Spirit Airlines (NYSE:SAVE) entered this year with high hopes, after ending 2018 with a stellar fourth-quarter performance. Revenue per available seat mile (RASM) surged 11.4%, causing adjusted earnings per share to skyrocket 92% year over year. The budget airline's earnings momentum continued in the first half of 2019, as adjusted EPS jumped 63%.

However, Spirit Airlines has been unable to keep unit revenue growing during the second half of the year in the face of tough comparisons. Even more troubling, operational miscues and other cost headwinds have caused a spike in nonfuel unit costs. As a result, Spirit's earnings fell last quarter and the company is on pace to post an even bigger EPS decline in the fourth quarter.

A rocky quarter

Spirit Airlines' initial forecast for the third quarter was not encouraging. The company called for RASM to be roughly flat year over year (plus or minus 1%) and for adjusted nonfuel unit costs to surge 7% to 8%. A runway closure in Fort Lauderdale -- Spirit's biggest focus city -- and a surge in flight cancellations due to bad weather and overly aggressive scheduling were the main factors behind this projected rise in unit costs.

In early September, the carrier lowered its guidance even further, citing the impact of Hurricane Dorian (which hit Florida on Labor Day weekend) and weaker fares during off-peak periods. However, Spirit raised its outlook earlier this month, as it performed better than expected in the final month of the quarter.

When all was said and done, RASM declined 1.7% on an 11.6% capacity increase. Total revenue rose 9.7% year over year to $992 million. Meanwhile, adjusted nonfuel unit costs rose 8.4%, partially offset by an 11.9% decrease in Spirit's average fuel price.

A yellow Spirit Airlines jet parked at an airport gate

Spirit Airlines' RASM fell and its unit costs increased last quarter. Image source: Spirit Airlines.

The net result was that Spirit Airlines' adjusted pre-tax margin slipped to 11.9%, compared to 14.5% a year earlier. Adjusted pre-tax income, adjusted net income, and adjusted EPS all fell about 10% year over year. Nevertheless, Spirit's adjusted EPS of $1.32 came in comfortably ahead of the average analyst estimate of $1.23.

Profit will plunge this quarter

Three months ago, Spirit warned shareholders to expect a 3.5% to 4.5% increase in nonfuel unit costs in the fourth quarter, whereas it had entered the year projecting that nonfuel unit costs would rise just 1%. The company confirmed the higher estimate yesterday in its official fourth-quarter guidance. Spirit Airlines does expect its fuel price relief to continue, with fuel prices down about 7.5% year over year this quarter. This fuel cost savings should more or less offset Spirit's nonfuel unit cost inflation.

Unfortunately, while total unit costs should be roughly flat this quarter, RASM is on track to fall 4.5% to 6.5% year over year. This isn't too surprising, in light of the downturn in off-peak demand that Spirit Airlines experienced last quarter, not to mention the extremely tough year-over-year comparison it faces after posting 11.4% unit revenue growth in the year-ago period.

Based on the midpoint of the company's guidance, Spirit Airlines' revenue would reach $946 million this quarter, up nearly 10% year over year. However, its adjusted pre-tax profit would plunge by more than a quarter -- from $124 million to $89 million -- as its adjusted pre-tax margin recedes to 9.4% from 14.4% a year ago. Adjusted EPS is on track to wind up around $0.99, slightly below the current average analyst estimate of $1.03.

Spirit Airlines isn't living up to its potential

2019 is on track to be a tale of two halves for Spirit Airlines, with strong earnings growth in the first two quarters of the year followed by substantial declines in the third and fourth quarters. On a full-year basis, adjusted EPS is likely to rise about 10%.

That's not a terrible result, but many of Spirit's peers have done a lot better. Furthermore, 10% EPS growth implies a modest decline in the company's operating margin compared to last year's 13.5%. That was already near the low end of its long-term target range. With fuel prices down year over year and the U.S. economy growing reasonably well, there's no good excuse for Spirit Airlines not expanding its profit margin in 2019.

That said, Spirit Airlines remains more profitable than most U.S. airlines. Moreover, it continues to expand at a double-digit rate. The key question for investors is whether the company will be able to start expanding its profit margin again in 2020 by reining in costs and boosting unit revenue through loyalty program enhancements, route changes, and other initiatives. With Spirit Airlines shares currently trading for less than 10 times earnings, it wouldn't take much good news to get the stock moving higher.