Spirit Airlines Inc. Earnings: 2017 Ends on a Brighter Note

Spirit Airlines (SAVE 0.81%) had a rough 2017. A dispute with its pilots led to a surge in flight cancellations during May, driving up costs and alienating customers. The airline was also hurt by the three major hurricanes that hit the U.S. last year: Harvey, Irma, and Maria. Finally, periodic price wars with larger carriers undermined the carrier's unit revenue.

However, Spirit Airlines started to improve its trajectory in the fourth quarter. It nearly stabilized its unit revenue, while achieving a big improvement in its non-fuel unit costs. The company expects these trends to continue in the first quarter.

Spirit Airlines results: The raw numbers

Data source: Spirit Airlines Q4 earnings release. Chart by author.

What happened this quarter?

Back in October, Spirit Airlines projected that revenue per available seat mile (RASM) would fall by 4% to 6% in Q4 due to severe price competition. That would have led to a sharp drop in earnings per share, particularly because fuel prices rose significantly during the quarter.

Instead, RASM declined by a much more modest 1.8%. Meanwhile, the airline reduced its non-fuel unit costs (excluding special items) by 4.4%, offsetting most of its fuel cost pressure. As a result, the company's pre-tax margin remained in double-digit territory at 12%, compared to 14.9% a year earlier.

Double-digit-percentage revenue growth and share repurchases also helped to cushion the blow to EPS, which declined just 5.2% year over year.

What management had to say

Management acknowledged that Spirit Airlines' 2017 financial performance didn't live up to the company's usual standards. However, its leaders are firmly focused on the future -- particularly the benefits that would come from signing a new long-term contract with its pilots.

"Looking ahead to 2018, we are focused on finalizing a deal with our pilots union, improving upon our operational reliability, continuing to enhance our guest experience, and delivering earnings growth for our shareholders," said CEO Robert Fornaro.

CFO Ted Christie -- who will take over as CEO next year -- also emphasized the importance of the tentative agreement that Spirit recently reached with its pilots union. While it will increase pilot wage rates by an average of 43%, it also provides important productivity improvements for the company.

Spirit Airlines' management hopes to defuse recent labor tensions in 2018. Image source: Spirit Airlines.

"Should the tentative agreement with our pilots be ratified, we will gain tools that will allow us to further improve our operational reliability and drive efficiencies, which gives us confidence that we will be able to maintain or grow our relative cost advantage," Christie noted.

Looking forward

For the first quarter, Spirit Airlines projects that RASM will decline by 1% to 2.5%, right in line with its Q4 performance. Meanwhile, it expects to achieve an impressive 5.5% to 6.5% reduction in its non-fuel unit costs -- excluding the potential costs of the new pilots contract, which still needs to be ratified by the union membership.

However, jet fuel costs are still rising rapidly. Spirit Airlines has forecast that its average fuel price will reach $2.16 per gallon this quarter, up from $1.77 per gallon a year ago. This will compress Spirit's pre-tax margin unless the carrier manages to beat its unit revenue guidance again. On the other hand, the carrier will get a nice lift from the corporate tax cuts passed in December. Its effective tax rate will probably average around 24% going forward, compared to 37% previously.

In short, Spirit Airlines is starting to stabilize its profitability after experiencing sharp margin erosion in 2017. However, the budget carrier still needs to get its unit revenue growing again to fully turn the corner.