The U.S. ultra-low-cost carrier Spirit has released details of its latest results for the second quarter of 2020 which showed capacity was down by some 83% and the adjusted loss was around $364 million.
“The COVID-19 pandemic negatively impacted our second quarter results. However, we were encouraged by our June results and believe they illustrate that when leisure travel demand rebounds and stabilizes, our leading low-cost structure positions us well to be among the first to return to profitability. We increased our schedule in June as a result of encouraging, albeit tenuous, signs of demand improving. This worked out well for us. The favorable dynamics of our low-cost structure, a slight rebound in demand for June, and an uptick in forward bookings for July resulted in favorable cash dynamics for the month of June. In fact, if you exclude an early principal payment of nearly $50 million related to our aircraft deferral agreement and extension of our pre-delivery deposit facility, on an average daily cash basis2, we were break-even for the month of June,” said Ted Christie, Spirit’s President and Chief Executive Officer.
COVID-19
“For our Guests who are ready to travel again, we are pleased to welcome them back. We are taking purposeful steps to provide a safe and healthy experience for our Guests and our Team Members. I am proud of how our entire team has stepped up in response to COVID-19, adapting to enhanced cleaning processes and changes in operational procedures, maintaining productivity amidst a changing work environment, connecting with our Guests in innovative ways, and proactively cutting costs and taking actions to preserve liquidity,” said Ted Christie, Spirit’s President and Chief Executive Officer.
As the COVID-19 pandemic continues to evolve, the Company's financial and operational outlook remains subject to change. The Company continues to monitor the impacts of the pandemic on its operations and financial condition, and to implement mitigation strategies while working to preserve cash and protect the long-term sustainability of the Company. The Company has implemented measures for the safety of its Guests and Team Members as well as to mitigate the impact of COVID-19 on its financial position and operations. Please see the Company’s Quarterly Report on Form 10Q for the period ending June 30, 2020 for additional disclosures regarding these measures.
Capacity and Operations
As the global COVID-19 pandemic spread throughout the U.S., demand for air travel declined rapidly. In response to this decline in demand, the Company reacted quickly to cut flying. Second quarter capacity was down 83.2 percent compared to the second quarter 2019. In part due to the Company quickly adjusting its network, load factors increased from 17.9 percent in April to 79.1 percent in June.
The Company estimates its capacity for July, August, and September will be down approximately 18, 35, and 45 percent, respectively, compared to the same periods last year. For the third quarter 2020, capacity is estimated to be down 32 percent year over year. The situation remains very fluid and actual capacity adjustments may be different than what the Company currently expects.
Operational performance in April 2020 was negatively impacted by the dramatic schedule changes following the onset of the COVID-19 pandemic. As measured by the DOT, Spirit's April Completion Factor was 80.2 percent, second among reporting carriers, and on-time performance was 74.6 percent, or third among reporting carriers. For the months of May and June 2020, Spirit achieved a DOT Completion Factor3 of 100 percent and on-time performance3 for May and June was 96.8 percent and 94.2 percent, respectively. These outstanding results, based on preliminary data, earned Spirit a first place ranking in both categories as measured by the DOT for both May and June 2020.
Revenue Performance
Total operating revenue for the second quarter 2020 was $138.5 million, a decrease of 86.3 percent year over year, due to the significant decline in air travel demand as a result of the COVID-19 pandemic.
The amount of breakage, brand-related4 and other revenues recognized in any given period are not directly driven by the number of passenger flight segments flown. Due to reduced air travel demand resulting from the COVID-19 pandemic, which drove a significant decrease in passenger flight segments, breakage, brand-related4 and other revenues in the second quarter 2020 accounted for 43.6 percent of total revenue compared to 8.5 percent in the second quarter 2019. Given this and the significant decrease in passenger flight segments year over year, breakage, brand-related4 and other revenues were the primary drivers of the increases in both ticket and non-ticket revenue per passenger flight segment in the second quarter 2020. Fare revenue per passenger flight segment increased 23.0 percent year over year and non-ticket revenue per passenger flight segment increased 49.5 percent year over year.
Cost Performance
For the second quarter 2020, total GAAP operating expenses decreased 61.3 percent year over year to $328.9 million, which includes $151.9 million of special items. Adjusted operating expenses for the second quarter 2020 decreased 43.3 percent year over year to $480.8 million5. These changes were primarily driven by a 92.5 percent decrease in fuel expense and reductions in various other expenses related to volume of flight operations, such as landing fees & other rents, distribution, and ground handling. Salaries, wages and benefits expense was about flat compared to the same period last year despite an 11.6 percent year over year increase in our pilot and flight attendant workforce prior to the onset of the COVID-19 pandemic. In March, Spirit suspended hiring across the Company except to fill essential roles.
Fleet
Year-to-date through June 30, 2020, Spirit took delivery of nine new A320neo aircraft, three of which were delivered during the second quarter 2020. Two of the aircraft delivered in the second quarter were debt-financed and one was secured under a direct operating lease. The Company ended the second quarter 2020 with 154 aircraft in its fleet.
During the second quarter 2020, Spirit entered into an agreement with Airbus ("the Deferral Agreement") to defer certain aircraft deliveries originally scheduled in 2020 and 2021. Under the terms of the Deferral Agreement, the Company now anticipates a total of 12 aircraft deliveries in 2020 (compared to 16 as previously planned) and a total of 16 in 2021 (compared to 25 as previously planned).
The Company has secured debt financing for two of the remaining 2020 aircraft deliveries and the final delivery will be financed with a sale/leaseback transaction. Of the 2021 aircraft deliveries, ten are secured under direct lease arrangements and we have not secured financing for the remaining six. The first aircraft to deliver in 2021 not yet financed is scheduled for delivery in mid-June 2021.
In June, Spirit amended its 2018 pre-delivery deposit financing facility to extend the expiration date from December 30, 2020 to March 31, 2021. As part of this amendment, the Company agreed to make an unscheduled principal payment of nearly $50 million during the second quarter 2020.
Liquidity and Capital Deployment
Spirit ended the second quarter 2020 with unrestricted cash, cash equivalents, and short-term investments of $1.2 billion.
"We started the year with strong momentum, but the global pandemic had a significant adverse impact on our second quarter results. I thank our entire team for their efforts in helping us to manage through this crisis. As we progressed through the quarter, our cash burn2 declined primarily due to the improvement in net sales. Our average daily cash burn2 trended from about $9.5 million in April to about $1.5 million in June," said Scott Haralson, Spirit’s Chief Financial Officer. “As the health and financial impacts of the COVID-19 pandemic continue to unfold, we are making tactical changes to preserve cash while maintaining our flexibility to respond when leisure demand eventually recovers. Looking forward, based on current demand trends which have flattened since June, we estimate our average daily cash burn2 for the third quarter 2020 will range between $3 and $4 million."
To enhance liquidity during the second quarter 2020, the Company:
Increased its senior secured revolving credit facility (“the 2022 RCF”) commitment amount from $110 million as of March 31, 2020 to $180.0 million as of June 30, 2020. As of June 30, 2020, the Company had fully drawn the available amount of $180.0 million under the 2022 RCF;
Completed the public offering of $175.0 million aggregate principal amount ($168.3 million in proceeds, net of issuance costs) of 4.75% convertible senior notes due 2025; and
Completed a primary public offering of 20,125,000 shares of its voting common stock. The Company received proceeds of $192.4 million, net of issuance costs, from this stock offering.
In April 2020, Spirit entered into a Payroll Support Program ("PSP") agreement with the U.S. Department of the Treasury ("Treasury"), under which the Company was eligible for a total of $334.7 million. Of this amount, a total of $264.3 million will be in the form of a direct grant from Treasury and $70.4 million will be in the form of a low-interest, 10-year note. Also, in connection with its participation in the PSP, the Company will issue to Treasury warrants to purchase up to 500,150 shares of the Company’s common stock at a strike price of $14.08. As of June 30, 2020, the Company had received total PSP proceeds of $301.3 million, and had issued to Treasury $60.4 million in notes and warrants to purchase 428,829 shares valued at $2.5 million. The Company recorded the remaining $238.4 million direct grant amount as a liability within deferred salaries, wages and benefits on the Company’s condensed balance sheets. The Company recognized $123.9 million of the deferred salaries, wages and benefits in the second quarter 2020 within special credits on the Company’s condensed statement of operations. The Company expects to receive the remaining $33.4 million of PSP proceeds at the end of July 2020 and in exchange will issue to Treasury an additional $10.0 million in notes, plus warrants to purchase additional 71,321 additional shares of the Company's common stock.
The Company has applied for additional funds under the CARES Act secured loan program (the "Loan Program"). The expected maximum availability to the Company under the Loan Program is approximately $741 million, in the form of a secured loan. The loan amount is dependent on the amount and types of collateral accepted, which may result in an actual loan of less than $741 million principal amount. The Company has until September 30, 2020 to determine whether or not to participate in the Loan Program. The PSP funds and, if received, the loan funds, subject the Company to certain ongoing restrictions under the CARES Act.
Total capital expenditures for 2020 are estimated to be approximately $560 million (approximately $215 million net of financings), of which $112 million ($28 million net of financings) is expected to be incurred in the third and fourth quarters of 2020.
Tax Rate
The Company recorded a $23.8 million discrete tax benefit in the second quarter 2020 related to the finalization of the Net Operating Loss carryback to tax year 2013. During the quarter, the Company amended its 2018 income tax return to claim bonus depreciation in order to utilize the five-year carryback period pursuant to tax law changes from the CARES Act. On a GAAP basis, the Company's tax rate for second quarter 2020 was 32.0 percent. Excluding this discrete tax benefit and special items, the Company's effective tax rate for the second quarter 2020 was 21.6 percent.
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