Spirit Airlines, Inc. (NYSE: SAVE) today reported first quarter 2020 financial results. These results reflect the adverse impact of the material decline in demand for both international and domestic travel resulting from the spread of novel coronavirus ("COVID-19").
Prior to March 2020, the Company was on track to meet or beat its first quarter 2020 pre-tax margin guidance of 6.5 percent to 7.5 percent. However, beginning with the second week of March through the end of the month, load factors and yields declined significantly as events across the U.S. were canceled, theme parks closed, and travel restrictions were implemented and broadened, resulting in a significant drop in passenger demand and bookings.
"The health crisis, loss of demand, and corresponding economic impact caused by COVID-19 is unprecedented. I want to thank all of our Team Members for their dedication to the safety and well-being of our Guests and each other, and for pulling together to help the Company meet the financial challenges we are facing. I am very proud of the Spirit team and I am confident that given our quick action to adjust, our industry-leading low-cost structure, our strong balance sheet, and the resiliency and commitment of our Team Members, we will emerge from this crisis ready to deliver on our promise of high quality and low fares," said Ted Christie, Spirit's President and Chief Executive Officer.
In response to COVID-19, the Government approved a financial stabilization assistance package through the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). Spirit commends President Trump, the Administration and members of Congress, for their support of the airline assistance programs included in the CARES Act. The benefits under the CARES Act help to position Spirit to support the economic recovery in the destinations it serves by continuing to provide low fare air travel to millions of Guests annually.
Capacity Reductions, Expense Management, and Liquidity Measures
In response to government restrictions on travel and drastically reduced consumer demand compared to its original 2020 plan, Spirit has taken many steps to reduce costs and to preserve and enhance liquidity, including:
- Reduced capacity for April 2020 by approximately 75 percent, and for May and June by approximately 95 percent. However, the situation is very fluid and actual capacity adjustments may be different than what the Company currently expects;
- Entered into a senior secured revolving credit facility ("RCF") for an initial commitment amount of $110 million (with an option to increase overall commitment amount up to $350 million with the consent of any increasing lenders). The RCF commitment was recently increased to $135 million, which was fully drawn during the month of April 2020. In May, we received a commitment to increase the RCF by $30 million to $165 million effective May 18, 2020, subject to the satisfaction of certain conditions precedent;
- Reduced planned discretionary capital spend in 2020 by approximately $50 million. The Company also is in discussions with Airbus to defer some 2020 and 2021 aircraft deliveries and related pre-delivery payments. The Company expects to reduce aircraft-related capital spend by approximately $185 million if those discussions are successful;
- Reduced 2020 planned non-fuel operating costs by $20 million to $30 million, excluding savings related to reduced capacity;
- Suspended hiring across the Company except to fill essential roles;
- Engaged in discussions with the Company's significant stakeholders and vendors regarding financial support or contract adjustments, including extensions of payment terms, during this transition period;
- Worked with our unionized and non-unionized Team Members to create voluntary leave programs;
- Entered into a Payroll Support Program Agreement ("PSP") with the U.S. Department of the Treasury pursuant to which the Company expects to receive a total of approximately $335 million in 2020 over the course of the second and third quarters. The PSP funds will be used exclusively to pay for salaries and benefits for the Company's Team Members, and the receipt of the funds will subject us to certain ongoing restrictions;
- Applied for a loan from the Treasury under the CARES Act ("Loan Program"). Spirit's maximum potential availability under the Loan Program is approximately $741 million. However, it is dependent on the amount and types of collateral accepted, which may result in an actual loan less than $741 million, if the Company accepts the loan. Over the next several months, the Company will be evaluating whether to take advantage of this government assistance. The Company also expects to realize significant liquidity benefits associated with the income and federal excise tax relief provisions in the CARES Act up to approximately $180 million during the current year. In addition, the CARES Act provides for deferred payment of the employer portion of social security taxes through the end of 2020, with 50 percent of the deferred amount due December 31, 2021 and the remaining 50 percent due December 31, 2022. This is expected to provide the Company with approximately $24 million of additional liquidity during the current year; and
- In connection with its participation in the PSP, the Company also will be obligated to issue to Treasury warrants to purchase up to 500,150 shares of common stock of the Company, par value $0.0001 per share (“Common Stock”), at a strike price of $14.08 per share (the closing price for the shares of Common Stock on April 9, 2020). The Company also would be required to issue to Treasury a number of warrants equal to 10% of the final loan principal amount divided by the same strike price as noted above ($14.08), representing a potential conversion of up to 5.3 million of underlying shares of Common Stock.
Additionally, Ted Christie, the Company's President and Chief Executive Officer, has temporarily reduced his base salary by 30 percent. All Senior and Executive Vice Presidents and members of the Board of Directors have temporarily reduced their compensation as well.
The Company anticipates it may implement further discretionary changes and other cost reduction and liquidity preservation measures as needed, in order to address the volatility and rapidly-changing dynamics of passenger demand and the impact of revenue changes, regulatory and public health directives, and prevailing government policy and financial market conditions. There is no guarantee that we receive all or any of the benefits we expect to receive under the CARES Act.
Caring for Guests and Team Members
Safety is always the Company's top priority. Since the COVID-19 outbreak, the Company's Operations and Task Force teams remain in constant contact with authorities, continuing to evolve its response to ensure the safety of Guests and Team Members. In addition to existing procedures including utilization of hospital-grade disinfectants and state-of-the art High-Efficiency Particulate Air ("HEPA") filters that capture 99.97 percent of airborne particles, the Company has taken other protective measures including:
- Secured and distributed additional supplies of gloves and sanitizer across the network and augmented the contents of onboard supply kits;
- Expanded cleaning protocols at airports and other facilities, including the use of electrostatic sprayers at select locations;
- Expanded aircraft turn and overnight cleaning protocols focusing on high frequency touch points as well as enhanced cockpit cleaning;
- Launched a new aircraft fogging program to provide additional disinfecting;
- Offering complimentary re-seating to provide additional distancing between Guests;
- Offering future flight credits with extended expiration dates to Guests with impacted travel plans;
- Leveraging its technology-driven solutions like automated self-bag drop and self-bag tagging to allow for contactless check-in; and
- Announced a new policy requiring all Guests and Guest-facing Team Members to wear a face covering when traveling through the airport and while onboard the aircraft.
As bans on travel were implemented with little notice, many travelers became stranded abroad. Spirit has operated specially approved flights for stranded travelers in Aruba, Colombia, Dominican Republic, Haiti, Panama, and the U.S. Thus far, Spirit has provided transportation to more than three thousand stranded travelers, and preparations are ongoing to transport hundreds more home in the coming days.
Spirit has also made efforts to address the growing needs of its communities through The Spirit Airlines Charitable Foundation (the "Foundation"). As part of its focus on supporting families, the Foundation partnered with other non-profit organizations including the YMCA and Jack and Jill Children's Center to provide food to seniors and families struggling during this time and supported organizations with the fabrication of face masks for healthcare workers.
First Quarter 2020
For the first quarter 2020, Spirit's total operating revenue was $771.1 million, a decrease of 9.9 percent compared to the first quarter 2019.
Total operating revenue per available seat mile ("TRASM") for the first quarter 2020 decreased 18.8 percent compared to the same period last year.
The year-over-year decrease in total operating revenue and TRASM for the first quarter 2020 was driven by the significant drop in load factor and yields as a result of COVID-19.
For the first quarter 2020, total GAAP operating expenses increased 8.0 percent year over year to $829.1 million. Adjusted operating expenses for the first quarter 2020 increased 8.2 percent year over year to $829.1 million2. An increase in flight volume of 11.5 percent and higher depreciation and amortization were the primary drivers of these additional expenses.
Aircraft fuel expense in the first quarter 2020 decreased by 7.2 percent year over year, on a 7.4 percent increase in fuel gallons consumed, due to a 13.4 percent drop in average fuel cost per gallon.
Spirit reported first quarter 2020 cost per available seat mile ("ASM"), excluding operating special items and fuel (“Adjusted CASM ex-fuel”), of 5.64 cents2, an increase of 3.3 percent compared to the same period last year, which was modestly better than expected on lower-than-planned capacity growth. On a per ASM basis, the largest driver of the year-over-year increase was salaries, wages and benefits as the Company had commitments to pay its unionized Team Members at a guaranteed volume greater that what it actually operated as a result of COVID-19. Higher depreciation and amortization and other operating expense per ASM also contributed to the increase.
Liquidity and Capital Deployment
Spirit ended the first quarter 2020 with unrestricted cash, cash equivalents, and short-term investments of $894.4 million and an undrawn $110.0 million revolver. On April 20, 2020, the revolver commitment was increased to $135 million, which was fully drawn during the month of April 2020. In May, we received a commitment to increase the RCF by $30 million to $165 million effective May 18, 2020, subject to the satisfaction of certain conditions precedent.
Also on April 20, 2020, the Company entered into a PSP with the U.S. Department of the Treasury pursuant to which the Company expects to receive a total of approximately $335 million. In April, the Company received $167 million of the PSP funds and expects to receive the balance of funds by July 2020. The PSP funds will be used exclusively to pay for salaries and benefits for the Company's Team Members, and subject us to certain ongoing restrictions. We expect to meet our cash needs for the next twelve months with cash and cash equivalents, financing arrangements, government assistance under the CARES Act, and cash flows from operations.
Operating activities in the three months ended March 31, 2020 provided $35 million in cash. Capital expenditures during the first quarter 2020 were $195.4 million, partially offset by proceeds from issuance of long-term debt of $169.0 million related to aircraft purchases. The company took delivery of a total of six aircraft during the quarter; four of these were debt-financed and two were secured with direct operating leases. The Company also purchased two aircraft off-lease resulting in payments of finance lease obligations of $24.8 million. Debt payments during the first quarter 2020 were $62.9 million (principal, interest and fees). Also during the first quarter 2020, the Company made pre-delivery payments of $123 million, and $2.9 million of capitalized interest for future deliveries of aircraft and spare engines.
"The rapid change in the economic environment and the substantial reduction in passenger demand led us to take quick and decisive actions to cut costs, preserve capital, and raise additional liquidity. This is an unprecedented turn of events for Spirit and the entire airline industry, and I want to thank our Spirit team and let them know I appreciate their hard work and dedication to help preserve Spirit's future. We entered the crisis with a strong liquidity position and healthy balance sheet which will benefit us as we manage through low travel demand period," said Scott Haralson, Spirit's Chief Financial Officer. "We estimate our current average daily cash burn rate3 is about $4 million and we are evaluating initiatives to further reduce that amount should demand not begin to rebound in the coming months. While we still have a lot of work ahead of us, I am confident that together we will leverage our resources and tools to reinforce our balance sheet and put us in the best position to navigate the economic downturn and prepare for the recovery period."
As of March 31, 2020, we had approximately $900 million of unencumbered assets. As of April 30, 2020, approximately $250 million of these assets were pledged under the 2022 Revolving Credit Facility, leaving approximately $650 million of assets unencumbered, primarily consisting of aircraft.
In response to the impact from COVID-19, the Company has reduced planned discretionary capital spend in 2020 by approximately $50 million. The Company also is in discussions with Airbus to defer some 2020 and 2021 aircraft deliveries and related pre-delivery payments. For comparison purposes, on February 5, 2020, the Company filed an 8-K in which it estimated purchase of property and equipment and net pre-delivery deposits (aircraft-related capital expenditures) would be approximately $710 million for 2020 and other capital expenditures would be approximately $110 million for 2020.
In addition to reducing its planned capital expenditures, the Company has deferred approximately $20 million of heavy maintenance events from 2020 to 2021.
Spirit took delivery of six new A320neo aircraft during the first quarter 2020, ending the quarter with 151 aircraft in its fleet.
Due to the passage of the CARES Act, the Company recorded a $31.1 million discrete tax benefit in the first quarter 2020 related to net operating loss carrybacks to 35 percent statutory tax rate years. On a GAAP basis, the Company's tax rate for first quarter 2020 was 62.7 percent. Excluding this discrete tax benefit, the Company's effective tax rate for the first quarter 2020 was 21.0 percent.
Conference Call/Webcast Detail
Spirit will conduct a conference call to discuss these results tomorrow, May 7, 2020, at 9:00 a.m. ET. A live audio webcast of the conference call will be available to the public on a listen-only basis at http://ir.spirit.com. An archive of the webcast will be available under "Webcasts & Presentations" for 60 days.