Spirit Airlines (SAVE -3.07%) has already had a rough 2017, but it's clear that things are about to get a lot worse for the beleaguered discount airline. After a costly spate of pilot-related cancellations in May, Hurricanes Harvey and Irma will continue to take a toll on Spirit's results through the remainder of this year.
Right in the eye of the storm
One of Spirit's most important markets happens to be Houston -- ground zero for Hurricane Harvey damage -- which represents roughly 10% of the company's flight volume. In addition, the company's largest market by far is Fort Lauderdale, with roughly 400 weekly departures, 2.5 times as many as Houston. Orlando is Spirit's third-largest market, with roughly 210 weekly departures. And while neither Fort Lauderdale or Orlando suffered a direct hit from Irma, both airports have been closed due to the hurricane since Saturday, Sept. 9, and are only expected to begin limited service again on Tuesday, Sept. 12.
Image source: Spirit Airlines.
Even before hurricane season began, Spirit's year was off to an ugly start. Its Q2 results were negatively impacted by roughly $45 million when its pilots stopped volunteering to work overtime, resulting in hundreds of May flight cancellations. And even though Spirit's flight completion factor and on-time performance have rebounded a bit since then, July's numbers still looked a little shaky -- with a reported completion factor of 97.2% that was below management's projection of 98% for the remainder of the year. With a disappointing second quarter, lowered forward guidance, and continued higher-than-expected cancellations, Spirit's stock had already dropped close to its 52-week lows. And then along came Harvey.
Harvey will harm Q3 results
On Sept. 5, Spirit issued an investor update, estimating that Harvey will cost the company $8.5 million in lost revenue for Q3 -- from canceled flights as well as a prolonged reduction in travel to the Houston area. Citing continued aggressive pricing by competitors in general, Spirit also slashed its Q3 guidance for TRASM (total revenue per available seat mile, aka unit revenue) from a range of down 2% to 4% to a new range of down 7% to 8.5% -- with about 100 basis points of this change attributed to Harvey. That's a dramatic reversal from the Q1 conference call, when the company was expecting to see unit revenue growth for the remainder of 2017.
One small bright spot is that the company lowered its Q3 guidance for CASM ex-fuel (cost per available seat mile, excluding fuel -- aka unit costs) from a range of up 1% to down 1% to a new range of down 2% to 3%. Spirit says this change was a result of lower passenger reaccommodation costs and crew-related expenses. That will help offset at least some of the expected decrease in unit revenue, which is important because Spirit's operating margin has been under pressure recently -- due mainly to Spirit's Q2 flight cancellations. For the 12 months ending in Q2 2017, Spirit's adjusted operating margin was 17.5%, compared to 23.7% for 2015 and 20.9% for 2016. And that's before the disruptions for Harvey and Irma are factored in. While Spirit's long-term goal is an adjusted operating margin in the "mid-teens or higher," according to its August investor presentation, that full-year target may prove challenging, depending on how badly Irma hampers post-storm travel.
Gauging Irma's Impact
Depending on how severe the damage from Irma turns out to be, the economic effects could linger well into Q4. Buckingham Research believes that Florida tourism could see declines throughout the fall and even the winter season if key resort areas sustain heavy damage.
It's also worth remembering that cancellations pose more of a problem for Spirit than for larger airlines due to its high aircraft utilization rate and the fact that Spirit doesn't have flight interruption manifest agreements -- which means it lacks the option to rebook disrupted passengers cheaply on other airlines. And with two of its top three airports closed for at least three to four days, it appears that Irma will manage to wreak even more havoc on Spirit's upcoming earnings than Harvey did.
