Summary: Spirit Airlines (NYSE: SAVE) reported 4Q23 and FY23 results with revenue coming in above the high-end of guidance and an adjusted operating margin, which remains negative, hitting the mid-point of prior guidance. With management stating that FY23 results were unsatisfactory, it took the opportunity to label many pundits as “misguided” in their belief that SAVE can’t operate as a standalone entity if a merger is not consummated. Ending liquidity of USD 1.3bn, that includes a USD 300m undrawn revolver, provides enough liquidity to navigate through 2024.

On the earnings call, management said that as it entered 2024, it was beginning to see the benefits from the tactical and strategic changes implemented in 2023, and that current domestic booking trends bolstered its confidence in a rebound. It cautioned, though, that there is still too much capacity in the system, especially at off-peak times. The company is expected to report an unprecedented sequential improvement in total revenue per available mile (TRASM) from 4Q23 to 1Q24.

Regarding the blocked merger with JetBlue Airways (NASDAQ: JBLU), Spirit remains focused on consummating the merger that was blocked when the US District Court for the District of Massachusetts granted an injunction against the merger. SAVE and JBLU appealed to reverse the injunction. The Court of Appeals said that it would hear arguments in June 2024.

Concerning the Pratt & Whitney (P&W) geared turbofan (GTF) neo engine issue, during January SAVE had an average of 13 grounded neo aircraft and estimates that the number will climb steadily to about 40 in December, averaging about 25 neo aircraft throughout 2024. Spirit currently estimates that its capacity for FY24 will be flat to up mid-single digits compared to FY23, but this is clearly a guess based on an uncertain amount of time the engines will be out of service and if there are any spare engines to replace the GTF engines that are in line for repair. Spirit said that it typically takes 90-120 days from the time an engine is removed from an aircraft until it returns to service. Currently, P&W is taking over 300 days. SAVE and P&W have been in negotiations regarding fair compensation for the financial damages related to the GTF issue. SAVE recently stated that while no agreement has been reached, it believes that the amount of compensation it will receive from P&W will be a significant source of liquidity over the next couple of years.

Management also stated current discussions about refinancing the USD 1.1bn Loyalty Notes maturing in September 2025, and USD 500m of convertible notes maturing in May 2026 are in the early innings of thinking about how it will address those notes, and will do so when the time is appropriate, which we believe could occur if SAVE is able to execute on its strategy to become cash flow positive in 2Q24 and 2H24.

There was a newswire report out today that said that a bondholder group has engaged Akin Gump Strauss Hauer & Feld to provide legal advice in the wake of concern over Spirit’s financial position after the SAVE/JBLU merger was blocked. The bondholder group holds a majority of Spirit’s 8% Loyalty Notes due 2025. Another newswire reported that SAVE is working with Perella Weinberg as financial advisor and Davis Polk & Wardwell as legal advisor as the company is working trying to address its upcoming debt maturities.

Spirit’s equity closed today at USD 7.18, up 3.3% the day, while its 8% Loyalty Notes due 2025 traded at 70 (32.7% yield), up three points on the day, and its USD 500m 1% convertible notes due 2026 traded at 42 (44% yield), up three points on the day.

Our valuation for SAVE reflects a midpoint enterprise value to revenue (EV/Revenue) multiple of 0.40x and NTME revenue of USD 5.5bn. At the midpoint, all of SAVE’s debt is covered, and the equity price is USD 5.41. In another scenario using EBITDAR, using a NTME EBITDAR of USD 348m and a midpoint multiple of 5x, the secured debt is covered and the unsecured debt has a 13% recovery. This scenario includes a 5% restructuring fee.

SAVE’s Debt, Liquidity and Cash Flow

On 31 December, SAVE had USD 3.4bn in debt, flat with September and down from USD 3.6bn on 31 December 2022. The airline has about USD 316m of current maturities of long-term debt and finance leases. During 4Q23, SAVE increased the capacity of its revolver to USD 450m from USD 300m, and extended the final maturity to 30 September 2025.

Spirit Airlines announced that it completed a series of sale-leaseback transactions during 4Q23 and early January 2024 with respect to 25 aircraft, 20 in December and five in January, resulting in the repayment of approximately USD 465m of indebtedness on those aircraft and net cash proceeds of USD 419m. These asset sales, while providing liquidity that should help the company navigate through 2024, have left the airline with USD 1.2bn of unencumbered assets, which included USD 350m in hard assets (of which USD 250m-USD 300m is its new headquarters), USD 425m in pre-delivery deposits (PDPs) related to Airbus financing, and USD 500m in aircraft equity.

SAVE stated that on 31 December 2023, it had USD 1.3bn of liquidity that included USD 300m available under its revolving credit facility. The airline believes that it will be operating cash flow positive in 2Q24 and beyond. Our NTME liquidity forecast, that includes a USD 400m minimum liquidity requirement, shows that SAVE will burn USD 192m in cash.

Total capital expenditures for FY23 were USD 232.4m, primarily related to the building of SAVE’s new headquarters in Dania Beach, FL, and the purchase of spare parts, including four spare engines, partially offset by net inflows of aircraft pre-delivery deposits.

During 2024, SAVE plans to take delivery of 27 Airbus 320/321 neos that are fully financed with sale-leasebacks, and will retire 17 Airbus A319 aircraft. In fact, all aircraft through 2025 (48 planes) are fully financed, except one. As highlighted in our last report, SAVE’s purchase commitments for aircraft and engine orders, as of 30 September were expected to be USD 456m in 2024, USD 1bn in 2025, USD 1bn in 2026, USD 1.1bn in 2027, and USD 2bn in 2028 and beyond.

On 31 December 2023, SAVE had a fleet of 205 aircraft comprised of 19 A319 CEO, 64 A320 CEO, 84 A320 NEO, 30 A321 CEO, and eight A321 NEO. The company is in the process of selling its A319 aircraft and increasing the number of A320 and A321 aircraft.

SAVE has agreements with credit card processors that would permit them, under certain circumstances, to retain a holdback or other collateral when future air travel and other services are purchased via credit card transactions. The holdback is a percentage of overall credit card sales that processors could hold to cover refunds to customers if SAVE fails to fulfill its flight obligations. Since SAVE has satisfied certain liquidity and other financial covenants, credit card processors were not holding back any funds. Currently, the maximum potential exposure to cash holdbacks based on advance ticket sales was approximately USD 400m.

SAVE’s 1Q24 Outlook

Total revenue for 1Q24 is expected to be in a range of USD 1.25bn to USD 1.28bn, down from USD 1.35bn for 1Q23 with a 1.5% YoY increase in capacity. The company had expected capacity to increase 2% YoY, but the grounding of planes due to the GTF issue lowered this forecast.

For FY24, SAVE is forecasting capacity to be flat to up mid-single digits as it expects 2Q24 capacity to increase in the low-single digits, 3Q24 capacity to increase in the high-single digits, and 4Q24 capacity to be flat.

FY24 capex is estimated at USD 235m which includes USD 60m for pre-delivery deposits (PDP), USD 35m for aircraft engine purchases, and USD 140m for other capex.

SAVE said that while it cannot comment on the amount of potential compensation it expects to receive from P&W concerning the GTF engine issue, Spirit has included an estimate of the compensation recovery in its guidance, and will continue to do so throughout 2024.

Valuation

Our valuation for SAVE reflects a midpoint enterprise value to revenue (EV/Revenue) multiple of 0.40x and NTME revenue of USD 5.5bn. At the midpoint, all of SAVE’s debt is covered and the equity price is USD 5.41. In another scenario using EBITDAR, using a NTME EBITDAR of USD 348m and a midpoint multiple of 5x, the secured debt is covered, and the unsecured debt has a 13% recovery. This scenario includes a 5% restructuring fee.

SAVE – Est 31 December 2024

Total Secured Debt (est)      2,049

Less Estimated Cash           (1,085)

Net 1L Secured Debt                 963

Unsecured Debt                          661

Net Debt                                     1,625

Shares Outstanding               109.2

The Details

Total operating revenue for 4Q23 was USD 1.32bn, down 5% YoY. TRASM was USD 8.94 cents, a 17.3% YoY decline from USD 10.81 cents for 4Q22 on 14.8% more capacity. TRASM was USD 9.14 cents for 3Q23. Fare revenue declined USD 104.6m (-15.9%) YoY but rose USD 28.4m (5.4%) sequentially. On a passenger flight segment (PFS) basis, total revenue per PFS fell 15.3% YoY to USD 114.84 as fare revenue per segment dropped 25% YoY to USD 48.24 and non-ticket revenue per segment fell 6.6% YoY to USD 66.60. SAVE’s load factor for the quarter was 80.1%, down from 81% in 4Q22, and 81.4% in 3Q23. The airline’s aircraft utilization was 11.2 hours, up 3.7% YoY, despite being constrained due to engine availability issues driven by unscheduled engine maintenance events.

SAVE saw strong leisure demand during the holidays, especially in the Florida market, but saw weakness in Cancun and the Caribbean. In general, there was too much capacity, which was a headwind.

On the cost side, GAAP operating expenses fell 9.5% YoY to USD 1.5bn primarily due to the large decline in special charges. In 4Q22, the company reported special charges of USD 348.2m compared to USD 28.3m in 4Q23. On an adjusted basis, operating expenses rose 11.3% YoY mostly due to increased flight volume, additional leased aircraft, and inflationary pressures, primarily reflected in salaries and wages which jumped 28% YoY. The jump in salaries, wages and benefits is primarily due to the two agreements that SAVE negotiated with the unions for the pilots and flight attendants that were ratified in January 2023 and April 2023, respectively. SAVE had fuel efficiency benefits with the increase in the number of neo aircraft in its fleet.

SAVE reported CASM of USD 10.40 cents compared to 13.18 cents for 4Q22. On an adjusted basis, which excludes fuel, CASM was USD 10.05 compared to USD 10.36 cents for 4Q22.

The reported operating margin for 3Q23 was negative 16.3% compared to negative 22% for 4Q22.

We calculated adjusted EBITDA and EBITDAR for 4Q23 of negative USD 80.8m and positive USD 25.7m, respectively, compared to positive USD 142.8m and USD 215.2m, respectively, for 4Q22.

As of 31 December 2022, SAVE had net operating loss (NOLs) to reduce future tax income of USD 1.5bn for federal income tax purposes, and approximately USD 594m for state income tax purposes.

Business Description: Spirit Airlines (SAVE), as an ultra low-cost (ULCC) carrier, offers affordable travel to value-conscious customers. The business model allows SAVE to offer unbundled base fares with customers given the ability to choose options such as checked and carry-on bags, advance seat assignments, priority boarding, and refreshments (non-fare passenger revenue). As of 31 December 2023, it had a fleet of 205 Airbus aircraft, and is in the process of retiring the 19 A319 in its fleet. During 2022, the airline served 92 destinations in 16 countries situated in Latin America, the Caribbean, and the US. SAVE has six union-represented employee groups that together represented 85% of all employees on 30 September 2023. The two largest unions, The Air Line Pilots Association, International (ALPA) represented 27% of the workforce and has its contract expiring in January 2025, while the Association of Flight Attendants (AFA-CWA) represented 48% of the workforce and has its contract expiring in January 2026.

Click HERE for previous Debtwire credit report on Spirit Airlines.

(Photo: Spirit Airlines)