Early last month, flight cancellations surged at Spirit Airlines (NYSE:SAVE) as a long-running dispute between management and the company's pilots boiled over. Tens of thousands of travelers' plans were disrupted. Near the end of the saga, there was even a brawl at the Spirit Airlines check-in counter in Fort Lauderdale.
This disruption to Spirit Airlines' operations has undermined the company's efforts to repair its image. But up until last week, it wasn't clear whether this setback would damage Spirit's chances of returning to unit revenue growth soon.
Fortunately, it appears that Spirit Airlines hasn't suffered long-term damage from this pilot dispute. In an investor update last week, Spirit acknowledged that demand fell off during the peak of the crisis. However, booking levels are already returning to normal.
A scandal-filled spring
The spring of 2017 has had more than its share of airline public relations disasters. Most notably, United Continental (NASDAQ:UAL) alienated millions of potential customers in April with its infamous passenger-dragging incident. This was followed by Spirit's pilot dispute, which led to the airline canceling more than 10% of its schedule on several days in early May.
The backlash against United in April gave Spirit Airlines a great opportunity to gain market share, particularly in light of its own service improvements. After all, if even "full-service" carriers have poor service, then travelers might be inclined to take the lowest price.
However, the slew of flight cancellations at Spirit Airlines in early May raised even bigger concerns among air travelers. Plenty of people are willing to sacrifice service to get a great deal. But it's not worth the savings if there's a significant chance that the airline won't get you to your destination remotely on time (or at all).
Spirit Airlines provides some details on unit revenue trends
In its recent May traffic release, Spirit Airlines stated that it had been "negatively impacted by a modest level of book away related to the disruptions." In other words, the uptick in flight cancellations led to a slowdown in bookings. This isn't surprising, given that there was substantial uncertainty in early May about Spirit's ability to meet its obligations to customers.
Yet a strong underlying demand environment has helped cushion the blow. Furthermore, customer behavior already appears to be returning to normal. As a result, Spirit Airlines still expects to record a solid 4%-5% increase in revenue per available seat mile (RASM) this quarter. That's down by just 0.5 percentage points since late April.
The only major impact to Spirit's financial results appears to be an increase in costs related to reaccommodating customers whose flights were canceled last month. Spirit now expects its adjusted cost per available seat mile (CASM) to increase 9%-10% year over year this quarter, whereas it had initially forecast a 3.5%-4.5% adjusted CASM increase.
This big increase in costs will put pressure on Spirit's second-quarter profitability. However, there should be no lingering effects beyond Q2. In fact, Spirit's management has indicated that non-fuel unit costs will decline on a year-over-year basis in the second half of 2017.
Furthermore, Spirit Airlines is starting to get some fuel-cost relief thanks to a recent decline in oil prices. Thus it seems that Spirit may have dodged a bullet -- while last month's spike in flight cancellations will depress its second-quarter earnings, the company should still be able to return to strong profit growth next quarter.
Will United Continental be so lucky?
Thus far, United's management has maintained that there has been no measurable effect on unit revenue from the passenger-dragging incident. United Continental currently expects its RASM to rise 1%-3% this quarter, in line with its initial forecast.
That said, United recently warned that it is facing "incremental weakness" in the trans-Pacific market. The carrier has blamed this unit revenue pressure on an unfavorable supply-demand balance for routes to China and Hong Kong. Yet it's noteworthy that United faced a huge social media backlash in China after the passenger-dragging incident in April.
Perhaps United's current unit revenue challenges truly are unrelated to its passenger-dragging scandal and will disappear as soon as supply-demand dynamics improve. However, the jury's still out on whether United Continental will recover as quickly as Spirit Airlines.