A Spirit Airlines A320neo.
Spirit Airlines says its exposure to the latest Pratt & Whitney Geared Turbofan (GTF) engine issue is unique and material, and it’s having an impact on margins.
Currently, of the initial 200 engines Pratt & Whitney has identified for accelerated inspection due to a manufacturing matter affecting turbine discs, up to 13 Spirit engines are in the affected group, the carrier said. As a result, seven Airbus A320neo aircraft were removed from Spirit’s scheduled post-Labor Day service.
Spirit is the largest operator of GTF-powered Neos in the U.S., with the highest number of engines produced during the 2015 to 2021 period in question, CEO Ted Christie noted on an Aug. 3 call discussing 2023 second quarter (Q2) earnings.
The aircraft on ground (AOG) will be in addition to another seven aircraft currently out of service due to the previously disclosed unscheduled Neo engine removals. While Spirit expects unscheduled removals to ease heading into 2024, Christie said a large spike in the number of scheduled Neo engine checks next year—due to a short time life-limited part—means the airline will have the equivalent of at least 10 aircraft out of service throughout most of 2024, not including further AOGs that may be necessary due to the latest engine issue.
Any additional affected GTF engines in Spirit’s fleet are expected to be identified this fall, Christie said on the call.
“We should know by mid to late September how many of the additional 1,000 engines Pratt has identified for inspection are ones we operate,” Christie said. “Timing for the engine inspections on the next 1,000 is not yet known, but we believe it’s likely the inspections will need to be performed before the end of September 2024. Pratt has indicated that some of the 1,000 engines may already be scheduled for removal in 2024, so the net incremental impact may be smaller.”
Pratt & Whitney parent company RTX has said they intend to offset impacts of the new problem and “make the [affected] airlines whole.”
“For now, we intend to take them at their word and use that assumption in our planning,” Christie told investors and analysts. “The details and timings of those reimbursements are unknown as of yet.”
Other factors impacting the Southern Florida-based ULCC are familiar Q2 2023 constraints—weather- and air traffic control (ATC)-related ground delays, and a surge in international demand pulling from domestic. To better respond to the current demand environment, Spirit is making tactical changes to its post Labor Day network including more variation between peak and non-peak day of week flying.
“These demand and pricing trends, and difficult weather, continued throughout July and are expected to continue into the fall,” Christie said. “However, once the international summer travel season ends and kids go back to school, we expect demand will shift back towards domestic. This should mean a more normal pricing and demand environment for the peak holiday travel periods in the fourth quarter.”
During Q2 the ULCC recorded operating revenues of $1.4 billion, up 4.8% year-over-year, while operating expenses remained relatively flat at $1.4 billion. Spirit posted a net loss of $2.3 million, improved from Q2 2022’s net loss of $52.4 million. Fare revenue per passenger flight segment fell 20.1% year-over-year to $57.86.
“Demand did not build into the peak summer period as we had anticipated, leading to lower fares across the network,” Spirit EVP and Chief Commercial Officer Matt Klein said. “When we look at our second quarter revenue guide compared to flown results, approximately 25% of the revenue miss was associated with elevated cancellations in the quarter,” with the balance of the variance attributed to weaker demand.
Spirit says it expects the new AOG event to affect third quarter (Q3) revenues by approximately 1.5%, on top of an estimated 6% in lost revenue for the original Neo AOG issue. Adjusting for this and taking into account weakened demand, weather and ATC impacts, the ULCC projects Q3 total revenue to be in the range of $1.30-$1.32 billion—versus Q3 2022 revenues of $1.34 billion—with capacity increasing 13.7% versus the prior year’s quarter. Spirit estimates its Q3 operating margin will range between -5.5% and -7.5%.
“I strongly believe our expected [Q3] performance is an anomaly,” Christie said. “Most important for us, as we trend towards a normalized utilization rate, we expect our cost structure to return to industry-leading levels and provide us margin tailwinds.”
By the end of Q2, Spirit had 104 firm orders for Airbus A320 family aircraft, with six deliveries remaining for 2023. Following conversations with the OEM around production limitations and order backlogs, Spirit converted all 31 of its A319neo orders to A321neos and reduced 2024 deliveries by 11 aircraft, spreading the remainder over 2025-2029. The airline ended the June quarter with 198 aircraft, after taking delivery of five A320neos and one A321neo, and retiring three A319ceo aircraft.
