After weathering more than a year of double-digit unit revenue declines, Spirit Airlines (SAVE -1.95%) finally started to see some relief in Q3. To be sure, total revenue per available seat mile (TRASM) declined again, while Spirit's pre-tax margin retreated from the record level of 26.9% set a year ago.
Nevertheless, Spirit's improving revenue trend puts it closer to returning to steady profit growth in the future. Let's take a look at how the company performed last quarter.
Spirit Airlines results: The raw numbers
| Metric |
Q3 2016 Actual |
Q3 2015 Actual |
Growth (YOY) |
|---|---|---|---|
|
Revenue |
$621.3 million |
$574.8 million |
8.1% |
|
Total unit revenue |
$0.0955 |
$0.1027 |
(7.0%) |
|
Adjusted cost per available seat mile |
$0.0548 |
$0.0539 |
1.7% |
|
Adjusted net income |
$86.3 million |
$97.3 million |
(11.3%) |
|
Adjusted pre-tax margin |
21.8% |
26.9% |
N/A |
|
Adjusted earnings per share |
$1.24 |
$1.35 |
(8.1%) |
Data source: Spirit Airlines Q3 earnings release. YOY = year over year.
What happened with Spirit Airlines this quarter?
Spirit Airlines' profitability continued to benefit from falling fuel prices during Q3, but the impact was much more modest than in previous periods. For example, per-gallon fuel costs plunged 37.4% year over year in Q1, allowing Spirit to grow its earnings per share despite a 13.8% slump in TRASM. By contrast, Spirit's fuel cost per gallon was down 8.8% year over year in Q3.
Fortunately, Spirit Airlines posted a better-than-expected revenue performance last quarter. TRASM fell 7%, compared to Spirit's initial forecast that it would decrease 9% year over year.
That wasn't enough to head off a decline in Spirit's profit margin and EPS in Q3. However, the company's 21.8% pre-tax margin last quarter still puts it in the upper echelon of the airline industry.
What management had to say
A quarter ago, Spirit Airlines CEO Bob Fornaro wasn't very pleased with his company's revenue performance. By contrast, he was much more upbeat about Spirit's Q3 performance.
"During the third quarter 2016, we saw sequential improvement in total revenue directly related to our own revenue initiatives as well as a modest improvement in the industry pricing environment, and are encouraged by the constructive trends we are seeing," Fornaro said. He also noted that Spirit set new company records for on-time performance throughout the quarter.
Spirit Airlines' unit revenue trajectory has started to improve in earnest. Image source: Spirit Airlines.
CFO Ted Christie was particularly pleased about Spirit's improved operational performance. He stated:
Our team continues to do a good job holding the line on core cost inflation. In addition, operational reliability improvements during the quarter produced more cost savings than we anticipated, provided a better product for our customers, and a better environment for our team members: a true "win-win-win" scenario.
Looking forward
Spirit Airlines reported that its unit revenue trends improved throughout the quarter. In other words, unit revenue declined less in August than in July, and declined less in September than in August. As a result, TRASM fell just 7%, compared to 14.3% in the previous quarter. That bodes well for its Q4 results.
Right now, Spirit Airlines is in the midst of a five week period when it will add 13 new routes connecting the Northeast and Midwest to Florida. It is entering these new markets just in time to meet a seasonal uptick in demand, as many leisure travelers visit Florida during the winter to escape the cold. At the same time, Spirit is cutting a handful of underperforming routes.
Other low-cost carriers that have focused on the Florida leisure travel market have been very successful. Of course, that's no guarantee that these network changes will lead to better unit revenue results for Spirit Airlines. However, it's more promising than the alternative of sticking with underperforming routes that face stiff competition.
