPIRIT team. Successfully implementing our transformation strategy entails significant extra lifting for many of our team members, And I thank everyone for their patience as we execute on our plan to evolve our business. And to all those on the front line, as well as everyone behind the scenes that keep our network flowing, even when faced with unusual circumstances, thank you. Thank you for taking care of our guests and each other. Now moving on to our second quarter revenue performance. Total revenue for the second quarter was approximately $1.3 billion. a decrease of 10.6% year-over-year. Total RASM for the second quarter was 9.05 cents, a decrease of 12.1% year-over-year. Elevated domestic industry capacity has restrained our ability to drive increased ticket yields, pressuring fair revenue per passenger flight segment during the second quarter. We also experienced downward pressure on non-ticket revenue per segment. Non-ticket revenue per segment declined 9.6%, down nearly $7 year-over-year to $63.44 for the full quarter. Last quarter, we mentioned that some of the changes we were planning to implement could result in lower non-ticket revenue per segment. As planned, during the second quarter, we eliminated charges for change and cancellation fees. We estimate that these changes contributed to a little more than half of the second quarter year-over-year decline in non-ticket revenue per segment. we expect the headwind from eliminating change in cancellation fees to continue for at least the remainder of 2024. However, we believe these changes will result in a larger funnel of consumers willing to include us in their consideration set for air travel, which over time will lead to higher overall revenue. It's still a relatively new change, but we are pleased to see that since implementing our new policy in mid-May, our flown volumes have ticked up And for the first time, we have seen consecutive months of year-over-year load factor improvement since the first quarter of 2023. We also experienced incremental pressure on ancillary pricing due to changes in the competitive marketplace. Ancillary revenue is and will continue to be an important part of our strategy as we move forward. However, given the product offerings and merchandising changes we are implementing going forward, you will see us report only total revenue per passenger segment. As part of our go-forward strategy, we will offer four travel options. Go Big, Go Comfy, Go Savvy, and Go. Go Big and Go Comfy are designed for guests who desire a premium leisure experience. Our current big front seat product is already known as the best value in the sky for a premium domestic 2x2 seating configuration. And with Go Big, it will get even better with a checked and carry-on bag, priority check-in and priority boarding, included Wi-Fi, and snacks and drinks, including alcoholic beverages. Go Comfy offers a guaranteed blocked middle seat, as well as a checked and carry-on bag, and other amenities including priority boarding, a snack, and a non-alcoholic drink per service. The Go Savvy travel option caters to our guests who only want a pre-assigned seat with a choice of either a carry-on or a check bag. And we will still offer a fully unbundled Go option for those guests who prefer to add only those options they want for their travel experience. So while we will still offer a la carte ancillary items for purchase, the majority of the most popular items will now be included as part of the bundled travel options that the guest selects. No other carrier has the combination of our premium leisure offerings along with our low cost structure, which we believe will be a winning formula. All travel options will be available for sale beginning on August 16th. The onboard experience, along with the enhanced airport experience that Ted mentioned in his opening remarks, will begin on August 27. In addition to changing our products and services, we are continuing to make network changes to better align with what we are seeing in the demand environment. As I've said before, making adjustments to better align our capacity towards markets where the supply-demand trends are more in balance is a continuous exercise. We are offering more day-of-week markets, In July 2024, less than daily routes have increased nearly 140% year-over-year, which allows us to expand our route options at a lower risk profile. We are scheduling fewer flights on off-peak days of the week than on peak days. The variance between daily flight schedules for peak and off-peak days of the week will be more pronounced in the off-peak and shorter periods for the remainder of this year. Other network changes include introducing new routes and suspending many others. In the third quarter of this year, as compared to the third quarter last year, we will have suspended 42 routes and introduced 77 new ones. Unfortunately, as we sit here today, the benefit of these changes is muted by an oversupply of industry capacity for the existing level of leisure demand. This phenomenon is exacerbated as we move into the off-peak period for the fall travel season, which begins around mid-August when many schools go back into session. As other carriers have already shared, the setup for Q3 revenue production is not favorable. We are estimating third quarter 2024 TRASM will be down 6.4 to 8% compared to the third quarter last year and estimate that third quarter 2024 total revenue will range between 1.155 and $1.175 billion. Including the impact of middle seat blocks, for the third quarter, we estimate capacity will decrease 0.3% year-over-year. And for the full year 2024, we estimate capacity will be flat to down low single digits versus full year 2023. Please note that our published schedules are finalized only through September. Published schedules for October and beyond do not yet fully reflect the estimates provided. Our aircraft on ground, or AOG, projections for the full year average in 2024 have improved, and 2025 forecasts are slightly better than our previous estimates. For the full year 2024, we now estimate we will have an average of about 20 AOGs versus our previous estimate of 25. Based on Pratt & Whitney's latest forecast for AOGs, The projection is that we will start 2025 with about 35 AOGs, and that number will continuously escalate throughout 2025, ending the year with about 67 AOGs. Our working assumption for 2025 is that capacity will be down high single digits year over year. And with that, I will now turn it over to Fred.
spk11: Thanks, Matt. It's an exciting time to be joining the SPIRIT team, and I look forward to being part of this new era for SPIRIT. As exciting as the prospects are, we acknowledge that we have a lot of work ahead of us to return SPIRIT to a state of financial health. I'll begin with a brief recap of our second quarter financial performance and third quarter outlook before discussing some balance sheet and liquidity items. For the second quarter, non-fuel costs were up 4.6% year over year on 1.7% more capacity. primarily due to expenses related to increased flight volume, inflationary pressures related to wage and labor costs, increased market share at high-cost airports, and a higher mix of aircraft financed under operating leases. Fuel expense increased 4.2% due to a 6.1% increase in fuel cost per gallon, partially offset by better fuel efficiency. On an ASMs per gallon basis, fuel efficiency improved 3.7% year over year, to 96.4. Regarding AOG credits accumulated during the second quarter, Brett and Whitney agreed to issue 37.2 million for AOGs during the period. For the second quarter, we recognized 7.1 million of credits within our income statement. Per the compensation agreement signed in March 2024 that covers AOGs related to GTF engine issues from October 1, 2023 through the end of 2024, We estimate the full year 2024 benefit to our liquidity will be approximately 150 to 200 million. Year to date through June 30th, Pratt & Whitney has agreed to issue us approximately 94 million in credits, of which we have recognized 75 million within the statement of cash flows. Operating margin for the second quarter was negative 13%. Had we been able to recognize all of the AOG credits earned during the quarter, our operating margin would have been negative 10.7%. This is clearly a disappointing result, and unfortunately, based on our revenue projection for the third quarter, it's going to get worse before it gets better. We understand the drivers underlying this performance and are working as expeditiously as possible to change course, but there's not a quick fix. We estimate it will Excuse me, we will estimate it will take more than a year before we realize the full financial benefits of our transformation plan and for industry capacity to come more into balance with demand. Moving on to our third quarter outlook, we will continue to face cost pressures from carrying costs related to the NEO engine availability issues and other labor and inflationary pressures. In addition, we expect to see modest pressure on expenses and Chasm X fuel related to the cost of implementing our transformation plan. There will also be some continuing pressure on Chasm X fuel related to the introduction of our Go Comfy product, which will block six seats from every departure. On a run rate go forward basis, once all the changes are implemented, we anticipate our Chasm X will settle in the $0.08 range, maintaining our position among the lowest cost producers in the U.S. industry. For the third quarter 2024, we estimate total operating expenses will be up 3% to 3.7% year over year with fuel cost per gallon averaging $2.65. We remain on target to achieve our previously discussed annual run rate savings of about 100 million, of which we expect to achieve approximately 75 million before year end 2024. These cost savings initiatives include the suspension of recruiting and onboarding pilots and flight attendants in 2024, offering voluntary unpaid leaves of absences for flight attendants, right-sizing overhead and non-crew operational positions, reducing discretionary capital spend, and the difficult but necessary decision to right-size our pilot group, resulting in the furlough of approximately 240 pilots and the downgrade of about 100 captains, effective September 1st. We ended the second quarter of 2024 with $1.1 billion of liquidity, which includes unrestricted cash and cash equivalents, short-term investments, and the $300 million of available capacity under our revolving credit facility. Of note, during the second quarter, we extended the maturity of our $300 million revolving credit facility to September 30, 2026, subject to certain conditions, including extending or refinancing our senior secured notes due 2025. Please refer to our 10-Q filing for additional details. Successfully extending or refinancing our senior secured notes remains one of our top priorities and we will provide updates on our progress when appropriate. We will continue to aggressively manage our costs to maintain our position as a low-cost leader in the industry and make every effort to maintain adequate liquidity. Earlier this week, we disclosed a direct lease and pre-delivery payment transaction that raised in aggregate approximately $186 million. We expect to end the year 2024 with over $1 billion of liquidity, including unrestricted cash and cash equivalents, short-term investments, liquidity available under our revolving credit facility, and additional liquidity initiatives, assuming that we are able to close those initiatives that are currently in process. And with that, I'll turn it back to Ted for closing remarks.
spk03: Thanks, Fred. There is much to be thankful of and for here at Spirit. As the saying goes, the hottest fire forges the strongest steel, and I'm seeing that every day with our group. The Spirit team has not and will not back away from the challenges. but instead is moving with speed and dedication to provide our guests with the best possible service and the best offering of products in our history that we expect will drive real benefit over time. Nonetheless, as we move through the period, we must consider every possible avenue available to us to find incremental revenue, cost savings, and market opportunities. The chatter in the market about Spirit is notable, but we are not distracted. We are focused on refinancing our debt, improving our overall liquidity position, deploying our new reimagined product into the market and growing our loyalty programs. We know the road is bumpy and uncertain and especially challenging for many of the smaller airlines and particularly so for Spirit, given the competitive dynamics in the markets we serve and the magnitude of impact from the GTF engine issues. In this business, size does have its advantages, which is why over the last two years, we took decisive steps to improve our competitive positioning. When those efforts were blocked by the federal government and courts, we quickly and decisively pivoted, investing in a new strategy to improve our competitive positioning by diversifying the products we offer. We are excited to be implementing the first stages of our new strategic direction. Given the current industry dynamics and consumer behavior trends, we are convinced this is the right move for us to make. And now back to Deanne for Q&A.
spk05: Thank you, Ted. Adam, we are now ready to take questions from the analysts. We ask that you limit yourself to one question with one related follow-up.
spk15: Thank you. At this time, I'd like to remind everyone to ask a question, press star and then the number one on your telephone keypad. Our first question comes from the line of Andrew DeDora with Bank of America. Your line is open.
spk10: Hey, good morning, everyone. Fred, my first question, can you just give us an updated rundown on the unencumbered asset base you have available today?
spk03: Hey, Andrew. It's Ted. I'm going to jump in here. Obviously, Fred's on his third week, so I'll give you a view. We still have unencumbered assets north of half a billion dollars in addition to we own around 50 airplanes that have equity value, and we've estimated in the past that that's somewhere in the neighborhood of half a billion dollars as well.
spk10: Got it. Thank you. And then, Ted or Matt, just Given the product changes, any way you can help us understand how you think about how this new pricing strategy that you have compares versus the old and any potential changes that you have to make to any of your systems? Just curious how that's going to evolve over the next year plus.
spk04: Yes, sir. Andrew, this is Matt. So everything that we merchandise and sell here at Spirit is demand-based. So for the most part, a lot of the experience we've had in the recent past with selling a la carte options, but also our bundled service offerings, which we've been doing for quite a number of years, gives us some advantage in knowing already how to think about the positioning of products like that. What's most exciting for us now is we're going to be able to make the merchandising and purchase experience for our customers significantly quicker for them as they move through Spirit.com and also through the Spirit app. And then over time, we're going to also be including in our distribution strategy the ability to market these products through third parties as well, which we think is going to be a real game changer for Spirit. Because today, our big front seat product, and in the future, the Go Big product that includes other offerings, as well as the new Go Comfy product, will be distributed through third parties over time. That's going to open up a whole new segment of customers for us that don't know the product today or haven't been exposed to the product today in normal shopping. So we think that's going to be quite a difference for us, and our systems are prepared internally, and we're working with our third-party partners externally to get that product disseminated as well.
spk10: Got it. That makes sense. Thank you, Matt.
spk15: Sure. Our next question comes from the line of Mike Lindenberg with Deutsche Bank. Your line is open.
spk00: Oh, yeah. Hey, good morning, everyone. Just a question here on the capacity now being flat to down low singles versus the prior. And yet the aircraft on ground improved from 25 to 20. It can't be just the blocking of six seats per departure, Matt. What else is driving that capacity? Is it utilization? Is it changes in the network?
spk04: Yeah, sure, Mike. It's largely driven. It is utilization, but think of it as the off-peak days a week that I had mentioned. In, say, last year, for example, if you look at the month of September, a day of week like Wednesday was about 80% flying on Wednesday relative to a peak day of week. And this year, it's um it's it's closer to 65 so some of these off-peak days we're just we're just trimming them down as a as a result of some of the supply situations and how demand's coming in so a big piece of the of that is what i just mentioned there with some extra day of week trims um we expect that to be through the shoulder and off-peak periods through the rest of the year and and this is exactly why we're introducing new products like this is because we have to have broader reach And we have to go get new customers, people that haven't experienced Spirit in the past. And that will help fill in not just the peak days of the week, but certainly will help us fill in the off-peak days of the week. But we have to give it some time for it to take hold.
spk00: Great. And it's Just my second question, Fred, welcome back to the airline industry. Great to hear you. Just on this $186 million, can you just go into the details on it, this PDP financing? What airplanes are we talking about here tied to this? Thanks for taking my questions.
spk11: Yeah, thanks for the welcome. It's great to be back, especially here with Spirit. But to answer your question specifically, look at the near-term order book, and 36 of those aircraft now come out of our order book, and we'll direct lease those going forward. So the PDPs associated with those come back to us, and we also avoid the PDP burden going forward because those are now direct lease aircraft. The remaining aircraft in the near-term order book now are, we've rescheduled those out a little bit, and the second half of that transaction, is a return of those PDPs as well, given the rescheduling of those deliveries. So you can think about it in two ways, right? 36 aircraft that are going to be leased and then the remaining 52 as we think about the combination of those two aircraft groups going forward.
spk00: Okay. Thank you. Thanks very much.
spk15: Our next question comes from the line of Dan McKenzie with Seaport Global. Your line is open.
spk09: Yes, thanks. A couple questions here. First is on the deliveries. Is Airbus continuing to deliver aircraft with Pratt & Whitney engines that are going bad shortly after delivery? And then if so, have they provided any kind of timeline for when they can start to deliver planes that have reliable engines?
spk03: Hey, Dan, it's Ted. My favorite topic, so I'll do my best to address it. So Pratt has made progress in reconfiguring new delivery engines with the revised parts that no longer have the flaw with regard to the powered metal. So that's beginning to bleed into your new deliveries. And whether or not that abates any early removal risk or eliminates it remains to be seen. But that is a step in the right direction. The larger issue is that they are still experiencing issues from a supply chain and production perspective on those parts that are backing up the MRO. And so the time to take an engine off wing and get it all the way through a heavy visit and back on wing is north of 400 days. And that's why... the worldwide system is backed up and why you're seeing us, for example, expecting north of 60 AOGs next year. There's simply not enough spares in the system and there's not enough throughput yet on the MRO side.
spk09: Yeah, understood. Okay. Second question here is on the credit card processing agreement. Just per the 10Q this morning, it looks Like there's a September 20th date in it and a $200 million deposit for a compensating balance arrangement. And that's a term that I don't think I've seen before, but it sort of looks like a soft credit card holdback. And I'm just wondering if you can just elaborate a little bit that. Is that at risk of being a hard credit card holdback at some point?
spk03: No, it is just purely a deposit account at the parent bank of our credit card processor. So it's unrestricted cash and reported as such on the balance sheet. And yes, there is a date in that agreement with Elevon that aligns with our plans for our negotiations with the existing bondholders and their advisors to find a solution for the 2025 loyalty notes. Obviously, we're in regular contact with those guys, and as those negotiations with our bondholders mature, we will be continuing to update them on the status of that.
spk09: I see. Okay. Thanks for the time, you guys.
spk15: Our next question comes from the line of Dwayne Finnigworth with Evercore ISI. Your line is open.
spk13: Hey, good morning. This is Jake Gunning on for Dwayne. Just given the blocking of the middle seat and the various cost puts and takes, do you have an idea about how to think about total ex-fuel expense into the fourth quarter?
spk03: Well, I think for the fourth quarter, we haven't given a full guide. For the third, the numbers are out there. You can kind of do the math and arrive at it. You know, the block middle seat, you know, you're talking about six seats coming out of inventory. So that provides some natural pressure to unit costs. I think Fred in his comments indicated that once everything sifts its way out, you know, meaning we're out of kind of the utilization issues associated with the Pratt & Whitney engines today with, you know, some of the near-term headwinds that we're experiencing and, you know, and dealing with, you know, that I can kind of outline some comments on that as well. We're sort of targeting an 8-cent chasm carrier from an ex-fuel perspective. The block middle seat is a very marginal component of that. So it's not a material inflator to cost. And in fact, the changes that we announce here from a product perspective don't move the unit cost needle very much at all. The combination of all of those things, it's probably about 4%. But we're expecting significant uplift in unit revenue that will take time for us to develop over the coming, and I think as Fred indicated, probably more than a year for things to kind of really take hold. But we do expect that unit revenue benefit to be 15 plus percent. So the impact of this reinvention, this reimagination of the brand is clearly margin accretive, which is why we believe it's the right answer.
spk13: Okay. And then just given the margin projections for the third quarter, do you have any insight what percent of the network is above break-even?
spk04: Yeah, Jake, that's just a question that we're not going to address right now. We think of the network overall, it lives as one large ecosystem, so it's just something that we're not going to address on a route-by-route basis. Okay. Thank you.
spk15: Our next question comes from the line of Jamie Baker with JP Morgan. Your line is open.
spk14: Oh, hey, good morning. Just a couple of questions on the pivot to an improved travel experience. You know, I guess my first question is, you know, how do you get the message across to consumers? You know, when I think about the industry rolling out basic economy, That was pretty time-consuming and a pretty steep learning curve, but I'm not sure that that establishes precedent. Just wondering how long you envision the new products taking to gain traction with a customer base that is unaccustomed to many of these new categories, these new options. Thanks.
spk03: good morning jamie it's ted i'll start and then maybe we can have um either matt or rana jump in as well but um i did see your your discussion on the analogy between the implementation of basic economy and one of your notes i thought that was an interesting comparison um i think things are a little different here uh and and the reason that i believe that true is first of all we haven't spent any money or time telling the spirit story in the past that simply has not been the case we've let price drive the discussion and so What will be completely different is we will be doing exactly that, which I think will have outsized impact. And what I mean by that is once we start talking, the media is going to pick up on it, the broader social media groups are going to start picking up on it, and we're going to get a lot of attention. And I think that that will have an outsized impact of traditional marketing. In addition to that, as we're developing that message, and as I said in my comments, we appointed a brand new ad agency and executor Tom versus world recognized, who's helping us think through how we do that in the best possible way and how we do it in the most cost efficient but effective way. So we have a real shot there. In addition to that, Matt alluded to it, that the way that our products are currently configured and sold, the leverage that we get out of third party distribution is muted today. when compared to the way they will eventually be merchandised and sold. To be direct about it, we have a product that simulates a business class product, but it's not sold that way on the GDSs and the OTAs. If you sort by business class, we do not arrive. So over time, as we work with those partners, that will change. And that's a natural and significant change. And we think the size of the population that will consider us. So a few thoughts from me. I'm going to turn it over to Matt and let him jump in as well.
spk04: Yeah, Jamie, one very large difference between, and I recognize also your analogy there. One large difference is that when basic economy was introduced, our competitors actively tried to not really sell that product. And it wasn't something they really wanted to put out to market. This is the opposite. We are very excited to put this out to market. We can't wait to get the word out there. And we know it's going to be received very well. We're very excited about, as Ted mentioned, about what we're doing from an advertising perspective and go out there and tell our story. And so I hope that makes sense. And we can't wait to get started.
spk03: I think Matt made an interesting point as well, Jamie, that I wanted to add on to. when basic economy was introduced, let's not forget, they were taking things away from the consumer. So harder to advertise that we're actually making things and adding things to the product. This is something for people to get energized about. And I just yesterday when we, or day before yesterday, we put out the release associated with it. We hosted an entire company town hall that was attended by the entire business online. And we had probably 400 people in our training facility and the energy in the building was palpable. I mean, I was honored and humbled to be a part of this organization that's ready to embrace change, that understands the challenges we face, but knows that the products and services that we're implementing are going to be a real value add. And we had over 13,000 people dialed in watching this. So you know for a fact the Spirit team is ready to go. And that's important. You've got to get alignment around your group to deploy these products. So we're excited to see how it transpires.
spk14: So, Ted, you need to go on a late-night talk show circuit. Remember when David Newman did that? Different circumstance, but I'll be looking for you on a TV screen soon. Just a quick follow up. You know, low cost, no frills is embedded in your managerial DNA, if you will. And, you know, I get it. Blocking middle seats isn't exactly rocket science, but I want to ask this delicately. Do you think you have to bring in any outside talent? to really crack the premium code. It just, it just seems far afield from what your current bench is accustomed to. Thanks.
spk03: I appreciate the, the, the delicate nature of the question, Jamie, by the way, if you want to do the late night circuit, you can play drums and I'll play guitar. Is that fair? Um, uh, well, look, we're, we're talking about, um, uh, the shift from being, um, just low cost and low fare to delivering value with low costs. And yes, we are bringing in outside assistance to help us think about that. I mentioned that we have a new ad agency. We also have a strategic brand advisor that's helping us thinking about how we deliver that. And as I said earlier, this is a reinvention and a reimagination that nobody around here is fighting. In fact, they're actually pushing for So, yes, we have DNA around low cost, and I'm glad for that because that's going to be a part of what we do. What's different is that we can give our team, the frontline, the management team, all that, the tools they need to deliver value. And that's where we think we're going to be a game changer.
spk14: That's great. Thanks, team. Appreciate it.
spk15: Our next question comes from the line of Savi Sith with Raymond James. Your line is open.
spk06: Hey, good morning, everyone. Matt, can I ask a little bit more of a near-term question? I was kind of curious if you're seeing, you know, is your exit rate, as you kind of exit third quarter, if that is showing any kind of improvement either because the industry is adjusting capacity or you're being a little bit more aggressive on, you know, adjusting your capacity over in those off-peak periods?
spk04: Hey, Savi. So I would say right now around some of the more shoulder periods, we're not necessarily seeing outsized advanced load factor benefit yet. But as we're moving through the booking curve, as we get closer and closer to the shoulder and off peak periods, we're starting to see some of the clawback. So we're not up year over year on advanced loads right now, but the clawback is happening. And that's why we're continuing to make some adjustments close in. The rapid nature of some of the moves that we're seeing in the industry overall does seem to be helping to move some traffic around. So if trends hold, as we've seen for the last year, the amount of close-in demand will be there. And then with our new structure and the way we're handling peak off peak, it should be able to push more onto the right days of the week. So that's what we're hoping for. That's what we're starting to see. It's a little bit too soon to talk about exit rate of third quarter. But as we get closer and closer to those periods, we're seeing what we want to see from a booking curve perspective.
spk06: I appreciate that. And just on the leasing move that you just did, it just seems like then the order book has been monetized and nothing more. And should we expect leasing revenue to build as these get put on lease?
spk03: Hey, Savi, it's Ted. I'll take that. I wouldn't describe it as the order book being, quote, monetized. This was a structured transaction to basically do a form of a sale lease back on 36 airplanes in the forward delivery. So we just pre-financed them. And the PDPs as a result of that were refunded to us. And all forward obligations on those airplanes are now air capped. So that's a notable working capital pickup over the next couple of years as well. I mean, we're talking north of $300 million. So that's an extreme benefit to the company going forward. And then the remaining 52 aircraft in our delivery stream, we did work on a structured way to basically get those PDPs advanced as well, with certain conditions that they will be repaid over time. But those airplanes remain in our order book and under our control. It's just we reached a conclusion that is liquidity enhancing in the near term.
spk06: Okay. And I misunderstood the way that was structured, so that makes sense. Appreciate it. Thank you.
spk15: Our next question comes from the line of Connor Cunningham with Milius Research. Your line is open.
spk12: Hi, everyone. Thank you. If you do some quick math on the 15% increase in unit revenue expected from the initiatives, I think it puts the new product opportunity at over a billion dollars. Is that correct? And if you could just help frame up the revenue puts and takes from, you know, I assume you're going to lose some non-ticket, but that gets accreted up just Just any thoughts around the opportunity when it's at full run rate. Thank you.
spk03: Sure, I can start. Matt, you feel free to jump in. But I think ballpark, your math is probably about correct, especially by the time we get to the landing zone, which, as I described earlier, is still a year or more out. But it will accrue over that time. And yes, we are experiencing some of the non-ticket headwind immediately. In fact, as Matt outlined, Uh, the, uh, the, the elimination change of cancel fees, some of the other, um, benefits that we extended from a flexibility perspective to our guests, like, um, credit credit vouchers and credit shell flexibility and the change in the care, uh, excuse me, the check back from 40 to 50 pounds. All of those are a natural headwind to, to, to unit revenue and to ancillary revenue, I think in the near term as much as 4%. So that's, that's a, that's a now problem that comes back to us over time. And so you can sort of think about that sort of crossing the streams over the next year or more as the benefits of the reimagined product, the widening of the funnel and getting access to new gas, the benefit associated with load factor, all of those things start to offset the headwinds we're experiencing in the near term. from an ancillary perspective. Matt, you want to add anything?
spk04: Yeah, sure. Connor, I think your calculation is a little bit rich there. We hope your billion-dollar number is right. It's going to be a little bit below that. But one thing to keep in mind is part of our loyalty program, and I think we talked about it last quarter, I'll mention it again, A lot of our loyalty we've had historically is because we had very low fares. And that was something that is what people are looking for. And the unbundled model was revolutionary and the optionality that we offer for our guests is exactly what they've wanted. But over time, in order to really build up a loyalty program, it has to be more relationship driven. We have to have loyalty that is coming back to spirit, not just for low fares. They want to come back to spirit for the experience and they want to come back to spirit for a program that is also more reflective of who we're going to be in the future also. So we haven't really announced any changes for the loyalty program yet, but we are in works on things with that as well. And that is a piece of how we think about things moving forward. And that takes time to build. So as Ted just mentioned, some of the unit revenue improvement, it'll be there and it'll take a little bit of time to get there. And it's sort of an ongoing process to get everything in place.
spk12: Okay, that's helpful. Thank you. And I'm not so great at math, so I appreciate you checking that. But in the press release, you mentioned you know, your liquidity target of over a billion, but then you kind of caveated it, you know, assuming that your initiatives close, that you're currently in process of working on. I assume that's the product changes, but could you just clarify what you're trying to message there? Thank you.
spk03: Sure, Connor. No, we're talking about a few transactions that we're already in discussions on that, you know, I think in the initial question that was asked by Andrew about what is the basket of unencumbered and other assets that have equity value in them. And we're looking at a few aircraft-related transactions that are underway that we feel confident we will get done, and those are included in that number. Gotcha.
spk12: Thank you.
spk15: Yep. Our next question comes in the line of Steven Trent with Citigroup. Your line is open.
spk08: Good morning, everybody, and thanks for taking my question. I was curious on CrowdStrike. I appreciate what you guys disclosed on that incident. Can you tell us whether you are having any sort of conversations with them with respect to the losses you incurred as a result of their outage?
spk03: Thanks, Steven. What was interesting about the impact spirit is we are not a customer of CrowdStrike, so this was an issue with regard to one of our third-party software providers. And so, to the extent that we have service-level agreements with that provider, we will be in discussions with them about it, and they may be in discussions on the back end with their relationship with CrowdStrike.
spk08: Okay. Makes sense. Helpful. And if I may, I know across the space you have other airlines also making big moves with their domestic product. Are you seeing any spillover, for example, with customers migrating over to your side of the fence from some competitor changes when you look at your booking curve, or is it just way too early to say at this point?
spk03: Well, I think that may be too early to say. We did acknowledge that we are seeing for the first time since 2023 some year-on-year load factor improvement, which we think at least is partially attributable to some of the flexibility we've granted in the second quarter. But I think one of the benefits associated with this deployment for us, at least vis-a-vis the rest of the competition, because I have heard other people talking about changes in their product, is we're doing it right now. this is not a promise of something happening in 25 or 26 with vague descriptions about what it might look like we're actually deploying this thing in the next two weeks which is why we were so careful um about the design why we were careful about the way we were going to do it the research we did um and acknowledging we were getting pressure um from our constituents to disclose what we were going to do and we felt it was The right time to do it was when we were going to do it, which is happening right now. So we're actually interested and excited to see whether or not we are successful at capturing share as a result of having a new product in the market faster than anyone else. That coupled with our low cost structure makes us a high value play. And I think that that's the advantage that we're going to have and we're going to exploit.
spk08: Okay. I appreciate the color. Thank you.
spk03: Yep.
spk15: Our next question comes from the line of Tom Fitzgerald with TD Cowan. Your line is open.
spk02: Hi, everyone. Thanks very much for the time. I just want to get a sense of, you know, with your long-term plan, kind of as we get to the end of 2025, where you see the mix of fair and non-fair revenue kind of settling out.
spk04: Hey, Tom. It's Matt. As I said in my prepared remarks, we're only going to be reporting on total revenue for passenger segment moving forward.
spk02: Okay, okay, fair enough.
spk04: Thanks.
spk02: And then how could you comment on how those 77 new markets are performing just so far versus expectations? Thanks again for the time.
spk04: Yeah, sure, Tom. I think one thing that's important to note, as opposed to talking about specifically those 77 new routes and how we move the network around wherever we see opportunities, one thing that we're doing, you've heard me talk about in the past, is about Latin America and the Caribbean. So we used to be around 15% of our network was in that region. We had moved that up to 20%. Sometimes of the year it was even a little bit over 20%. Now we're back down to that 15% number right now. There's a lot of capacity in that region, the near international plus U.S. territories. So we've been very careful there, and we're making sure that we're evaluating everything we're doing with the network. But that's an example of how when we need to move things around, we will. And that's just an example of that.
spk15: And our final question comes from the line of Ryan Capozzi with Wolf Research. Your line is open.
spk01: Hey, good morning, guys. Thanks for squeezing me in here. Ryan Capozzi on for Scott. Could you just discuss sort of your early CapEx plans for next year, as well as other sources and uses of cash? And then do you have any kind of minimum liquidity targets as we look out to next year?
spk03: We're going to have to refine for you, Ryan, the 2025 CAPEX expectations. You know, we usually give you guys a view on that once we get close to the beginning of the year. So I wouldn't expect that our non-aircraft related CAPEX is going to be dramatically different than our run rate. And given that we've just moved considerable aircraft in the forward part of our delivery, to a third party. That changes the PDP CapEx kind of discussion as well. So we got to kind of do some math on that and get back to you on that, which we will do as we get closer to year end.
spk01: Got it. Very helpful. And then maybe if I could just squeeze in a follow-up. You know, you guys have kind of outline some of these new initiatives and products very well. Could you just, you know, as they get implemented, talk about sort of the best-case scenario of when you get back to profitability, or at least sort of the steps to getting there?
spk03: Sure. So, look, we recognize that, you know, we're in a tough position today, and I don't think we're anywhere but heads up about that issue. And so... The way I would think about margin repair at Spirit is I think you've got to divide it into a few baskets so that we can start to build our way back to profitability. The first is that in the current quarter, there are a number of both unique to Spirit and one-time items that are hitting us from a margin perspective. The first is the Pratt issue. The mere accounting of the credits we receive and then are able to report on the income statement is about a point and a half of the margin. But in addition to that, we've previously disclosed that the inefficiency associated with removing aircraft from service and not being able to fully adjust the business is another couple of points. So we've really got Pratt headwinds in the near term of around 3.5%. In addition to that, we are exiting the remainder of the company's 319 fleet. In fact, the last two aircraft in service will go back to their lessors at the beginning part of next year. As a result of terminating that fleet type and returning those aircraft, we have a one-time accrual in the current quarter that actually hits us at about two points on the margin. So that's another couple of points there. We talked about the CrowdStrike IT outage. That actually was about a point on the margin for us this quarter. And then as we start to roll out the reimagined spirits, We are incurring expenses in the near term that, first of all, don't have the revenue benefit associated with them yet, but also are somewhat one-timey in nature. I'm talking about training of our personnel. I'm talking about IT-related reconfiguration and e-commerce platform changes. I'm talking about some airport-related expenses, both material that has to be delivered to introduce the new product as well, things like that. And actually, it adds about a point, excuse me, a couple of points of headwind in the near-term quarter. And then as we just talked about in detail, the change in the ancillary model from the removal of change in cancel fees and a few of the other things like the 50 pound bag and that sort of stuff is in the near term a headwind of three to four points before it starts to benefit. You add all that up and you're 10 to 11 points of margin headwind in the near quarter. Additionally, but the benefit is we expect longer term, as I said earlier, Bravo to deliver somewhere in the neighborhood of around, or what we call internally, but like our reimagined spirit, a neighborhood of around 15 points of incremental unit revenue. And that will come with some additional unit cost pressure I discussed earlier of around, you know, three to four points. So we're talking 10 plus points of margin benefit associated with that. And then really the last lever, which is the one that's the hardest to predict, the most difficult to kind of quantify, but we think potentially has the biggest potential swing, is today we acknowledge that we're in a supply-demand imbalance. And we are moving to make changes to that. We're already talking about the fact that we deferred a number of aircraft out of the near term. In fact, next year, we're actually getting smaller, some of that obviously as a result of the PRAT issues. But nonetheless, Spirit is contributing to that, and we're hearing other airlines making similar adjustments. And as the market starts to return to a more balanced supply and demand market, we should see natural tailwinds to unit revenue and margin. So you combo all of those three things together and you can build your way back to a profitable answer, most notably over that window of time, which will take some time. you're getting more EBITDA and you're starting to cash flow, which is really where we want to be. So I wouldn't put an end zone on it right now. It's definitely, you know, a year plus, but those are the factors that will drive it.
spk01: Super helpful. Thank you.
spk15: I'll now turn the floor over to Deanne Gable for closing remarks.
spk05: Thank you, Adam. I just want to say thank you, everyone, for joining us today. And if you have any questions, please feel free to reach out to Investor Relations or Media Relations.
spk15: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
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