Like its peers in the airline industry, Spirit Airlines (SAVE -3.69%) rang up a big loss last quarter. However, business trends have changed for the better over the past two months.

Indeed, Spirit's rock-bottom fares and focus on short-haul leisure travel positions it for a quick comeback as the U.S. economy reopens. Let's take a look at what the budget airline's recent first-quarter earnings report means for investors.

Travel restrictions weighed on Q1 revenue and earnings

In the fourth quarter of 2020, Spirit Airlines generated revenue of $498 million, up from just $139 million two quarters earlier. However, a surge in COVID-19 cases toward the end of 2020 led to new travel restrictions in early 2021. Spirit's management warned in early February that the company's financial performance would take a step backward in the first quarter.

Sure enough, revenue decreased sequentially to $461 million last quarter. Additionally, Spirit's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) worsened to a loss of $200 million. That said, the resulting adjusted EBITDA margin of negative 43.4% beat the company's initial guidance and was even somewhat better than the updated outlook CEO Ted Christie provided last month.

A yellow Spirit Airlines jet parked at an airport gate

Image source: Spirit Airlines.

Even better, resurgent demand in March -- and the resulting jump in bookings for future travel -- helped drive a big turnaround in cash flow. Spirit Airlines generated $187 million of operating cash flow in the first quarter. This allowed the company to start paying down debt. (To be fair, the company also benefited from a $109 million income tax refund and $159 million of payroll-support grants.)

Expecting big improvement this quarter

Last quarter, Spirit Airlines operated at 19% less capacity than it did in the first quarter of 2019. But with demand recovering rapidly, the budget airline expects to operate just at 5.5% less capacity this quarter than it did two years ago. Stronger demand should also boost unit revenue compared to the first quarter.

As a result, management expects the company's adjusted EBITDA margin to reach negative 5%, at worst, in the second quarter -- and breakeven, at best. Spirit's guidance also implies that revenue could surge sequentially to around $800 million, ahead of the average analyst estimate of $746 million.

Spirit Airlines should generate positive cash flow again this quarter. First, it could bring in a ton of cash from customers booking summer travel. Second, the airline will continue to benefit from government support. It expects to receive approximately $226 million of additional payroll-support funds this year, with more than half of that likely to arrive in the second quarter.

A rendering of a Spirit Airlines jet in flight, with clouds in the background

Image source: Spirit Airlines.

A recovery winner in the making

Demand for business travel and long-haul international trips remains extremely weak for now. By contrast, leisure-travel demand has come roaring back in recent months. In fact, demand for travel to many outdoor-focused tourist destinations in the U.S. now exceeds 2019 levels.

That plays right into Spirit's wheelhouse. The carrier specializes in serving leisure travelers, and its point-to-point route structure allows it to quickly shift capacity around to match demand. That's why the airline will be able to restore capacity to nearly 2019 levels this quarter, while legacy carriers Delta Air Lines and United Airlines expect capacity to be down more than 30% compared to Q2 2019.

By the end of June, most American adults will be fully vaccinated against COVID-19. That will probably unlock a surge in demand in the second half of 2021, enabling Spirit Airlines to increase capacity beyond 2019 levels.

Capacity growth is essential for returning to profitability. After all, Spirit Airlines currently has 159 aircraft in its fleet and expects that number to reach 190 by the end of 2022, whereas it had just 133 aircraft two years ago. Fortunately, it looks like Spirit should be able to productively employ its full fleet within a quarter or two. That could drive a return to profitability later this year -- and a return to healthy financial results as soon as 2022.