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Spirit Airlines Incorporated Earnings: Profit Plunges as a Fare War Heats Up

By Adam Levine-Weinberg - Oct 26, 2017 at 2:25PM

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The budget carrier's adjusted profit fell 24% year over year due to the impact of three major hurricanes and a fare war.

Spirit Airlines (SAVE 1.11%) faced severe challenges during the third quarter of 2017. Between late August and late September, Spirit's operations in Houston, Florida, and the Caribbean were disrupted by three major hurricanes: Harvey, Irma, and Maria. If that wasn't enough, a fare war with United Continental (UAL -0.62%) broke out over the summer.

Nevertheless, Spirit Airlines remained solidly profitable last quarter -- indeed, far more profitable than its nemesis, United. The company is preparing to deal with similar fare pressure at least through the end of the year.

Spirit Airlines results: The raw numbers

Metric

Q3 2017

Q3 2016

Year-Over-Year Change

Revenue

$687.2 million

$621.3 million

10.6%

Total unit revenue

8.95 cents

9.55 cents

(6.3%)

Adjusted cost per available seat mile excluding fuel

5.42 cents

5.48 cents

(1.1%)

Adjusted net income

$65.5 million

$86.3 million

(24.1%)

Adjusted pre-tax margin

15%

21.8%

(6.8 percentage points)

Adjusted EPS

$0.94

$1.24

(24.2%)

Data source: Spirit Airlines Q3 earnings release.

What happened with Spirit Airlines this quarter?

Back in the second quarter, Spirit Airlines returned to unit revenue growth. It did so despite the negative impact of flight cancellations related to a dispute between management and Spirit's pilots that peaked in May. However, this revenue momentum was ultimately short-lived.

The three major hurricanes that struck in August and September and the continuing effects of the pilot dispute combined to depress revenue by about $40 million last quarter, according to Spirit's management. This accounted for a sizable chunk of the carrier's 6.3% decline in revenue per available seat mile (RASM). A fare war between United Continental and Spirit Airlines -- that has also sucked in American Airlines -- was the other major factor that reduced Spirit's RASM.

A yellow Spirit Airlines plane waiting at an airport gate

Unit revenue fell sharply at Spirit Airlines last quarter. Image source: Spirit Airlines.

On the bright side, Spirit Airlines' non-fuel unit costs declined during the third quarter, even as the company incurred incremental costs related to the hurricanes. (For example, Spirit relocated hundreds of employees and their families from the company's headquarters in South Florida to a backup facility in Detroit during Hurricane Irma.)

Nevertheless, good cost control couldn't offset the impact of lower RASM and higher fuel prices. As a result, adjusted net income and adjusted EPS both declined 24% year over year.

What management had to say

Even though Spirit Airlines posted a big profit decline last quarter, management was pleased with the company's performance in light of the big headwinds it faced. Spirit Airlines CEO Bob Fornaro said, "Multiple hurricanes during the third quarter 2017 caused us to cancel over 1,650 flights. ... I am very proud of how the Spirit team pulled together to assist our guests and employees in the regions affected by the storms while keeping the rest of the network running smoothly and still delivering solid financial results."

Spirit Airlines' revenue chief also pushed back against the notion that broad price-matching campaigns by the legacy carriers would undermine Spirit's business model. "Contrary to some rhetoric of late, the Spirit model continues to produce excellent returns, and our focus on new and optimized ancillary products is a unique driver of unit revenue for us," said Matt Klein.

Looking forward

For the fourth quarter, the revenue environment will remain challenging for Spirit Airlines due to the ongoing fare war. Management projects that RASM will decline 4%-6% year over year -- only slightly better than Spirit's third-quarter performance.

Fortunately, Spirit's solid cost performance is set to continue. Non-fuel unit costs will decline 3%-4% year over year in the fourth quarter, according to Spirit Airlines CFO Ted Christie. This should mostly offset an uptick in fuel costs and help to limit the impact of falling RASM on the company's earnings.

Non-fuel unit costs are also on track to decrease in 2018, excluding any potential impact from reaching a new labor contract with Spirit's pilots. If sagging profitability eventually forces United Continental and American Airlines to scale back their price-matching activity, the outcome could be very good for Spirit Airlines.

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