Spirit Airlines delivered an extremely bearish message to investors this week, warning of a steep operating loss in the quarter that ends this month.
The Florida-based carrier now expects a third-quarter operating margin to register somewhere between negative 15-16%, a figure that stunned even competitors. Speaking at a Morgan Stanley investor event this week, United Airlines executive Michael Leskinen, said “the magnitude of what we have seen from peers was as shocking to us as it was to all of you.” He was referring to not just Spirit but also Frontier Airlines, which similarly reversed course and now expects a third quarter loss.
In August, Spirit expected an operating margin of roughly negative 7% in the third quarter. But fuel prices have increased sharply in recent weeks, while demand has softened. It now expects to pay an average of $3.06 per gallon for fuel this quarter, a 9% increase from the $2.80 forecast it assumed a month and a half ago. Total revenues for the quarter, meanwhile, will be about 4-5% less than previously forecast.
“During the last few weeks,” Spirit wrote in a regulatory filing, “the company has seen heightened promotional activity with steep discounting for travel booked for the second half of the third quarter through the pre-Thanksgiving travel period.”
The alarmingly poor forecast follows a difficult first half for Spirit, once routinely among America’s most profitable airlines. In the first and second quarters, only Hawaiian Airlines performed worse in terms of operating margin. United’s Leskinen, in his Morgan Stanley address, described what he saw as “a complete inversion of the industry structure,” pointing to supply-side constraints that are hobbling ultra-low-cost carriers like Spirit, which have historically depended on rapid capacity and workforce growth to achieve unit cost advantages.
“Air traffic control is going to be constrained. The OEMs [original equipment manufacturers building planes and engines] are going to be a constraint. Pilots are going to be a constraint,” Leskinen said.
Spirit will in fact grow capacity, measured in available seat miles (ASMs), about 13% this quarter compared to last year. But that’s less than it was hoping to grow coming out of the pandemic. In fact, it slightly lowered its capacity growth outlook for the quarter, from 13.7% in early August to 13.4% currently. Importantly, Spirit’s capacity plans have been greatly disrupted by Pratt & Whitney’s much-discussed difficulties delivering engines for A320neo jets. During its second quarter earnings call in early August, Spirit CEO Ted Christie remarked: “Exposure to this issue is very unique and material for us and is having an impact on our margin.”
Spirit’s bleak outlook raises questions about whether other U.S. airlines are seeing similar pressures. Several have provided updates in recent days, in all cases acknowledging the challenge of higher fuel costs. Frontier, like Spirit, dramatically revised its earnings forecast downward, moving from an expected pre-tax margin of positive 4-7% to negative 4-7%. “In recent weeks, sales have been trending below historical seasonality patterns,” Frontier said in a statement. It also blamed hurricanes and other operational disruptions.
Speaking at the Morgan Stanley event last week, CEO Barry Biffle said, “Airlines Reporting Corporation has kind of shown you that over the last couple of weeks, things have changed and sequentially gotten worse. You’ve gone from industry sales being up to flat, to now being down versus 2019, and that’s coming at a time that capacity is going up. And then the third leg of that stool is fuel. So you’ve got fuel, capacity, and demand all headed in the wrong direction.”
Alaska Airlines lowered its third-quarter earnings guidance as well but still expects a healthy profit. Others have pointed to some modest demand weakening. But in general, the strong demand and revenue outlook enjoyed across the industry this spring and summer appears to persist, according to Alaska, Southwest Airlines, United, and others. American Airlines, for the record, lowered its third-quarter operating margin guidance to 4-5%, from a midpoint of 9%. Its unit revenue guidance worsened modestly.