This week marks the beginning of the trial in the Department of Justice’s lawsuit to block JetBlue from buying Spirit. After the numbers Spirit put up this week, JetBlue might want to think about rooting for DOJ here. It was not pretty.
Spirit’s Q3 numbers were staggering, and I don’t mean that in a good way. The airline lost nearly $150 million excluding special items on revenue of nearly $1.26 billion. That’s an operating margin of -14.2 percent. To be fair, Spirit warned us this was coming in a September update, but that doesn’t make it any easier to stomach.
The culprit according to Spirit is “softer demand for our product and discounted fares in our markets.” I will actually touch on that more tomorrow when I look at Frontier, but suffice it to say for now that there is a ton of capacity in Las Vegas and Florida where the ultra low cost carriers are concentrated, and demand is just not there to support it all.
In Q3, Spirit’s unit revenue plunged 17.4 percent to 9.14 cents vs last year. Overall total revenue per passenger dropped 13.5 percent, but it was only that good because ancillary revenue stayed fairly flat. Actual fare revenue dropped a shocking 27.8 percent year-over-year.
As you’ll see tomorrow, this impacts Frontier as well, but the difference is that Frontier says it sees things stabilizing. Spirit says otherwise.
We continue to see discounted fares for travel booked through the pre-Thanksgiving period. And, unfortunately, we have not seen the anticipated return to a normal demand and pricing environment for the peak holiday periods.
Gulp.
Nobody else is seeing this level of weakness right now, or at least that’s not what they’re saying. So, what gives? I wish we knew.
Since Spirit is currently in the process of being gobbled up by JetBlue, the airline decided not to have an earnings call this quarter. Instead, it is presumably hiding in a bunker and stockpiling for the end of the world, which appears to be rapidly approaching based on this mess of a quarter.
It’s not just the profitability that’s a problem here. The wheels seem to be coming off completely. During the quarter, the airline had only 67 percent of flights arrive within 14 minutes of schedule, and Spirit canceled 1.6 percent of all schedule departures. It blamed this on weather and ATC delays, but really I assume Spirit is just trying to make its operation worse so it can match JetBlue’s standard poor performance. (JetBlue in Q3, if you’re curious, only had 57 percent on time with a similar cancel rate.)
As if that’s not enough for Spirit to deal with, it is being hit very hard by those Pratt & Whitney engine problems. In Q4 of this year, Spirit expects to have 10 of the impacted A320neo family aircraft sitting on the ground. In 2024, it will start around 13 but spike to a whopping 41 by the end of the year. What’s even worse is this buried gem:
Pratt & Whitney recently notified the Company that all the geared turbofan (GTF) neo engines in Spirit’s fleet, including the engines slotted for future aircraft deliveries, for a yet undetermined period, are in the potential pool of engines subject to the inspection and possible replacement, of the powdered metal high-pressure turbine and compressor discs
Say what? P&W said that this was limited to just older engines and newer ones did not have issues. This would certainly suggest otherwise and that the problems are spreading. Oh my.
Now, you might be tempted as I was to say, “well, Spirit can probably make more money on compensation from Pratt than from actually flying these airplanes considering its current revenues.” That may very well be true, but the problem is that Spirit has the infrastructure (read: fixed costs) in place to operate all these airplanes. So the cost savings are not nearly as great as you might hope. And without growth, cost creep happens quickly. But maybe this will help Spirit to bolster revenues to some extent.
Overall, this is about as a bad of a result as you can imagine. So, how do you think JetBlue is feeling right now?
To be fair, JetBlue says it is buying Spirit for the pilots, airplanes, and presence in congested cities where it can’t grow on its own. Spirit airplanes will go into the JetBlue model. So maybe Spirit’s woes now don’t really impact JetBlue’s plans. But the weaker the airline gets, the more JetBlue has to be getting anxious about the whole thing.
At this point, Spirit has to just be hoping to get to the finish line in that merger. Then it’ll be JetBlue’s problem on top of all the problems JetBlue already has. In the meantime, it’s worth watching that trial closely.