UPDATE – As the biggest operator of the Geared Turbofan in the US, Spirit Airlines expects to be hit hard by the latest engine issue. The airline will remove seven Airbus A320neos from service after Labor Day for accelerated inspections and replacements of disks produced from contaminated powder metal. The carrier expects more effects during 2024. Spirit Airlines: GTF issues hurt; no more A319neos.
Spirit was advised on the last day before filing its September schedule that it has up to thirteen engines in the fleet affected by the quality problem. It was forced to remove seven aircraft from service at the last minute. CEO Ted Christie said in the Q2 earnings call that these seven aircraft are expected to remain out of service through the end of the year. Consequently, September’s capacity has been reduced by five percent. Revenues production in Q3 will be hit by 1.5 percent due to the latest engine issue. This is on top of the revenue impact from other GTF issues of six to seven percentage points as fleet utilization takes a hit.
Spirit is particularly hit hard, as it operates the most GTF engines in the US and the most engines produced before 2022 that have the contamination issue. Consequently, it will also feel the pain in 2024, when another 1.000 GTF engines must be checked and repaired for this latest issue before September. As Wizz Air said earlier today, Spirit also lacks visibility about the exact number and what this means for 2024. It could be that P&W finds out that fewer engines are affected. Christie said more details show become available in September.
As shop visits for the GTF will spike next year as many engines need checks for other durability issues anyway, Spirit can’t say how many aircraft it will have to ground in 2024 because of the latest issue. Because of the other GTF problems with the combustors and turbine blades, Spirit had six A320neos grounded in Q2 and is up to seven aircraft on the ground now. This will continue until Q4 and should drop to four aircraft, at least temporarily, before increasing to at least ten aircraft again during the year. This excludes aircraft grounded with the latest engine issue.
P&W has promised to reimburse customers for the accelerated engine removal. Without sharing details, Christie said he expects P&W to keep its promise: “We have a long-standing partnership with them. They are an institution in the US. They have always stood by their customers and honored their commitments, so we have no reason to doubt that this time.”
Spirit says it will likely be overstaffed with pilots in Q4 and early 2024 as a by-effect of so many aircraft out of service. Pilot attrition is no longer a problem for the airline, so it may have to stand down the pilots until the aircraft becomes available again.
A319neo order ditched
Speaking about aircraft, Spirit Airlines has looked at its future fleet. After Airbus advised the airline earlier this year that some 2023 deliveries will be pushed out to 2024, Spirit risked deliveries would be piling up next year. Others will likely move to the right and beyond 2024. “In the near term, we need a general slow-down of growth to de-risk the business and give ourselves the chance to digest the previous few years of growth. Given all of these things and the fact that our original orders only extended into 2027, we started discussing a broader evaluation of our future aircraft deliveries,” said Chief Financial Officer Scott Haralson.
This has resulted in changes to the original Purchase Agreement and delivery plan, with a reduction of eleven deliveries planned for 2024. These and the remaining deliveries have been “smoothened” between 2025 and 2029. The carrier also held options for 2026-2028, which have been changed to 2027-2029. This gives Spirit a consistent level of deliveries until the back end of the decade.
The single biggest victim of this review is the Airbus A319neo. Spirit has decided to “upgauge” from the smallest neo family member, part of an MoU announced in October 2019 for 100 A320neo aircraft. The order for 31 A319neos confirmed in January 2020 has been converted to A321neos, of which the first aircraft was delivered on lease from AerCap in Q2. Seven more are to follow this year.
Without the Spirit order, Airbus has 61 A319neos in the order book, of which thirteen have been delivered by the end of June. The following table shows A319neo gross orders. Only 13 have been delivered. The model is increasingly marginal and has less market interest than its competitor, the MAX7. But Airbus can convert customers to the A220-300 if the aircraft size is desired. Spirit seems to be moving to the A321neo as this aircraft increasingly makes sense for the US market.
Q2 results
During Q2, operations were severely impacted by the various thunderstorm across Spirit’s network. Flight cancelations resulted in a 25 percent revenue miss during the quarter. The carrier has also seen a shift in demand for domestic to international travel, as reported by other airlines. Christie expects this to flip back into the fall when demand patterns should normalize. During the summer, longer-stage routes were added to the network, which performed well compared to 2019 levels but didn’t outperform as expected. Demand had to be stimulated with lower fares.
Spirit reported a $2.349 million net loss for Q2 compared to $52.406 million last year. Revenues grew to $1.432 billion from $1.367 billion. Of this, $1.410 billion was from ticket revenues versus $1.348 billion. Other revenues grew 19.4 percent to $22.4 million from $18.8 million.
Operating expenses were almost identical to Q2 last year at $1.412 billion compared to $1.411,9 billion. Aircraft fuel was thirty percent cheaper at $391 million, but salaries were up by 32.1 percent to $407.7 million. The operating was $20.211 million compared to $-45.330 million.
In HY1, the net loss was $106.3 million versus $247.1 million in 2022. Revenues were up to $2.782 billion from $2.334 billion, with ticket revenues up 19.1 percent to $2.738 billion. Expenses were up 10.9 percent to $2.874 billion. The operating loss for HY1 was $92.2 million versus $256.8 million. Liquidity stood at $1.5 billion.
For Q3, Spirit expects demand trends in the domestic US, Latin America, and the Caribbean to continue to be weaker than normal. The revenue guidance is between $1.30 and $1.32 billion, down 3.2 to 1.7 percent. The operating margin is guided at -5.5 and -7.5 percent. Capacity will increase by 13.7 percent year on year.
