Like other airlines, Spirit Airlines (NYSE:SAVE) lost a lot of money last quarter as air travel demand remained extremely low due to the COVID-19 pandemic. Spirit also continued to burn cash. Nevertheless, its results were far better than what peers reported. Indeed, the company's third-quarter performance highlighted why Spirit Airlines is likely to return to profitability much sooner than most of its rivals. Let's take a look.

Travelers return to the skies

In the second quarter, Spirit Airlines generated $138.5 million of revenue, down 86% year over year. For much of the period, the airline ran a bare-bones schedule, recognizing that there was minimal demand even at low fare levels. The plunge in revenue caused Spirit to post a loss of $1.81 per share under generally accepted accounting principles (GAAP) and a non-GAAP loss of $3.59 per share.

Booking activity improved significantly around Memorial Day, as lower new case counts led many consumers to start buying tickets for summer travel. This allowed Spirit to reduce its average daily cash burn from $9.5 million in April to just $1.5 million in June. Unfortunately, COVID-19 case numbers began to rise rapidly again in late June, causing demand to stagnate in July. As of late July, the company projected that daily cash burn would average $3 million to $4 million in the third quarter: significantly worse than its June cash burn.

Demand recovered starting in August, though. This enabled Spirit Airlines to report a strong sequential improvement in quarterly revenue to $401.9 million (down 59.5% year over year) on a 33% year-over-year capacity reduction.

A yellow Spirit Airlines jet parked at an airport gate.

Image source: Spirit Airlines.

Spirit also managed to reduce spending more than management had forecast. This enabled it to reduce its GAAP net loss to $1.07 per share and its non-GAAP loss to $2.32 per share. Moreover, daily cash burn averaged just $2.3 million for the quarter -- much better than the carrier's original guidance, and at the better end of the airline industry range, adjusted for size.

Improvement is continuing

At an industry level, the passenger traffic recovery has slowed over the past couple of weeks compared to the pace of improvement experienced in August and September. That said, in the current environment, Spirit has been able to use its rock-bottom cost structure to stimulate pent-up air travel demand with low fares. As such, it plans to continue restoring capacity to the market this quarter.

For Q4 as a whole, Spirit Airlines expects to reduce capacity by approximately 25% year over year. It's planning for capacity to be down 36% in October and down 20% in November and December (to support greater flying for the major holiday periods). Management estimates that this will translate to a 43% to 45% revenue decline.

Meanwhile, operating expenses will be roughly similar to the third quarter despite an expected 10% sequential increase in capacity. That should enable Spirit to reduce its adjusted loss yet again. Furthermore, the company expects average daily cash burn to tick down to $2 million this quarter.

Shareholders' pain will last

Once Spirit Airlines can get fleet utilization back to a reasonable level -- perhaps as soon as next spring -- cash flow should turn solidly positive. In the meantime, the company has plenty of liquidity, having ended the second quarter with $2.1 billion of cash and investments.

While Spirit's revenue, earnings, and cash flow will likely recover much faster than most of the industry, that doesn't mean Spirit Airlines stock will make an equally quick comeback. Having entered the pandemic with a stretched balance sheet due to its rapid growth over the past decade, Spirit Airlines has had to take on high-interest debt and issue new shares to bolster its liquidity.

In fact, Spirit now has nearly 98 million shares of stock outstanding, up from 68.5 million at the beginning of 2020. It could suffer some additional dilution due to convertible debt it issued earlier this year and warrants that the federal government received in exchange for payroll support aid.

This dilution will certainly be painful. However, it's already reflected in Spirit Airlines' stock price following a 58% year-to-date decline. As leisure travel demand returns over the next couple of years and Spirit Airlines capitalizes on its recently redesigned loyalty and credit card programs, net income should rebound. It will take several extra years to offset the drag from a higher share count. But as Spirit carries out its promising growth plan, earnings per share could eventually reach record levels, too.