Leisure travel demand has come roaring back in the U.S. over the past six months. That helped most major airlines achieve strong sequential improvement in their earnings results last quarter.

Among U.S. airlines, Spirit Airlines (SAVE -2.90%) has a particularly strong focus on leisure travel. Not surprisingly, the budget airline saw a huge turnaround in its business in the second quarter, positioning it for a return to profitability starting this quarter.

A solid earnings beat

In the first quarter, Spirit Airlines posted a massive $308 million adjusted pre-tax loss on $461 million of revenue. Adjusted earnings before interest, taxes, depreciation, and amortization, or EBITDA, was negative to the tune of $200 million. However, at the time of the Q1 earnings report in late April, management projected that Spirit would get close to breakeven EBITDA in the second quarter, with an adjusted EBITDA margin between negative 5% and 0%.

In mid-June, Spirit raised its guidance, pointing to improving demand and (to a lesser extent) favorable cost performance. At that point, the company anticipated reporting a "modestly positive" second-quarter EBITDA margin.

Even this updated forecast proved too conservative, as demand continued to strengthen. By June, average fare levels had recovered to just shy of 2019 levels. As a result, total revenue for the quarter reached $859 million: up 86% sequentially and down just 15% from Q2 2019.

A Spirit Airlines jet parked at an airport gate.

Image source: Spirit Airlines.

For the full quarter, Spirit's average fare was just $44.09, down from $57.60 two years earlier. However, non-ticket revenue per passenger segment surpassed pre-pandemic levels, reaching $58.39 (compared to $55.54 two years earlier).

Spirit's better-than-expected revenue performance enabled it to generate $62 million of adjusted EBITDA, putting its adjusted EBITDA margin at 7.2%. The company's adjusted pre-tax loss narrowed to $45 million, while its adjusted net loss came to $0.34 per share. On average, analysts had expected a loss of $0.86 per share.

Momentum continues

Spirit Airlines turned profitable in the month of June, as strong demand gave its fares a lift. Management expects the company to remain profitable in the second half of the year.

For the current quarter, Spirit intends to operate 10.6% more capacity than it did in the third quarter of 2019. Management forecasts that revenue will increase 3.5% to 11% compared to the Q3 2019 figure of $992 million, hitting a new record. This should enable the carrier's adjusted EBITDA margin to improve again on a sequential basis to a range of 10% to 15%.

A Spirit Airlines plane on the tarmac.

Image source: Spirit Airlines.

At the low end of that range, Spirit would post roughly break-even results. Even at the high end, it would log a mid-single-digit pre-tax margin -- well shy of its typical pre-pandemic earnings power. That said, despite the airline's plan to increase capacity relative to 2019, it hasn't returned to its normal level of aircraft utilization yet. That's putting pressure on unit costs, weighing on earnings. Rising wage rates, higher aircraft rent, and increased airport costs are also driving up unit expenses.

On a path to record profits

As Spirit Airlines boosts aircraft utilization back to pre-pandemic highs and the airline industry finishes recovering from the COVID-19 pandemic, the company's unit costs should steadily recede to around 2019 levels. Meanwhile, the budget airline's strong non-ticket revenue performance last quarter bodes well for future unit revenue, as non-ticket revenue is more stable than fares.

The net result will likely be a return to Spirit's historic midteens operating margins by 2023 -- and potentially even 2022, in an ideal scenario. Indeed, Spirit Airlines plans to boost its fourth-quarter capacity by 23% compared to 2019, which will already get utilization close to pre-pandemic highs exiting the year.

While the pandemic isn't over yet, Spirit Airlines is already returning to its normal high-growth mindset. It hopes to end 2023 with 59% more aircraft in its fleet than it had at the end of 2019. And the airline continues to find plenty of attractive new growth markets in which to deploy those planes. This sets the stage for Spirit to achieve record profits within a few years -- with abundant prospects for future growth.