Just a few weeks ago, Spirit Airlines' (SAVE +0.00%) recovery seemed to be accelerating. The budget airline posted a much smaller second-quarter loss than analysts had expected. It returned to profitability in June, and management projected further improvement in the third quarter.
Unfortunately, Spirit suffered a massive operational meltdown beginning a few weeks ago. The fallout has forced the company to dramatically cut its third-quarter guidance.
Flight disruptions spiraled out of control
Over the past few months, Spirit Airlines has steadily ramped up its flight schedule beyond pre-pandemic levels. As of late July, the carrier expected to increase third-quarter capacity by 10.6% compared to 2019, with further acceleration in its growth rate planned for the fourth quarter.
However, like many businesses in the U.S., Spirit Airlines has struggled to meet its hiring goals in 2021. It still had enough staff to keep things running when everything was going smoothly, but it had no margin for error. Alas, a series of severe weather events during July caused many Spirit Airlines crews to wind up out of position and thus unable to staff their scheduled flights. Eventually, the airline ran out of reserve crews, too, leading to a full-scale meltdown.
At the peak of the crisis in early August, Spirit canceled more than 40% of its schedule for five consecutive days -- including three days when it operated less than half of its scheduled flights. In total, Spirit Airlines canceled 2,826 flights during the 11-day period from July 30 to Aug. 9. Many of its remaining flights were delayed.
Image source: Spirit Airlines.
Tallying the damage
The raft of flight cancellations in late July and early August caused Spirit to miss out on about $50 million of revenue, according to the budget airline's recent investor update.
The staffing shortage hasn't gone away, so Spirit Airlines has trimmed its schedule for the rest of the third quarter to prevent a repeat of its recent problems. In addition, booking trends have slowed and the cancellation rate has increased this month. To some extent, the sharp uptick in COVID-19 cases and hospitalizations over the past month associated with the Delta variant explains the deterioration in demand trends. But management acknowledges that Spirit's highly publicized operational meltdown has also driven some customers away, at least in the short term.
These factors will reduce Q3 revenue by another $80 million to $100 million, according to the company. As a result, Spirit now expects to generate $885 million to $955 million of revenue this quarter.
Meanwhile, Spirit incurred significant incremental expenses because of its operational disruptions, mainly from the cost of paying for hotel rooms and buying tickets on other airlines for customers whose flights were canceled. The company estimates that operating expenses for the quarter will come in between $1.03 billion and $1.04 billion, $30 million higher than its previous forecast.
Just a few weeks ago, Spirit Airlines confidently projected that its EBITDA margin would rise to double-digit territory this quarter. Now, it expects to record negative adjusted EBITDA for the period.
Spirit will recover with time
Spirit Airlines may have lost some customers for good this month. Yet most people tend to have short memories when it comes to air travel chaos. (The same is true of many other things. Remember when people believed nobody would eat at Chipotle Mexican Grill again due to repeated food safety problems?)
As long as Spirit avoids similar operational meltdowns in the future, most consumers will eventually forget about what happened earlier this month. The budget carrier's rock-bottom costs and massive ancillary revenue streams will enable it to underprice rivals for the foreseeable future, and cheap fares are hard to resist. By the time the airline industry finishes recovering from the COVID-19 pandemic in two or three years, Spirit Airlines will likely be earning record profits, too.
