Spirit Airlines (SAVE) Q3 2021 Earnings Call Transcript

Spirit Airlines (SAVE)
Q3 2021 Earnings Call
Oct 28, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to the third quarter 2021 conference call. My name is James, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.

[Operator instructions] And I'd now like to turn the call over to DeAnne Gabel, senior director of investor relations. DeAnne, you may begin.

DeAnne Gabel -- Senior Director, Investor Relations

Thank you, James, and welcome, everyone, to Spirit Airlines' third quarter 2021 earnings call. This call is being recorded and simultaneously webcast. A replay of this call will be archived on our website for 60 days. Presenting on today's call are Ted Christie, Spirit's chief executive officer; Matt Klein, our chief commercial officer; and Scott Haralson, our chief financial officer.

Also joining us in the room today are other members of our senior leadership team. Following our prepared remarks, there will be a question-and-answer session for sell-side analysts. Today's discussion contains forward-looking statements that are based on the company's current expectations and are not a guarantee of future performance. There could be significant risks and uncertainties that cause actual results to differ materially from those reflected by the forward-looking statements, including the risk factors discussed in our reports on file with the SEC.

We undertake no duty to update any forward-looking statements. In comparing results today, we will be adjusting all periods to exclude special items. Please refer to our third quarter 2021 earnings release, which is available on our website for the reconciliation of our non-GAAP measures. With that, I turn the call over to Ted.

Ted Christie -- Chief Executive Officer

Thanks, DeAnne. Thanks to everyone for joining us today. Over the past 18 months, our Spirit team members have proven time and time again that they are the best in the business. Third quarter 2021 started off very strong with July being solidly profitable.

Unfortunately, our own irregular operation in August, together with a surge of Delta variant cases, led to a third quarter loss of $74.6 million. Higher fuel prices continued travel restrictions and near-term staffing issues have all played their part in delaying our returns to sustain profitability. The direct and indirect impacts of the pandemic have lasted longer than anyone could have predicted. It may take some time for the industry to adjust to the near-term challenges, but nothing about the current environment changes our long-term view of Spirit.

As we've indicated previously, one of our challenges has been staffing levels at our airports with the most notable being at Fort Lauderdale airport. I'm pleased to announce that earlier this month, we reached a tentative agreement with our ramp service agents in Fort Lauderdale, represented by the International Association of Machinists and Aerospace Workers, which includes competitive wages and benefits. And following the ratification of that agreement, we look forward to resuming appropriate staffing levels and over time, adding back capacity to one of our guests' favorite leisure destinations. I'm also pleased to say that we recently published our inaugural sustainability report.

The report showcases our commitment to meaningful advancements of our ESG initiatives. Before I turn it over to Matt and Scott to discuss more details of our quarterly performance, I want to say how proud I am of the Spirit team. Operationally, it was an unusually challenging summer, and their Spirit pride, and dedication shine even on the most challenging days and helped us recover the operation and take care of our guests. And now over to Matt. 

Matt Klein -- Chief Commercial Officer

Thanks, Ted. I echo the special shout-out of appreciation to our team members and thank them for their perseverance in delivering quality service to our guests regardless of the circumstances. Turning now to our third quarter revenue performance. As a reminder, I'll be comparing this year's results to the same period in 2019.

Total operating revenues declined 7% compared to the third quarter of 2019, in line with our revised guide given in mid-August. On a per segment basis, compared to the same period in 2019, total revenue per passenger segment increased 0.7%. The passenger revenue per segment component declined 7.6%, but we once again saw very strong non-ticket revenue results with non-ticket revenue per segment increasing nearly $5 compared to the same quarter in 2019, an 8.9% increase. This non-ticket result is yet another record for Spirit.

We remain extremely pleased with how well our investments in enhanced product offerings, improved customer-facing merchandising, and revenue management initiatives are paying off. Turning to the passenger ticket side of the equation. Load factors were very strong during the peak summer demand period. However, average load factors were a bit softer than expected for the second half of the quarter driven in part by our own operational issues and the rise of COVID-19 variant cases.

As we have communicated previously, given the constrained staffing resources, we are currently a good bit smaller in Fort Lauderdale than we would like to be, and that will have a negative impact on our fourth quarter results as Fort Lauderdale is one of our best-performing markets, especially at this time of the year. Nevertheless, it is the right decision until we can achieve the appropriate staffing levels to support our desired level of operation there. In the meantime, the team is doing a great job managing through the changes. Elsewhere in the network, we have been growing our leisure and VFR routes.

In the third quarter, we started service to Puerto Vallarta, Mexico. We also announced new service to Tegucigalpa, Honduras. And in early October, we brought Spirit to Miami with our launch of service to nine nonstop destinations, which will soon grow to 31 destinations. We are very excited to be growing our network, bringing our low fares to more guests in more places, and we have an exciting lineup planned for next year, as well as we continue to expand our network footprint.

For the fourth quarter 2021, we now estimate our capacity will be up 11.2% versus the fourth quarter 2019. This is more than 10 percentage points lower than our initial expectation, with half of that related to targeted reductions at Fort Lauderdale with the other half spread throughout the network. Moving ahead to the fourth quarter revenue outlook, we are extremely encouraged by the search trends we are seeing for the holiday periods, and all indications are that yields and loads for the peak holiday travel periods will be quite healthy. Taking all this into account, the revenue range implied by our EBITDA guide is $938 million to $975 million or about flat compared to fourth quarter 2019.

And now here's Scott. 

Scott Haralson -- Chief Financial Officer

Thanks, Matt. I also want to start by saying thanks to our entire Spirit team. Over the summer period, many of them worked extra shifts or performed duties outside their usual jobs to support the operation, and they did so with the utmost professionalism and dedication. Now turning to our third quarter 2021 financial performance.

Adjusted EBITDA margin was positive 1%. This was better than expected due to lower costs. Compared to our expectations shared in mid-August, costs came in lower due to a little less flight volume, a slower-than-expected pace of hiring and airport rents and landing fees improving at a faster rate than anticipated. Compared to the third quarter of 2019, total operating costs increased 15.1%, primarily due to higher crew member headcount, increased flight volume, a greater mix of aircraft financed under operating leases, higher depreciation and amortization, and additional costs incurred as a result of our irregular operations in the period.

Our cash balance remains strong. We ended the third quarter with $1.9 billion in liquidity, which includes unrestricted cash, short-term investments, and $240 million of available capacity under our revolving credit facility. Turning to our fleet. During the third quarter, we took delivery of four A320neo aircraft, ending the quarter with 168 aircraft in our fleet.

We also completed sale-leaseback transactions for our Airbus deliveries through 2022. With these transactions, we have financing in place for all our aircraft scheduled for delivery now through the end of 2022. In addition, we completed direct operating lease transactions to secure additional aircraft to help meet our targeted capacity growth through 2024. In addition, we announced earlier this week that we executed an agreement with IAE for Pratt & Whitney GTF engines to power the aircraft associated with our fleet order placed with Airbus in December 2019.

The agreement covers engines for the firm 100 aircraft ordered, as well as options for another 50 aircraft. In addition to the engine order, we entered into a comprehensive long-term maintenance agreement to service all our neo engines. We already operate one of the youngest and most fuel-efficient fleets in the industry, and this order for the latest GTF engines combined with our existing pipeline of new aircraft will ensure we continue to be a leader in fuel efficiency. Increasing fuel efficiency is part of our ESG goals, but it's also helpful to the P&L, especially in high fuel price environments like we are currently facing today.

Higher fuel prices impact all airlines, but because we have greater seat density than most of our competitors and our fleet is fuel efficient, our per passenger fare would need to move up less than other competitors to more fully offset the rising cost of fuel. For the fourth quarter, we estimate our ASMs per gallon will be about 5.5% better than the fourth quarter of 2019; said differently, at today's fuel prices that's equivalent to about $18 million in savings. Regarding capital expenditures, we continue to estimate a total of about $290 million of capex for the full year of 2021, including net pre-delivery deposits of about $120 million. To recap the forward-looking guidance we provided in our earnings release, we estimate our EBITDA margin for the fourth quarter will range between negative 5% to breakeven.

This assumes total operating expenses of $1.050 billion to $1.060 billion. We are assuming a fuel price per gallon of $2.54 and D&A of about $75 million. Regarding 2022, we previously shared we expected to hit full fleet utilization by mid-2022. However, uncertainties about staffing resources have led us to slow the pace of returning to full utilization, and we now expect to produce 53 billion to 55 billion ASMs.

We are still targeting sub-$0.06 CASM ex fuel once we reach full utilization. The timeline to achieve this target has stretched out till later in 2022 or early 2023 due to our slower pace of growth and increased inflationary pressures, particularly labor and airport costs. So again, we are still targeting unit cost ex fuel below $0.06, but it's likely closer to $0.06 than we originally anticipated. In closing, the resiliency and strength of our business model has allowed us to deliver the -- among the best financial performance throughout the pandemic and gives us confidence in our ability to navigate the challenges ahead and what has proven to be a prolonged recovery period.

When the recovery has fully taken hold, we are confident that we will still be among the best margin producers in the business while remaining the low-cost leader. With that, I'll hand it back to Ted. 

Ted Christie -- Chief Executive Officer

Thanks, Scott. Before we move to Q&A, I know many of you may have questions about lessons learned from the IROP in August. We do believe the disruption was caused by a confluence of factors exacerbated by staffing issues, primarily in Fort Lauderdale. As the IROP unfolded, we experienced many crew dislocations, which stressed our ability to recover.

We are never going to be able to perfectly solve for all variables to avoid every disruption, no airline can. But we believe we can get better at recovering more quickly when it does happen. The main takeaways from our review are that in addition to airport staffing, there are several other areas where adding a few additional positions could be beneficial in helping us to recover when IROPs occur. Our current recovery process is heavily reliant on manual innovation.

We've automated a few processes over the last several years that have been helpful, and we are exploring if there are opportunities to do even more. Given our scale, we have also been considering if it is time to add a few more crew bases. We are making some changes, but we don't believe any of them will have a significant effect on our cost structure. As a high-growth carrier, it is a continuous exercise to review how our network flows, and we make small changes all the time.

We are not pleased with our operational performance in this instance, but the fact is we have a proven record of reliable operations. That was evident in 2020 when we flexed the network dramatically to adjust the schedule due to the quickly changing demand environment throughout the pandemic. This put tremendous stress on our resources, yet we finished third in on-time performance and first in completion factor in 2020. The targeted schedule reductions in the fourth quarter of this year are working as intended.

Our operations have stabilized, and we believe that operational and crew network changes that we are planning for in 2022 will enhance reliability without sacrificing efficiency and utilization. We continue to believe we will be able to produce operating margins in 2023 that are in line or better than what we achieved in 2019. In the near term, our priorities include increasing staffing to support higher growth while maintaining reliable operations and making network moves that position us for the post-pandemic environment, an environment in which Spirit will remain the low-cost leader with ample opportunities for continued growth and among the best margins in the business. With that, back to DeAnne. 

DeAnne Gabel -- Senior Director, Investor Relations

Thank you. We are now ready to take questions from the analysts. We ask that you limit yourself to one question with one related follow-up. If you have additional questions, do feel free to put yourself back in the queue, if you'd like.

James, we are ready to begin. 

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question comes from Brandon Oglenski of Barclays. 

Brandon Oglenski -- Barclays Investment Bank -- Analyst

Hey, good morning, everyone, and thanks for taking the question. Ted, I guess I want to follow up with your closing remarks there. For better or worse, you know, investors have viewed Spirit as maybe, you know, off-track on being the lowest cost generator. And, you know, Scott even said it, like, you know, you guys are still targeting sub-$0.06 CASM, but closer to $0.06 than where you were.

But then you say, look, you know, we've learned some lessons operationally. The things that we're going to change aren't adding a lot of costs. So I guess how do you square those two comments that, hey, CASM actually is coming up a little bit from where we thought it would be, but we can still generate, you know, profitability at levels where you were or even better?

Ted Christie -- Chief Executive Officer

Well, as it relates to CASM being, you know, maybe -- it's still sub-$0.06. It's within the range of what we thought about. I think the inflationary pressures that we've been experiencing are real, probably a little more severe and more pronounced than we originally anticipated, principally on labor, but airports are always a concern. That was true before as well.

So I think it's more to do with that than it has to do with our analysis and reaction to the company's operational performance this summer. So as we evaluated, what we experienced throughout the course of the summer, we're now looking at ways that we can enhance reliability and still deliver the same efficiency with the units, which is what's most important. I have to say that while it's a very -- you know, it was an exhausting summer for the Spirit team, I'm very excited about and interested about the output that's coming out of that work. And I think we're going to be able to make both network design changes in both the way the airplane network flows and more importantly, the way the crew network flows that will help us create a more reliable network.

And as I indicated in my comments, we're probably going to come up with ways that are going to speed recovery when we run into bumps. Those will always happen. There'll be weather. We live in Florida.

There's going to be hurricanes and that sort of thing. So I think that we'll have some ways that probably are going to be -- make us even a little bit better in that regard, so cost benefit being a part of that. So I would echo what Scott said. I think we're very encouraged about the cost structure inflation aside.

Inflation face -- every airline is facing inflation today, it's almost like taxes, and we're going to continue to be the low-cost leader. 

Brandon Oglenski -- Barclays Investment Bank -- Analyst

I appreciate that response. I guess at what point do you hold yourself and the company accountable to achieving sustainable profitability even if you keep pushing back the full utilization target because some of that is just, I guess, built in with your fleet delivery schedule. So what levers can you pull to get, you know, sustainably in the black? 

Ted Christie -- Chief Executive Officer

Well, first, I mean, we always are 100% accountable to the profitability of the business. So that's always been true, and that will remain true going forward. And the levers we can pull are the same levers we would have looked at prior to the pandemic. We're going to evaluate individual route performance.

We're going to make sure that our growth is delivering the ROIC that we had intended. We will adjust, if that's not true, but the market opportunities that we're looking at today are as rich or perhaps richer than they were two years ago. And that is why we've committed to the growth rate that we're committing to, if we're wrong, which we don't anticipate that being true. And by the way, wrong could be in either direction.

But if we're wrong, we'll adjust. And we believe we have the necessary levers to do that, both for fleets being larger, as well as smaller. And I think we'll show that we've been prudent managers. Look, over the course of the company's public existence, we've consistently delivered mid-teens or better-operating margins.

And I think I hope there's some credibility there that we'll continue to do so going forward.

Brandon Oglenski -- Barclays Investment Bank -- Analyst

Thank you.

Operator

Our next question is from Helane Becker of Cowen Securities. 

Helane Becker -- Cowen and Company -- Analyst

Thanks very much, James. Hi, everybody, and thank you very much for the time. So, as you guys think about 2022, I guess the implication is it's going to be another transition year. So number one is that a correct assumption? And then number two, Ted, as you think about the operations and staffing and so on, how do you get ahead of these issues.

I mean I hear what you're seeing about weather and stuff happening, you know, we all understand that. It's the airline industry. But on the other hand, you want to be in a position where you can recover quicker or prevent stuff from happening so that you don't have the unfortunate incidences where people don't like you. Don't like the airline.

Maybe not you personally. Anyway, that's kind of my bad attempt at the question.

Ted Christie -- Chief Executive Officer

Yeah. Well, as to the first part, viewing 2022 as a transition year, I don't know what the right label is, we're viewing it as a recovery year. We believe that the pandemic is moving in the right direction. Despite the delta variant, you know, the impact of the summer, the line is still going up.

We're still flying more capacity. We're delivering better margins than we were at the same time last year, and we expect that to continue into next year. So we expect it to be a recovery year. It's not going to be all the way back probably to where we want it to be.

But we're going to do our best to move that along as quickly as we can, which leads into the second point you raised, which is how do we get ahead of this issue that we've all faced? And I think it would be -- I think it would have unanimous agreement on the phone call and in the room that the past 18 months have had broad and wide-ranging impacts that have been difficult for people to forecast. It is a different environment today than it was prior to the pandemic. And so we've been actively learning from that. The way we recruit, the way we hire, the way we staff, all of those things we have learned from.

And getting ahead of it was our objective going into the summer and without a doubt, we missed it. So part of the reason that we're looking at taking our foot a little bit off the gas here for a little bit of a period of time is so that we can do exactly what you're suggesting, which is let's see the hiring come in. Let's build the base to get ready for the summer of next year, for example. And we'll layer the capacity in as necessary.

So it's been a tough labor market. We're adapting to that. I mentioned some specific moves here in Fort Lauderdale, but that's been true throughout our system. And I do believe that as the economy begins to recover and people start to feel more normal about their lives and the virus starts to subside again, that will also move more normal.

The labor market will become more normal, and we're going to be ready for that.

Helane Becker -- Cowen and Company -- Analyst

Got you. OK. That's very helpful. Thanks, Ted.

Operator

Our next question is from Mike Linenberg of Deutsche Bank. 

Mike Linenberg -- Deutsche Bank -- Analyst

Hey, good morning, everyone. Hey, just one question here. Scott, the comment that you made, and Ted, you can chime in on this. Just the comment about being among the best margin producers in the business while remaining the low-cost leader when the recovery has fully taken hold.

I'm just -- I'm taking that from the release. When I sort of think about your model, at least historically, let's move the September quarter aside because of the irregular operations, I mean that was just extreme. But when I think about your model historically, you would be the best margin producer and also among the low-cost leaders as we went through downturns. That's usually when the ULCC, LCC model really thrived and you would outperform.

And it just feels like based on this statement here that maybe things have changed a bit. And maybe it's that this labor inflation is going to be with us a little bit longer. And I realize that historically, for the ULCCs, LCCs, labor has been maybe a larger area from a cost advantage perspective vis-a-vis the big carriers and the legacies. So I'm just -- I'm curious if there's kind of a shift in philosophy here or maybe you're just sort of hedging your bets, maybe being conservative, maybe this downturn that we went through is like no other, and we can't really comp it against the GFC or 9/11.

I mean just your thoughts on that. Thank you.

Ted Christie -- Chief Executive Officer

Hey, Mike, I'll go first, and Scott can jump in. But thanks for the leading question because you set me up perfectly. We perform in good and bad times and throughout the course of the pandemic, if you look at margin performance, when things started to actually come back so we can't look at like the April period of last year. We've been among the best margins in the business.

And if you give me the credit for now, the benefit of removing the IROP in the September quarter, that remained true then, too. So if anything, the statement is a revalidation of what has always been true and a confirmation of what we expect to be true in the future. So Scott, what over to you. 

Scott Haralson -- Chief Financial Officer

That's exactly what I would say. I think if you go back and look at the pandemic over the last year, we were in the top two or three margin producers in all of the quarters, again, outside of the quarter when we were flying 5% of the airline. But I think everybody was kind of figuring their way out at that point. But I think you saw it over the last decade and you saw it over the last 18 months, and we're predicting that to be the case in the future.

Mike Linenberg -- Deutsche Bank -- Analyst

OK. Very good. Thank you.

Operator

And there's question from Conor Cunningham of MKM Partners.

Conor Cunningham -- MKM Partners -- Analyst

Hey, everyone. Thank you. So, you mentioned changes to potentially increasing staffing, potentially new crew bases, network changes, and also inflationary pressures. I mean that's a lot.

So why do you have confidence that you're going to be able to adjust to that and maintain your cost advantage to your peers? I mean United, for example, has plans to lead on cost and drive costs back down to 2019 levels. If they -- if that plays out, I mean they're compressing to you on a CASM perspective. I get that you said there's some automation and other adjustments. But just what else are you doing that leads you to maintain your cost advantage to everyone else? 

Scott Haralson -- Chief Financial Officer

OK. There's a few things in there. Let me try to get them one at a time. So you mentioned some of the things that we talked about are our crew bases and hiring.

We do that every year. We've been growing at double-digit rates for a while. And that means you sort of reinvent the airline every year or two in doing that. So crew bases and hiring that's all sort of, you know, normal operations for us.

So we do that all the time. This is a little bit of a unique environment. This is, you know, interesting times, a lot moving around at this point. Look, you know, we're usually really good at forecasting the business.

Over the, you know, last decade, we've been pretty accurate. And it's been somewhat more simplified historically. But right now, it's definitely just more difficult to forecast. We have labor rate volatility, labor behavior, very difficult right now to really forecast airport rates at this point.

So we'll have a lot of movement in that area. So that variability does cause some heartburn right? It does impact our confidence just because of the range of possible outcomes. But the good news is that most of these things affect the entire industry. So labor and airports is everybody's problem.

One unique thing for us is that we are financing the aircraft a little differently today than we did in the past. So that's something unique to us. But for the most part, this affects the entire industry. So, you know, the good news is that while, you know, we're going to have to digest all of these.

So as everyone else. So our relative cost advantage should be maintained. And your quote on United, I mean, they're, what, two-plus times our unit cost. So I'm not expecting them to come to the levels that we are.

And everybody has their own unique components around cost. But I think once things settle out, you're going to see our unit cost advantage continue to widen.

Conor Cunningham -- MKM Partners -- Analyst

OK. I appreciate it. And then with nonfuel unit cost kind of ramping throughout the industry, higher fuel in general as well, driven in part by a better economy. Just how has your thought process changed toward base fares in general? Like, for example, McDonald's discussed the other day about having historically higher average pricing to offset a lot of the labor increases.

Starbucks just raised base pay for all hourly employees with the assumption of offsetting with higher pricing. Like why wouldn't that be the case for you guys in general? I mean it just seems like there's an ability to push fares now than there's kind of ever been before, given all the cost pressures that are out there in general. Thank you.

Matt Klein -- Chief Commercial Officer

Yeah. Sure, Conor. This is Matt. I'll take that question.

So generally speaking, fares will move based on supply and demand. As demand continues to improve, I would anticipate that we would see upward yield movement. I can give you an example that's happening right now. So while we're coming off of a low base and a base of which we are not satisfied with, we are seeing yields starting to firm, especially if you look at traffic, say, inside seven days from departure, we don't carry a lot of that traffic.

We carry our fair share of that kind of traffic. And we are seeing that traffic start to improve. And we're also seeing those yields start to firm. So to me, that's an indication of while we're coming off of a low base that we have been -- and we're starting to be successful in pushing yield increases through the network.

Another thing I would mention, too, in terms of fares in general and what we're seeing happen from a demand perspective, is -- and this is a little bit counterintuitive, but I will tell you that our conversion rate is actually while quite strong and starting to fall just a little bit over Thanksgiving and Christmas. Well, what that means actually is that as the fares are continuing to improve over Thanksgiving and Christmas, customers are taking a little more time to shop around, and that is an indication of, in fact, that we're going to see yields that we expect to be a little bit higher. Instead of customers seeing fares and just snapping them up, they're shopping around a little bit more which is actually good news and why we have some confidence here that fares will continue to move up. Those are more short term in nature.

I think you're talking more longer term. And as always, it's a supply versus demand balance. And we're comfortable and confident in our network and that what we're building, we're moving to. Moving forward, we'll deliver the RASMs and deliver the margins that we expect to see from our network long term.

Conor Cunningham -- MKM Partners -- Analyst

Appreciate the color. Thank you.

Matt Klein -- Chief Commercial Officer

Sure thing.

Operator

Our next question is from Duane Pfennigwerth of Evercore. 

Duane Pfennigwerth -- Evercore ISI -- Analyst

Hey, thanks. Thanks for taking the question. I wanted to ask you about targets. I'm sure in the early innings post this most recent meltdown, the focus was on settling down the operation in fighting fires and attribution and things of that sort.

But I wonder if you'd be willing to share with us if the nature of your conversations with the board has changed. Has there been any discussion about, you know, fundamentally what you're trying to solve for? For example, is there any discussion about an absolute profit or absolute margin goal for 2022 and should an absolute profit goal drive capital allocation, which would include a fleet plan from arm's length, right, from arm's length, it's easy from our seat. It feels like the organization is solving for a pre-pandemic fleet plan.

Ted Christie -- Chief Executive Officer

Duane, it's Ted. So obviously, the board is very much aware of the company's five-year objective. We are a long-term planning cycle business with long-term assets. We view the -- as I said earlier, the root opportunity and market opportunity to be large in our market.

They're also well aware of the company's margin objectives, which we've shared with you guys, and I think it's consistent. So they expect us to deliver on those things much like you do. And I believe we can. So to your comment about whether or not it's a pre-pandemic or post-pandemic fleet plan, again, it is our belief today that the market opportunity is as large or perhaps even larger than it was prior to the pandemic.

And we believe with our cost structure and our current network presence, we're the best suited to explore that at the lowest fare and lowest cost level. And I know there's a variety of other different products out there and different airlines can serve those segments. But that's what's important to us and important to our board.

Duane Pfennigwerth -- Evercore ISI -- Analyst

Appreciate the thoughts, Ted. And then maybe just a hypothetical question, a little bit out of that field, but this year over two frameworks that we've been stuck in from a capacity, from a cost structure, from a margin perspective, is there any thought on sort of putting out targets for '22 on a year-over-year basis where you're talking about capacity and margins and hopefully RASM, not just CASM, but hopefully RASM on a year-over-year basis. And thanks for your thoughts. 

Ted Christie -- Chief Executive Officer

Yeah. We're considering the right way to present it. I get your point. And at some point, you start going year over three-year or -- but we'll make sure we present the most -- the clearest way and the most digestible way.

Duane Pfennigwerth -- Evercore ISI -- Analyst

Thanks.

Operator

The next question from Hunter Keay of Wolfe Trahan.

Hunter Keay -- Wolfe Research -- Analyst

Hey, good morning, everybody. Scott, in the budget right now, are you expecting profits next year?

Scott Haralson -- Chief Financial Officer

Well, we have a number of scenarios. Obviously, we're still in that process today. I think we are looking at sort of a middle ground scenario where we do generate a little bit of profit. Hard to say at this point.

We're still trying to figure out what unit revenue looks like for Q4, much less for 2022. So we have a number of scenarios at this point.

Hunter Keay -- Wolfe Research -- Analyst

OK. Thanks. That's helpful. And then another one for you, Scott.

How do you -- how much do you spend each year on overhead? And how do you measure it?

Scott Haralson -- Chief Financial Officer

On overhead, sort of a generic term. I mean I guess you're sort of really getting at sort of fixed and variable components. And those change over time, really depending on how close you get to departure. But overhead really in sort of -- the corporate overhead component is really primarily people, and that's a big component of the expense.

But I would say you're talking about -- we talked about 50-50 variable and fixed. And that's the way I would sort of think about overhead is sort of that 50% of our expense component.

Hunter Keay -- Wolfe Research -- Analyst

OK. All right. Thank you.

Operator

Our next question is from Stephen Trent of Citi.

Stephen Trent -- Citi -- Analyst

Good morning, everybody, and thanks very much for taking my question. Just two quick ones for you. One, I noticed that you launched some service to Puerto Vallarta. When you think about the FAA downgrading Mexican aviation to Cat 2 that ostensively gives some advantage to U.S.

carriers flying Southbound versus Mexican carriers launching new Northbound. Do you see any more of those type of opportunities in the pipeline? And the second question, just real quickly, you know, to what extent over the long term, could you envision Spirit participating in M&A either as a buyer or a target? Thank you.

Matt Klein -- Chief Commercial Officer

Stephen, it's Matt. I'll take your first question. I think Ted will take your second question. In terms of Mexico, in general, we see lots of opportunities in Mexico.

We've been flying there for quite some time. And there's always opportunities there for leisure traffic there. And I think over time, we'll be thinking about VFR traffic and seeing how we can best develop a network there for VFR traffic as well. And then I'll turn it over to Ted for --

Ted Christie -- Chief Executive Officer

Yes. Stephen, as it relates to M&A, I think the answer is going to be consistent with what we've said before. One thing I'll reiterate, we're extremely excited about the organic opportunity here. We think it's pretty big.

And we believe we have the resources to go and explore that. However, it's in our best interest to always be looking around at ways that we can best deliver return to our shareholders. Today, we're the largest ULCC in the space. And so we want to figure out the best way to capitalize upon that.

So we're always thoughtful, but at the same time, very interested and excited about organically what we can do.

Stephen Trent -- Citi -- Analyst

OK. Very helpful color, guys. Thank you very much.

Operator

Our next question is from Chris Stathoulopoulos of Susquehanna. 

Chris Stathoulopoulos -- Susquehanna International Group -- Analyst

Good morning. Thanks for taking my question. So your prepared remarks sound that the response to what happened in August is more structural in a good way versus what your response was when we look back at some of the press releases and transcripts to 2015 and 2019. So curious, if you could rank order the top three initiatives that you put in place to address this.

Is there an IROP committee? Or what gives investors the confidence that when demand plus weather plus tension, say, reservation system or shortages of FTEs at critical parts in the network where Spirit can now get in front of this. And I'm not saying that can be completely avoided, but that we have confidence that the magnitude of sort of breakdown -- that we won't see a similar sort of magnitude of breakdown? And also, is there anything -- I haven't looked at the proxy, but is there anything now that's going to be tied to KPIs for executives around this? And I guess the third part is, should we expect, as you come into 2022 and '23 with these changes that we would see a higher OTP scores? Thanks.

Ted Christie -- Chief Executive Officer

OK. I'll try to address those, Chris. First, the reaction in this current period versus what we experienced in 2015. So took learnings from 2015, actually deployed them into the network, and they were successful.

And I think that was measured by the company's reliability in 2016, '17, '18, '19 and '20. What's different is, as Scott indicated earlier the company grows 15% a year. And while we're pretty good at forecasting what that looks like and adapting the network to it and making necessary design changes to enhance reliability, clearly, this summer, we didn't get enough in front of it. Now I'm willing to if you give me a little bit of credit to say this was a weird period for airlines from a planning perspective.

But despite that, we should have done better. We should have done better by our team. We should have done better by our guests. So it starts with the network design that's both the aircraft network and the crew network.

And basically, we tear it back apart again and make sure we've got the right constructs, both in the form of bases and in the way that aircraft flow. And I think we're going to have some real wins come out of that, which I'm excited to see. And then to the extent that we do have any irregular operation, which like you said, and I acknowledged earlier, will happen, how do we recover faster? So putting in place a more robust plan about how we react to it. And more importantly, how do we predict it's happening? What are the leading indicators for us as our network gets bigger, it gets a little bit more complex? And so we're evaluating multiple inputs, which is probably what led us to our issues in early August.

And what are the right ways for us from a green, yellow, red perspective to evaluate each one of those inputs. And I think there's going to be some very exciting takeaways from that as well, using data and automation to help the team make good decisions. Then we can recover faster. And I think that's what's really important is, yes, we will not avoid them altogether, but we want them to become smaller and more nonevents because I understand your concern that investors may have, and I would like to assuage that concern because I do believe that we're a unique set of circumstances, we have been growing relatively rapidly, and we are reacting to that.

But I think we can be more proactive. And that's what this process is teaching us. Now as it relates to KPIs and how that is measured, we are already measured in our short-term incentive on the company's operational performance measured by on-time performance, and it's not an insignificant portion of our short-term incentive, and that has played out well for us over the last four or five years because we've been a pretty good producer of on-time performance. So I think our board is focused on it, the management team is focused on it because we want to deliver the best experience for our guests.

And we did not do that this summer, but we believe it's an isolated incident that we can move past. So looking forward into 2022, you're going to see similar KPIs that will be measured, and we will be held to that standard going forward.

Chris Stathoulopoulos -- Susquehanna International Group -- Analyst

OK. I appreciate the depth of the response. And just a follow-up here. So the closer to $0.06 CASM ex, if fuel moves lower, and you feel better about the environment and unlocking more capacity, could that closer to $0.06 get back to a high 5s or lower that you outlined back in July.

Is that at all being contemplated in your planning for 2022 at this point? Thank you.

Scott Haralson -- Chief Financial Officer

Yeah. Thanks, Chris. So I think the part that's key here is capacity. We've talked about before, getting back to full utilization.

And we mentioned in the prepared remarks that we're going to slow the pace of that a bit. so that we make sure we get the hiring in place in order to run the schedule that we want as opposed to getting up in front of it a little bit. Now our plan all along is to hire enough to run a full airline a little quicker than maybe we hope. And if those things happen, it is very possible that, you know, we're able to get to full utilization a little bit quicker than maybe we're talking about here in our guidance.

That's possible. But we're not going to get ahead of that too soon. So it is possible that we get to full utilization by late summer. It is possible, but it all depends on hiring and we'll just see how that goes next year.

Well, look, I think it's -- our goal all along is to get to full utilization as quick as we can, balancing the operational components that we always do, even more so today with the IROP and the changing landscape underneath us. So we're going to be patient, and we may be a little bit conservative, but our hope is that we can get there a little bit sooner.

Ted Christie -- Chief Executive Officer

And I'll just add to Scott's comments which were all correct. We're obviously a part of the environment. We recognize that supply and demand have an impact, and we've always been managers of that. To the extent that there is a more robust recovery or a lower fuel environment that could stimulate additional activity, we would be responsive to that.

And we believe we can have levers to pull in that regard because utilization on our fleet is meaningful. And so yes, there are ways for us in a more -- in a faster-running economy to perhaps lean in a little more and that would have an appropriate impact on CASM ex as well. So yes, we would take that into account also

Chris Stathoulopoulos -- Susquehanna International Group -- Analyst

Appreciate all the color. Thank you.

Operator

Our next question is from Savi Syth of Raymond James.

Savi Syth -- Raymond James -- Analyst

Good morning, everyone. I realize you've answered some of this in different spots. But -- and then I also realize that unlike some of your kind of non-ULCC competitors, there isn't a lot of efficiency and productivity and you know already favoring to be wrung out relative to 2019. But -- and maybe for Scott, could you perhaps kind of walk through the major cost line items? And on a kind of a per ASM basis, just how much of kind of inflationary pressure we might be seeing or kind of -- or some range that we might be seeing relative to 2019 once you're back to kind of precrisis utilization?

Scott Haralson -- Chief Financial Officer

Yeah, Savi. So we'll try to hit on some of those. And I think they're all going to be the ones that we've talked about before. Labor right now is a moving target on rates.

And hopefully, we stabilize behavior over time, but labor rates are moving north, hard to predict where they will stop. But that's a moving target. Airports right now very difficult to predict where they're going to rationalize that. But our hope is that throughout 2022 as throughput of airport starts to become more predictive, those rates are easier for airports to predict, and it stabilizes how we forecast the business.

But it's going to be labor, which is going to be throughout the spectrum. We talked about it at the ramp and gate agent level but we're seeing it throughout the organization. I think as most companies are, and it's going to be at airports. Those are the two largest, and we also talked about financing aircraft.

So aircraft rent on a per ASM basis is going up. Those three areas account for probably more than 90% of the move in unit cost. So that's the vast majority of it right there.

Savi Syth -- Raymond James -- Analyst

And so then at airports, you should return to normal once the traffic levels return to normal rate?

Scott Haralson -- Chief Financial Officer

Well, I wouldn't say normal. The way I would describe it would be, it has elevated upwards of 50% on a per departure basis for us. And we think that it will probably stabilize at somewhere around 20% higher. But that's a predictive guess at this point.

I don't expect it to go all the way down to the per passenger or per departure basis that we had pre-COVID and don't expect that to happen.

Savi Syth -- Raymond James -- Analyst

Makes sense. And just a follow-up on the -- just capacity and bring it back up. It sounds like is it -- is it solely like bringing Fort Lauderdale back up, for example, is it totally on making sure the staffing levels are right. And what's the kind of likely cadence as you kind of go through 2022? Is it a little bit more back half weighted? Or is it pretty fairly kind of consistent uptick in capacity?

Matt Klein -- Chief Commercial Officer

Hey, Savi, it's Matt. I'll start, and then Scott can come in after me here. So a piece of this definitely is for Lauderdale staffing, and we want to make sure that we're being smart with the schedule and making sure that we're looking and how to add that back in. Of course, we would like to get that back to a full utilization of Fort Lauderdale as soon as possible.

But as Scott mentioned and Ted mentioned, we're going to be smart in how we do that to make sure that we have the right guest experience and not cause other kinds of disruptions for our guests along the way. It's not just Fort Lauderdale per se. That's where the biggest issue is. We do see some pressures in some other airports.

But generally speaking, it is Fort Lauderdale. We'll continue to ramp up through the first quarter into the second quarter. And although we won't -- although we're not anticipating, as Scott mentioned, that we'll be back at full utilization by early summer, we'll be getting pretty close to that, and that's where we think we'll be able to flex back up by the summer again, not quite the full utilization, but approaching that number. Scott?

Scott Haralson -- Chief Financial Officer

I would agree with all that you covered.

Savi Syth -- Raymond James -- Analyst

OK. Thank you, guys.

Operator

Our next question is from Jamie Baker at J.P. Morgan.

Jamie Baker -- J.P. Morgan -- Analyst

Hey, good morning, everybody. I actually liked Mike's question a lot, and I wanted to expand on that by asking a slightly different variant. If you had known in, I don't know, March or April of 2020, that the government was going to allocate something around $75 billion of aid to the industry. Would you have behaved any differently? And do you think that your 2023 margin commentary today would be any different?

Ted Christie -- Chief Executive Officer

So Mike -- I assume, Jamie, it's Ted. So you mean if we had known about it, but it was still going to happen, would we have behaved --

Jamie Baker -- J.P. Morgan -- Analyst

Yeah. 

Ted Christie -- Chief Executive Officer

Yeah. I don't think so. I think we reacted early on in the pandemic knowing that we had to solve our own problems. So we anticipated that we were going to do that regardless.

And I think we would behave exactly the same coming out. And I can't speak for everyone else. And we probably had a slightly different view on that program than maybe some of our larger competitors. But I would tell you that we -- I believe that we did everything exactly according to what I would have anticipated.

In fact, I think the group executed extremely well throughout the course of 2020. And now as we look forward into '23, we see the opportunity. And thankfully, we did make those moves because I feel good about the company's balance sheet. I feel good about the company's order book and our ability to tackle that opportunity, assuming I'm right.

Jamie Baker -- J.P. Morgan -- Analyst

OK. Interesting. And the second question, just on fuel efficiency. If we look at ASMs per gallon, the metric steadily rose during the crisis.

It peaked in the fourth quarter of last year. It's been coming down ever since as you rebuild the network, but the guide for this quarter does suggest a sequential increase again. Just wondering on the revised 2022 capacity forecast, the $53 billion to $55 billion. How should we be thinking about the various moving network pieces that would allow us to sort of better model fuel efficiency relative to 2019 baselines? Thanks.

Scott Haralson -- Chief Financial Officer

Yeah. Jamie, we haven't done the forecast on 2022 ASMs per gallon, but I'll talk to some of the moving parts here. The movement primarily in 2020 and 2021 on that metric has really been driven around mix around the flying of the Neos versus our oldest aircraft, the 319s. So if you think about that production, we're going to fly most likely the A320neos first and then it sort of trickles down.

So as capacity gets flexed up and down your mix of NEO versus, call it CO or 319 here, changes that metric. So that's the primary driver of the change. Now we have been building our NEO fleet over this period, and we'll continue to do that next year. So that is a tailwind to the metric.

But we will incorporate more of the aircraft into the fleet next year as well. So that's going to be a headwind. So as those things sort of play out, hard to really tell, but those are the puts and takes. We don't have a final number yet, but that's where the things that are going to influence it.

Jamie Baker -- J.P. Morgan -- Analyst

OK. I very much appreciate the color. Thanks a lot, guys.

Operator

And our next question is from Catherine O'Brien of Goldman Sachs.

Catherine O'Brien -- Goldman Sachs -- Analyst

Hey. Good morning, everyone. Thanks for the time. So there's been a lot of industry focus on flying to Florida and some other leisure markets over the last 18 months, just as the recovery has, of course, been led by leisure demand.

I guess in the schedules for early next year, are you starting to see that additional capacity decline at all? Or it's too early to tell?

Ted Christie -- Chief Executive Officer

Hey, Catie, it's Ted. So first, the -- you're right, and we've noted that, right? So we're largely -- we're not only a Florida-headquartered airline, but 50% to 60% of our airline touches the state. And so we're very aware of and sensitive to capacity moves within the state. And it's been interesting to see how it -- what's happened over the course of the pandemic In fact, for the fourth quarter, domestic capacity in the United States is down still around 6%, but Florida is up like 8%.

So despite competitive pressures, in our home state, we're still outperforming the industry and have so -- have been doing so because of our competitive position here and we're sized in the right places, and we intend to expand that. Now looking ahead, it's anyone's guess. But I would tell you that if -- assuming that -- and we agree, by the way, with the broader commentary that international traffic will return, corporate traffic will return. Timing of that is in question, but we tend to agree with that commentary.

Assuming that happens, that capacity that has been moved into domestic leisure will and all likelihood move to other places that are suited which is probably going to be beneficial to low-cost carriers. And so I don't know exactly when that happens and the forward schedules are still in flux, but we anticipate it will.

Catherine O'Brien -- Goldman Sachs -- Analyst

Got it. And then one, just drilling a bit more into the labor inflation you called out as one of the main drivers to not getting as far below $0.06 CASM as you previously thought. There's, of course, very well-documented labor inflation everwhere in the economy. But with 80% of your labor under union contracts, is it that other 20% that drives the inflation? Or if not, are you expecting to see rates increase and new contract cycles in the next couple of years? Is it changing staffing levels permanently to improve the recoverability you guys have been talking about over the call? Or maybe is your labor force getting more senior.

I know I gave you like five options there, but just trying to get a sense of what is changing your longer-term expectations versus what is transitory? Thanks.

Scott Haralson -- Chief Financial Officer

Yeah. Thanks. All those are moving around. So in -- we talked about the airport staffing, which has been above and below wean, of which we are unionized in Fort Lauderdale, but the other airports in our system are all outsourced.

So while the labor costs of those are not under our umbrella, it does influence our cost structure. So we -- that labor component, when we talk about labor, it's all of that. It's the ground handling component for our outsourced providers, as well as those internal. But we're seeing it throughout the spectrum.

The biggest percentage increase is happening at the airports. And we spend -- we'll probably spend upwards of $300 million next year in airport labor expenses. So it's a big number for us. But the union component is a little bit fixed in the short run.

But the other stuff, we are seeing a good bit of inflation throughout the spectrum. So that is happening. But as you mentioned, too, there is a component of the labor increase even for the unionized folks internally that is happening on a rate basis, an average rate. So we spent the last, call it, year or 18 months of the early parts of COVID without hiring any additional crew members.

So that changed the average rate structure within the business. Over time, as we start to hire those again, and we did that starting back in January and February, that will have a dilutive effect to our average rate, but the overall expense for labor is going to be significantly higher period.

Catherine O'Brien -- Goldman Sachs -- Analyst

 Thank you, guys.

DeAnne Gabel -- Senior Director, Investor Relations

And with that, I think that's a wrap for this call. Thank you all very much for joining us today.

Operator

[Operator signoff]

Duration: 56 minutes

Call participants:

DeAnne Gabel -- Senior Director, Investor Relations

Ted Christie -- Chief Executive Officer

Matt Klein -- Chief Commercial Officer

Scott Haralson -- Chief Financial Officer

Brandon Oglenski -- Barclays Investment Bank -- Analyst

Helane Becker -- Cowen and Company -- Analyst

Mike Linenberg -- Deutsche Bank -- Analyst

Conor Cunningham -- MKM Partners -- Analyst

Duane Pfennigwerth -- Evercore ISI -- Analyst

Hunter Keay -- Wolfe Research -- Analyst

Stephen Trent -- Citi -- Analyst

Chris Stathoulopoulos -- Susquehanna International Group -- Analyst

Savi Syth -- Raymond James -- Analyst

Jamie Baker -- J.P. Morgan -- Analyst

Catherine O'Brien -- Goldman Sachs -- Analyst

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