Spirit Airlines’s Lack of Updated Improved Guidance Weigh on Its Share Price

Spirit Airlines (SAVE) is a low-cost airline serving the United States, Latin America and the Caribbean, primarily offering customers to slash base rates to get rid of unnecessary travel services. If necessary, the client can choose additional options for an additional fee. Most of the revenue comes from the United States. The crews of all aircraft are completely interchangeable, and maintenance and other support services are simplified due to the absence of an overly complex aircraft fleet. Due to the system-wide route structure, the company has one operating segment – air transportation. Bank of America reported that airline tickets sales for the week ending August 29 improved to -51.9% the 2019 level from -61.5% for the week prior. After the pandemic, with the progress of vaccinations, the business is on the mend. Spirit Airlines unveiled the largest flight bookings it has ever operated from Orlando on July 8, 2021, including new flights to destinations stretching from New Hampshire to the Dominican Republic.

Based on the latest available stats, the utilization rate for the first quarter averaged 72.1%, but the last two weeks of March averaged well over 80%, with many days coming up from 90%. Although total Q1 operating revenue decreased 40.2% YoY, while capacity declined 26.9% YoY, the sequential change from peak December to off-peak January and February was larger than usual in that season as the number of Covid-19 cases surged again. But this has been accompanied by sustained improvements in operating profitability and TRASM (Total Revenue per Available Seat Mile) throughout the quarter.

On the demand side of the equation, Spirit is one of several airlines that aggressively began re-adding capacity last summer, but other airlines, including its ULCC competitors Allegiant (ALGT) and Frontier (ULCC), began restoring capacity sooner and in larger quantities. In June 2020, Spirit's capacity reduction compared to 2019 was identical to the industry (down almost 80%), but by July 2020, Spirit's capacity reduction was far less than the industry's 70% reduction in capacity. Airlines including American (AAL), Southwest, and the ULCCs began to aggressively chase the leisure demand last summer that resulted from three months of very limited U.S. travel. So it’s a nice sectorwide smoothing play.

Ticket revenues by segment continued to demonstrate relative growth, declining only 10.8% YoY. As with the outbreak of the pandemic, out-of-ticket revenue by segment in the first quarter was impacted by the suspension or reduction of some booking-related fees. However, as the quarter progressed and U.S. domestic and international demand gradually rebounded, segment ticket revenues also began to increase significantly.

In terms of guidance, Spirit still expects total operating revenues in the range of $885 million to $955 million vs. $1.05 billion consensus. Also, the company expects a negative revenue impact of ~$50 million from 2,826 flight cancellations between July 30 and August 9, due to airport staffing shortages and adverse weather. The company also noted softer-than-expected booking trends and increased close-in guest cancellations, likely due to a resurgence in Covid-19 Delta cases. It expects these trends, along with future potential flight cancellations, to lead to an additional $80 million to $100 million negative revenue impact in Q3. This is why its shares remain visibly depressed vis-a-vis de-facto improving outlook.