Great. Hey, everybody. Welcome back. It's Jamie Baker and Mark Streeter. Apologies for the telephonic challenges. That falls on JP Morgan's shoulders, not Spirit in this case. We're a couple minutes, you know, behind schedule, though, so I do wanna turn it over to Ted Christie. And just as a reminder, Mark and I will be handling Q&A, but if you have any specific questions that, that you'd hope we might bring up with management, please feel free to email. Ted, I assure you I'll go into mute now, which is good. And I'll let you take it from here. Thank you.
Perfect. Perfect. Thank you, Jamie. Good morning, everyone. This is Ted Christie. I'm the CEO of Spirit Airlines. I'm joined today by Scott Haralson, our CFO, and Matt Klein, our Chief Commercial Officer. I hope everyone had the opportunity to pull down the presentation that we posted to our IR website as well as to the JP Morgan site. Just a few slides that I'll talk through, and then, I'll let Jamie and Mark ask questions after that today. I think the best place to start on slide three is a quick update as to what we're seeing so far as it relates to the impact of COVID-19 on our business, and then we'll get to later how what we're doing to react to that and the status of the company's resiliency.
First, as it relates to the first quarter, January and February, we were in a very good position. Both months were performing very well, setting us up for what was going to be a very good quarter. In fact, if you look at our second bullet, we estimate that our CASM ex-fuel performance for the quarter right now will be trending towards the good end of our original guide, in fact, a little bit better than that, at up 3%, which is reflective of very good operating performance. Since late February, when news of COVID-19 really started to spread into the United States marketplace, we began to see.
It is our belief, by the way, that that largely stems from a fall in demand in both domestic corporate travel, coupled with the significant impact that the COVID-19 has had on demand in the transatlantic and the transpacific, restricting additional demand for the domestic leg of international journeys. All of that creating an environment whereby larger network carriers were competing for leisure traffic across the booking curve and doing so at very low fare levels, which is compressing yield closer in. I will show you a chart in a second as it relates to volume, but the slightly silver lining view of that is that despite these, what is an impact on yield, we are still seeing leisure traffic, and our volumes so far for the month of March, we're still gonna produce load factors in the 80s.
We're definitely getting volume, but it's coming at much lower yield. The other factor moving around since then has been the well-publicized fall in fuel prices, which has helped offset some of the yield pressure that we've experienced in the month of March, but not all of it. Given the uncertainty of the impact of demand on demand of this, of COVID-19, we have suspended our full-year guidance as of right now. The components of that largely being, obviously, we gave a full-year capacity guide, we gave a full-year margin guide, and obviously fuel-related guidance that we are saying is considerably lower than where we were at that original moment.
If you flip to the next slide, which is slide four, which is what are we doing, since this became more of a news story? First, as we've disclosed here today, we're taking a look at our network, and we're making what we believe to be smart and important decisions for the Spirit network to make some reductions in the near term. Loaded yesterday, we will be trimming our April capacity by about 5%. Most of that capacity comes in the role being just the first move, and I think that's a baseline at this point, but we're gonna make probably some additional changes as we look at the May schedule, given that we have a little more time prior to awarding those schedules to our crew members.
From an operating perspective, the team mobilized very quickly and put in place a task force that is led by our VP of Safety and Security and has almost an incident response type setup to it where we have a daily meeting and a briefing on the news learned as it relates to updates from both the CDC and the World Health Organization, as well as our own consultants and our airline partners, such that we're making sure that we're consistent with and ahead of the game in planning for any response to exposure to the virus.
We've deployed some incremental training for our crews so they're aware of response to infectious diseases to make sure that they're taking care of themselves, our team members, and our guests in the right way to enhance cleanliness on board the airplane at all our facilities, including, for example, on the airplane, higher touch items like laboratory doorknobs and, as you know, materials that we use to clean the airplane are certified to kill the coronavirus. As you all probably know, modern aircraft, us having amongstlets in the air as well. Generally, feeling pretty good about the cleanliness on board the airplane as well. From a guest relations perspective, beginning in late January, we began allowing more flexibility with regard to change as it relates to concerns, proactive, as well.
If I take you to slide five, just a quick snapshot, as I referenced earlier, as to how we've performed since really the news started, the news cycle really picked up, which was, we call it the beginning of March. You can see our load factors still in the mid-80%, which March is a peak month. We're beginning spring break here, early this week, and it'll roll through the remainder of March and into the second week of April with Easter. I would say loads across the board are down a few points in our system, but we're still able to get traffic at low yields, which is the leisure traffic that we're all very familiar with and that we're built to carry.
If I could have you turn to our sixth slide, it talks a little bit of a, you know, a much more discreet event, but I think the things that make Spirit successful in a wide array of economic backdrops clearly set us up to be in a very good position to deal with a downturn in demand and/or, you know, much lower yields at our demand point. First, we have the best cost structure in the business, and while that's an important part of the stimulation model that we drive, it is also our best defense as we head into tougher economic times. Anyone can sell low fares. The issue is who can sell low fares to operate at these lower times and do so much more profitably than our peers can do.
In addition to that, we start with a higher margin business, which naturally acts as a shock absorber in more recessionary-type environments. Our margins have historically always been above the average in the business, which is true today, and we believe that gives us a little more cushion when things get a little tougher. As we rotate to the balance sheet, Spirit has historically and intentionally created a balance sheet with a much stronger liquidity position. Perspective, we wanted to do it so we had adequate self-insurance to insulate ourselves against various shocks, be they demand or fuel price, and clearly competition, which we believe on a metric basis, as I said earlier, is amongst the best in the industry.
What we've also done since the IPO has strengthened the balance sheet by improving the overall unencumbered asset position of the business, where today we have in excess of $700 million in assets sitting on the balance sheet in properties and facilities and spare parts that are imminently financeable, and provide us with additional access to liquidity to the extent that we felt that was necessary. The debt on the balance sheet is all largely amortizing debt in the form of mortgages on airplanes or WTC bonds, which also have an amortization profile to them, and they are very covenant light from a financial covenant perspective. The company is able to weather and deal with kind of temporary fluctuations in demand using its cost structure and its balance sheet. Flipping to slide seven, this just gives you the lineup.
We've seen this chart many times, but I think it's important to reinforce that what it shows you and illustrates is that in periods of distress, when corporate travel begins to dry up and when long-haul transatlantic and transpacific becomes challenged, it becomes more difficult to subsidize low- fare competition without higher fares backing you up. I think that's going to create an opportunity for Spirit over the longer term. Finally, this last slide before Jamie, I turn it over to you for Q& A. You can see when you combine balance sheet liquidity plus undrawn revolvers plus unencumbered assets that we sit in a very enviable position today. So, with that, I'm gonna turn it over to you, Jamie and Mark, and we're happy to take some questions.
Yeah, that's great. Thank you very much. Do we have a clear connection?
We hear you. We hear you loud and clear. Or we did. You just broke up.
Which phone's there? Last week we held a conference call and identified the Spirit model as, you know, being easier than most to tip into lost production, you know, if we simply slash the top line and management didn't do a thing. And that's obviously not the right way to be thinking about this. How should we think about your ability to remain profitable during times of reduced capacity? I mean, I think one of the things we're learning this morning from the other presenting airlines is that, you know, demand outside of seven days can be stimulated by, you know, by, by lower fares. I'm not looking for any assurances or promises here, but, you know, given the capacity cut, given stimulation, should we be sufficiently confident in your ability to remain profitable?
You know, you can take a number of cuts at this where one of them being we wouldn't do anything, right, which is not the way we manage our business and have never managed our business. In fact, today, as we announced, we're reacting with capacity moves. And then in addition to that, I didn't spend a lot of time talking about it, but as you would expect, we're also evaluating our own discretionary spend as well as our capital expenditure, and making some decisions regarding that as well.
This is not the type of business, nor are we the type of company that sits on its hands and rests on its laurels, despite the fact that we have, what we believe to be tremendous assets in our favor in a competitive low fare environment, the primary being that we're the only ones that can offer these fares at our cost structure and even have a hope at profitability. I think, you know, we're gonna do the right things to manage the business from a liquidity standpoint and from a profitability standpoint.
When you look at the company's EBITDA production over the last few years, and factor in what has been a rapid and steep decline in fuel prices, you can do your own math, but you can imagine that the shock absorber there from a margin perspective is pretty large with regard to the ability to maintain profitability with reductions in unit revenue. It helps to have $0.055 CASM. I mean, that's the primary thing.
Yeah.
Yes, we do feel confident that we'll be able to manage through this, and we expect to come out the other side of it in an ability to take advantage of the opportunities that exist.
And thank you because I think it was important to clear up, you know, some of our comments from last week. So that's helpful. Just given that some of your owners might be a little bit less familiar with the typical ULCC cost structure, and we've heard from other airlines this morning, how much should we model for CASM going up for every, you know, point or so of capacity that comes out? How is your variable- to- fixed cost relationship, you know, different than your higher cost competitors?
Sure. I'm gonna give you a couple of comments. I'll let Scott fill in the blanks as well. But one of the reasons, Jamie, that we over the years have, you know, not taken hits, I don't know the right way to explain it, but we're a reasonably high-growth airline, growing in the 15% range. We often get the question, at least, that says, "Well, if you guys are growing so much, how come your unit costs aren't running down, quicker than?" The stated, the underlying assumption there is that a tremendous amount of the expense we add when we add an airplane is variable. And so, the variable-fixed mix here, I think, is considerably more favorable to variable than it would be somewhere else. The inverse is generally true as well.
When capacity isn't moving as quickly or growing as quickly as you would originally anticipate, because we tend to be more variable, it doesn't have the same amount of pressure that you would expect in other places. The definition of variable, by the way, can float depending on when you define it. In the near term, there are components of our crew, for example, that are fixed. But as you move over time, crew becomes more variable because you make decisions with your fleet. Once you incorporate crew into that variable mix, it becomes the vast majority of the business because then the fixed component of our business is really reduced to aircraft overhead and fixed-related amortization expense associated with heavy maintenance. The rest of the income statement can be at some point more variable than you would expect.
The bid packages will be submitted after we made the changes. So, the near-term impact to the crew won't be fixed. Secondarily, when you think about what happened to us last year, the loss in ASMs was due to cancellations, which had a cost increase in addition to the loss of the ASMs. So, pulling the ASMs out the way we've done it this year won't be as impactful as we've seen in 2019 from a year-over-year change. We do expect there to be some pressure events, and we'll be able to plan for more variability in the cost structure. There will be pressure, but it won't be as impactful as you might think.
I think you answered this, but one question that was just emailed to me was, you know, what were the best practices that. Practices that you now possess relative to this time, I guess, about six months ago?
Yeah, I think there were learnings that we've kind of, and to your point, I know there's people on the call still learning about the company, but we've gone through some of the things that we implemented last year in an effort to drive efficiency into the business that instead created some volatility when presented with more challenging operating environments, be it bad weather or difficult runway construction timing or whatever it might be. Really, we can quickly summarize those things around crew, crew-related reserves and peak utilization, especially on particular fleet types.
As we headed into more peak periods, towards the end of last year and then throughout the course of this year, we were much more, we made the necessary adjustments, I guess I would say, to ensure that we had adequate reserves for both our pilots and flight attendants. Again, we're talking about sensitivities here in single-digit percentage points of reserves. We're not talking about wide fluctuations.
When you cancel five or six or seven flights a day, which may not sound like a lot, your completion factor is still relatively high at that number, but if those flights are controllable cancellations, they can be extremely expensive to Spirit. The sensitivity there is in small numbers. We made the necessary adjustments to our crew staffing. In addition, one of the other takeaways from last summer is that we found that we had increased peak utilization, you know, to drive revenue production in the peak period, but we did it, unfortunately, in one of the more fragile fleets, which was our oldest fleet, the 319. And so the good news here is as we move into the next year and the coming years, the 319s obviously will be used less this year.
Their utilization will come down. The airplanes that will get more, more utilization will be the newer, more fuel-efficient A320neo aircraft. The net effect of all this, by the way, being utilization down a little bit in the peak, but more importantly, going to be a tailwind operating performance in the peak.
Okay, that's helpful. Very helpful. Let me pass to my colleague, Mark Streeter, who I think has a question.
Yeah. Hello. Can you hear me?
Yeah. Hey, Mark.
Okay. Great. Thanks. You know, we're sort of breaking out the distress playbook from all the prior cycles here that we've gone through with a lot of the major network airlines. I realize you're different with the ULCC model. You've got your low CASM and so forth. How do we think about some of the levers that you can pull, your primary partner, for example, on that pipeline? You know, anything that you might be able to do in terms of credit card relationships or I don't think you have much in terms of route slots and gates, but just sort of talk about if it gets really bad, how do you raise liquidity?
Hey, Mark. This is Scott. I'll start. I think what Ted outlined in the levers, obviously, we're gonna manage our capital expenditures. We're gonna do things internally to restrict cash outflows. We do have, you know, obviously, a fairly large relationship with Airbus and credit card provider as well. I think the ability to, you know, first step is to think about our unencumbered assets. We'll likely probably enter that market here shortly and see what's available to us. I think we do have other avenues, but the vast majority of it is going to be around the unencumbered assets.
What's the best way to do that in this market is you've had success in the EETC market. Obviously, you could go to the banks and just pledge the collateral. You could do sale- leasebacks. You know, right now, given and I realize things are changing day to day right now. We just had that Delta EETC, but the markets are moving pretty quickly here. How would you envision raising that liquidity?
Yeah. I mean, right now, we do have a couple of assets, and I would sort of bifurcate it into aircraft and non-aircraft. I think the aircraft market from a secured basis is readily available. There is EETCs. There's private placement public EETCs, as well as secured bank funding. And the non-aircraft side, probably a revolver-type facility would probably make the most sense. We'd probably think about two different avenues there. I think what we've been told and as we've been thinking about the market, there is definitely an avenue for secured lending in this market. Unsecured would likely be a little more difficult. I think on a secured basis, there's definitely capital to be had.
I would agree with you on the latter point. Great. Thanks very much. I'll turn it back over to Jamie.
Sure.
Hey, guys. An investor question here. Prior to the crisis, Spirit had achieved détente with the industry. Delta had, in fact, spoken publicly about profitable cohabitation with ultra-low-cost carriers. In the absence of corporate demand, shouldn't we assume that larger competitors try to prey on Spirit's lower fare passenger base despite their higher costs? How would you respond to that?
I made a few comments in the beginning, and I guess I'd echo some of that. I think the way we've always talked about the macroeconomic cycle, and I would use that, I would use the same theory and using history as a guide, would tell us the following: that as you head into a more challenged economic cycle, be it because of a recessionary environment or, in this case, what we hope is a more transitory event, the first thing that happens is that corporate travel does dry up. And what we've seen historically is that while aircraft all are already deployed, higher-cost carriers will compete for leisure travel at lower fares in order to fill the marginal seat.
And so with that being true, at the front end of the news around a tougher cycle, you're gonna see yield depression across the board, both large and smaller, low-cost carriers. The next phase of that tends to be that the recognition that that traffic is, not only is it dilutive, but it tends to burn cash quickly at high-cost levels. And so the first thing that happens is, marginal capacity begins to be removed. You know, you're not gonna see wholesale major retrenchments into hubs, that sort of thing.
That's the way it's worked in the past, which then starts to normalize the supply-demand balance, imbalance in this case, and starts to put it more into balance with the available corporate demand and leisure demand at low fares. What I can tell you about what's happening today is the first is definitely true. I alluded to it earlier that we're seeing competition with low fares, close in for leisure traffic. The change in domestic capacity close in, which is probably a little quicker than we've seen in other cycles, they tend to burn in a little bit more than what we're seeing here.
On that, I think we feel very good about our ability, A, to compete for leisure traffic, and B, to be able to deal with the temporary blip that we're experiencing today, such that we'll be in a good position.
Excellent. Thank you for that. Another one, that just came in. If you remember, then March would have been sort of a TRASM down, you know, 12%-13% to arrive at the new pre-tax margin guidance. One, is that reasonably accurate in gross bookings.
Right. I think that, first of all, the ballpark feels about right to me as it relates to TRASM performance in the month of March. As to the second point, we're still taking net bookings. We're still in that position. I would describe the impact because of the need to do so as it relates to the coronavirus. I would say that that's a smaller component of the issue, the bigger component of the issue being overall yields just being lower.
Okay. Helpful. Another one that just came in, and you, you addressed this a bit with Mark, you know, in terms of flexibility down the road with new aircraft deliveries. Can you talk about your flexibility to let go of older, owned and/or leased, aircraft?
Hey, Jamie. This is Scott. Yeah. Ted mentioned we do have 29 fully unencumbered aircraft. A majority of those are the aging 319s. We do have some flexibility if we thought that was the right decision to put those down. Or we could encumber those to generate cash. We could do, you know, one of two things with those unencumbered aircraft. We will consider both of those options as we go forward. I think a lot of this is going to depend on duration of the impact.
We'll sort of step through this as Ted have some flex on the unencumbered side. As far as our current leases, obviously, very little flexibility from our leases in that perspective, but also limited flexibility in the near term from, you know, our own order book and the aircraft we're taking. Obviously, those are firm aircraft. We do obviously have a strong relationship with Airbus, and Airbus historically has shown a willingness to work with airlines. At this point in time, we don't expect to think about any near-term, you know, pushes and deliveries.
Okay. And then last question for me, and this is not one that I've asked of other management teams this morning, and it's highly speculative, but just sort of, I don't know, philosophically, how does this all end? I mean, when we think about lessons learned in prior downturns, new entrant aspirations, obviously, you guys don't know any better than JPMorgan does, you know, when does the downturn conclude? When do people get more comfortable flying? You kind of fast- forward a few years. I mean, thematically, does this change the shape of the domestic airline industry?
So, our belief is no. You know, it's, like you said, it's hard to say for sure what's gonna happen here, but our view is that, now I'm transitioning a little bit into personal opinion, but, you know, this, our expectation is that we'll navigate the scope of COVID-19 to the point where, you know, clearly this is disruptive, but I think it's created a tremendous amount of opportunity to both continue to explore the new markets, but more importantly, to improve the margins of the business, as we focus on better revenue execution, better network deployment, opportunities, and kind of technology driving a lot more efficiency in our business. I don't think that that's a dramatic shift either. It's hard to say y ou know, I know everyone's scratching their head, and I know there was some discussion around small percentage numbers reduction in revenue.
Driving, outpaced volatility, which I think could have been misinterpreted just based on the company's growth rate and that sort of thing. I think I alluded to it earlier. It's as simple as looking at the company's EBITDA production, which no matter how you kind of pump it through, you're pretty large numbers before you're even kind of getting to a point where you're talking about liquidity. It feels like that's kind of been lost in the shuffle, in my opinion. If I, you know, I know we wanna talk about broad base and all that other kind of stuff, but it does feel a little bit reactionary right now. I think that will just have to be something we prove over time.
That's super helpful. Gentlemen, and Deanne as well, thank you very much for taking the time today. Good luck with the investor meetings. For those still on the line that wanna transition over to Alaska, we'll be starting in, you know, a couple of minutes. Thank you to the Spirit team. Thanks, Ted and everybody.