Airlines have been reporting awful second-quarter earnings results this month as the COVID-19 pandemic caused air travel demand to plunge in March. On Wednesday afternoon, Spirit Airlines (NYSE:SAVE) got in on the action, posting a quarterly loss that was significantly worse than analysts' expectations.

That said, business trends improved significantly at Spirit Airlines over the course of the quarter. And while a surge in COVID-19 cases over the past month is weighing on air travel demand, Spirit's June performance highlights that the airline has an easier path to cash breakeven than its rivals.

Another awful earnings report

Spirit Airlines' revenue plummeted 86.3% year over year to $139 million on an 83.2% capacity reduction last quarter. Not surprisingly, the company couldn't reduce its costs nearly as much as revenue fell. Under generally accepted accounting principles (GAAP), operating expenses declined 61.3% year over year to $329 million, leading to an operating loss of $190 million. Spirit's GAAP pre-tax loss totaled $213 million, and its net loss was $144 million.

However, these GAAP figures included the benefit from payroll support grants that Spirit -- like other U.S. airlines -- received last quarter. Excluding these payroll grants and other special items, Spirit Airlines reported a $364 million pre-tax loss and a net loss of $286 million ($3.59 per share). That was significantly worse than what Wall Street analysts had been expecting. The average estimate called for a loss of $2.66 per share.

A Spirit Airlines plane parked at an airport gate

Image source: Spirit Airlines.

A key reason for Spirit Airlines' massive loss was that it had been gearing up for big growth in 2020 prior to the pandemic. That left it severely overstaffed when demand suddenly dried up. Salaries, wages, and benefits decreased just 1.3% year over year last quarter, whereas United Airlines -- which reported a day earlier -- slashed spending on salaries and related costs by 29% year over year.

Cash burn progression is a hopeful sign

The good news for Spirit Airlines shareholders is that the company's performance improved dramatically over the course of the second quarter. During April, the airline burned through $9.5 million of cash per day, on average. By June, cash burn had receded to just $1.5 million per day, as a modest rebound in demand drove an uptick in ticket sales for the summer.

In fact, Spirit's management said that excluding an unscheduled $48.8 million debt repayment, the airline reached cash breakeven last month. Most other airlines are hoping to reach breakeven near the end of this year -- and only if demand improves significantly compared to recent levels. Spirit Airlines' June performance confirms that the budget carrier should be able to return to profitability faster than rivals due to its leisure focus, rock-bottom cost structure, and significant ancillary revenue streams.

Unfortunately, the recent uptick in COVID-19 cases has caused a setback for air travel demand. As a result, whereas Spirit Airlines expects to reduce capacity just 18% year over year in July, it is now planning for 35% and 45% year-over-year capacity cuts in August and September, respectively. Moreover, management expects average daily cash burn to tick up to between $3 million and $4 million for the third quarter.

Spirit Airlines can survive this

Based on that cash burn estimate, Spirit Airlines is likely to burn through a little more than $300 million of cash this quarter. Fortunately, the company ended the second quarter with over $1.2 billion of cash and investments on its balance sheet. Furthermore, it will receive the last $33.4 million of its payroll support funds later this month and it has a current income tax receivable of $147 million on its balance sheet. Management has previously indicated that this tax refund will come in the fourth quarter.

Additionally, Spirit Airlines is eligible for a subsidized federal secured loan of up to $741 million. The company has until the end of September to decide how much to borrow. Spirit also announced an at-the-market equity offering program on Wednesday afternoon, which will allow it to sell additional shares to raise capital if market conditions are favorable.

Thus, Spirit Airlines has plenty of capital available to cover near-term cash burn, particularly since it will have the option of implementing furloughs and/or layoffs at the beginning of October, depending on management's demand forecast.

Even without a vaccine, Spirit Airlines has a good chance of returning to cash breakeven next year, as long as the U.S. can get the pandemic slightly more under control (as it seemed to be in mid-June). And when a vaccine does become available, Spirit should rapidly return to strong profitability, as it is especially well suited to profitably serving price-sensitive leisure demand.

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