Spirit Airlines Inc (SAVE) 2019 Q4 法說會逐字稿

Good morning and welcome to the Fourth Quarter 2019 and Full Year 2019 Conference.

My name is Brandon, and I'll be your operator for today.

(Operator Instructions)

I will now turn it over to DeAnne Gabel, Senior Director of Investor Relations.

And DeAnne, you may begin.

Thank you, Brandon, and welcome everyone to Spirit Airlines fourth quarter earnings call.

This call is being recorded and simultaneously webcast.

A replay of this call will be archived on our website for 60 days.

Presenting on today's call are Ted Christie, Spirit's Chief Executive Officer; Matt Klein, our Chief Commercial Officer; and Scott Haralson, our Chief Financial Officer.

We will have a Q&A session for sell-side analysts following our prepared remarks.

Also joining us in the room today are other members of our senior leadership team.

Today's discussion contains forward-looking statements that represent the company's current expectations or beliefs concerning future events and financial performance.

Forward-looking statements are based on management's current expectations and are not a guarantee of future performance or results.

There could be significant risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements, including the risk factors discussed in our annual report on Form 10-K and quarterly reports on Form 10-Q.

We undertake no duty to update any forward-looking statements.

In comparing results today, we will be adjusting all periods to exclude special items.

Please refer to our fourth quarter 2019 earnings release which is available on our website for the reconciliation of our non-GAAP measures.

And with that, here's Ted.

Thanks, DeAnne.

Good morning, everyone.

Thanks for joining us today.

I want to congratulate our entire team for the strong operational performance in the fourth quarter.

We adjusted to the challenges we faced in the summer, and for the fourth quarter delivered on-time performance of 84.2% and a completion factor of 99.4%, an operational performance that placed us near the top of all operators in the United States.

Our improving operational reliability and the investments we're making to provide our guests the best value in the sky are being noticed by our guests and are earning us international acclaim.

Recently, Spirit received global recognition as the Low-Cost Airline of The Year at the CAPA World Aviation Summit.

In addition, we celebrated being honored as Air Transport World's Value Airline of The Year and being ranked as the country's Most On-time Low-Cost Airline by Flight Global.

I'm very proud of the Spirit team for earning these accolades.

They earned them by improving our operational reliability and by becoming a best-in-class value airline.

This took hard work, commitment and dedication, and I thank them all for their efforts.

In addition to driving improved guest satisfaction, running a good airline is essential to our financial results, and I'm pleased to say we exceeded our fourth quarter expectations for both TRASM and CASM ex-fuel and delivered a fourth quarter adjusted earnings per share of $1.24 and an operating margin of 13.4%.

As we strive for continuous improvement, some of our pursuits will prove more successful than others.

That said, we are committed to continue moving forward.

And I'm very proud of how our team redirected and recovered from the summer operational issues and finished 2019 in a strong position, setting us up well as we head into 2020.

Here's Matt and Scott to discuss our results for the fourth quarter 2019 and our forward outlook in more detail.

Thanks, Ted.

For the fourth quarter 2019, total revenue increased 12.4%, which includes approximately $7.2 million of out-of-period passenger revenue.

Total revenue per available seat mile decreased 3.6% year-over-year.

Without the $7.2 million, TRASM would have been down 4.3% on 16.6% capacity growth.

About half of the $7.2 million is attributable to 2017 and 2018, with the remainder spread over the first, second and third quarters of 2019.

On a per passenger segment basis, nonticket revenue for the fourth quarter was $58.03, up 2.3% year-over-year.

Our dynamic pricing initiatives continue to do very well and we are pleased with the continued build we are seeing in our bundled services offering.

We continue to estimate that our nonticket revenue per passenger segment will increase 3% in 2020.

Our revised packaging product gives us access to broader inventory and better pricing options.

While we expect it will take 12 to 18 months to spool to full maturity, we should see some improvement in contributions from packaging as we move through the high demand periods this year.

And our new website provides an improved user experience for booking, and early results suggest this is driving increased ancillary conversions.

Additionally, our improved web data layer is providing greater insights into guest behavior that will allow us to present even more relevant products and services in the future.

Turning to network.

Earlier this month, we announced 2 more destinations in Colombia, Barranquilla and Bucaramanga.

Colombia is considered home to many in Florida and is also a growing leisure destination.

And while we are always excited to add new growth to new cities, much of our growth this year will come from connecting existing cities in our network as well as selectively adding capacity on existing routes.

In addition to our e-commerce and network initiatives, we are continuing our focus to improve our guest experience.

As part of our multi-year Invest in the Guest initiative, we recently unveiled an automated and expedited self-bag drop station at LaGuardia airport, reducing the processing time for guests to get to their gate.

The guest response has been very positive and we look forward to rolling out self-bag drop machines in other Spirit stations.

Looking ahead, for the first quarter 2020, we expect capacity to increase about 15% year-over-year.

We are still making some schedule changes to the latter half of the year but maintain our estimate for full year 2020 capacity to be up 17% to 19%.

As a reminder, about 100 basis points of our 2020 year-over-year growth is attributable to depressed completion factors in the second and third quarters of 2019.

Now turning to our revenue outlook.

Domestic traffic trends at our price levels remains strong.

Last quarter, we mentioned that we had retimed several of our Orlando international markets.

We are very pleased with how the retime routes are performing and their rate of spool.

In the aggregate, our portfolio of Latin America and Caribbean routes continues to do very well.

However, we are seeing some softness in the Dominican Republic and have made several capacity cuts to that area.

We are still seeing looser inventory controls for leisure fares in the domestic network than we saw last year at this time, which is impacting yields, but demand at our fare levels remains good.

Peak periods have continued to perform well, and as of right now, the off-peaks are largely a volume play.

In closing, from an inventory perspective, the backdrop remains similar to what we've been experiencing since May of 2019.

We continue to leverage our cost structure and will pivot our revenue management strategy and capacity deployment for each individual region or route as we think best for business.

And with that, I'll turn it over to Scott.

Thanks, Matt, and thanks to everyone joining us today.

Our fourth quarter 2019 CASM ex-fuel was $0.0567, an increase of 3.3% year-over-year.

Strong operational performance and overall good cost performance helped us achieve these better-than-expected results.

The primary drivers of the year-over-year increase on a per ASM basis include heavy maintenance amortization, maintenance materials and repairs, and other operating expenses, including some pressure from higher ground handling rates.

During the fourth quarter, we took delivery of 9 A320 aircraft, bringing our 2019 year-end total fleet count to 145, of which 27 are unencumbered, giving us increased fleet flexibility.

We ended 2019 with $1.1 billion of unrestricted cash and short-term investments and $341 million of adjusted free cash flow.

Looking ahead to our cost outlook for 2020, we continue to estimate that our full year CASM ex-fuel will be up 1% to 2% year-over-year.

For the first quarter, we estimate CASM ex-fuel will be up 3.5% to 4.5% year-over-year.

The first quarter should be the apex of our quarterly percentage change in 2020.

Better year-over-year operational performance will help produce better cost performance in the second and third quarters.

As noted in our fleet plan, several of our 2020 and 2021 aircraft deliveries have been delayed by several months due to production issues at Airbus, tariff-related delays and additional engine supply issues with Pratt & Whitney.

Our previous 2020 capacity and cost guidance incorporated estimates for the impact of these delays.

Also the most recent delay updates are primarily impacting our 2020 capacity plans and we will be working to remedy these delays as we progress through the year.

We remain keenly focused on improving our industry-leading low-cost structure.

But it is even more important that we increase our relative cost advantage, as this gives us the foundation to profitably grow and stimulate markets.

And even though we had an unusually high CASM ex-fuel pressure in 2019, we managed to maintain our relative cost advantage to our primary competitors.

Many of the cost pressures we face in 2020 are also being felt by other U.S. airlines and we are confident that we can maintain or grow our relative cost advantage again in 2020.

Additionally, we are seeing real fuel efficiency gains with our NEO aircraft.

On average, the fuel burn per block hour for our A320neos is 16% better than that of our A320ceos.

By November 2019, we had enough critical mass to subfleet the A320neo fleet.

We will now fly the NEOs on our longer haul routes and maximize the fuel burn engage benefit of the larger, more fuel-efficient aircraft.

We already have one of the youngest, most fuel-efficient fleets in the U.S., and as we add even more NEOs to the fleet and schedule them to fly the routes they were meant to perform, the additional fuel efficiency gains will help offset some CASM ex-fuel pressure.

Regarding profitability, we are expecting pretax margin for the first quarter of 2020 will be in the 6.5% to 7.5% range, with an implied TRASM range of down 1.5% to 3% year-over-year.

For the full year 2020, we estimate we will earn a pretax margin of about 12% or about flat year-over-year, which assumes a fuel price per gallon of $2.05.

We recognize that after the recent drop in fuel prices, this is above where the current curve sits.

But the recent changes make it difficult to estimate how the full year will play out.

If fuel remains at current levels or lower for longer, we will adjust our longer-term views and update you as the year progresses.

Now before I close, I have a few housekeeping items regarding changes in our guidance practices.

We will continue to provide a CASM ex-fuel range for the current quarter and full year.

In addition, we will be providing current quarter and full year pretax margin estimates.

Investors have been asking us to provide longer-term guidance and adding a full year pretax margin is a step in this direction.

We believe pretax margin best represents our financial performance, as it normalizes for our fleet financing decisions.

Based on feedback from many investors and analysts, we are planning to drop our scheduled pre-earnings updates as well.

Barring any unusual circumstances, we plan to give our guidance in conjunction with our earnings releases, and we'll update you on that performance when we report actual results.

And with that, back to Ted.

Thanks, Scott.

Throughout the earnings season, we heard about a litany of issues the airline industry is facing.

Manufacturing delays at both Boeing and Airbus, changes in competitive behavior, tariffs on aircraft, and most recently, concerns about the coronavirus and its potential impacts, all this and the ever-present concern of near-term oil spikes.

As a manager of an airline, we expect to have curveballs thrown at us, sometimes from all sides.

You can't always predict the curveballs, but you can set yourself up to react and pivot quickly when unforeseen things happen.

Over the last few years, Spirit has added processes and talent to be able to do just that.

We've also learned from our past experiences.

First and foremost, we must run a safe operation and provide the resources to offer reliable service to our guests.

Beginning in the fall of 2019, we worked to create some flexibility and recoverability in our scheduled flight lines and work our way back to a crew reserve ratio that our analysis suggests will produce a better outcome when balancing efficiency, A:14 and completion factor.

From a network perspective, last year we were focused on capturing opportunities to expand our footprint of destinations.

This year, we have pivoted towards connecting existing dots and adding a few more frequencies to large underserved leisure markets.

As for revenue, as Matt indicated, his team is preparing to align our revenue management strategies as necessary to achieve the best outcome for our market performance.

Spirit is still growing, evolving and innovating.

I'm very excited about our future prospects as our network expands and matures as well as our ability to create a brand our guests can associate with value.

We are very focused on improving our guest experience but doing so in a smart, investor-friendly way.

We've added modern features to our website to make it easier to book travel and choose options.

And we're offering a broader array of travel packages.

The airport process is becoming more streamlined with new self-bag drop technologies that ultimately translate to a better experience for our guests and cost savings for us.

And we're in the process of rolling out new seats that weigh less and are more comfortable.

These innovations, along with our improving operational reliability, sets us up well to produce earnings growth in line with our capacity growth.

With that, it's back to DeAnne.

Thanks, Ted, Matt and Scott.

We are now ready to take questions from the analysts.

(Operator Instructions) Brandon, we are ready to begin.

(Operator Instructions) And on the line, we have Brandon Oglenski.

I guess, Ted, can you come back to the things that you guys are doing on the operational side, such that when we get into summer, that something unforeseen doesn't cause quite the cost disruption that we did in 2019 for shareholders?

Sure.

Yes.

So we've, over the last few quarters, had to rehash what we experienced in 2019.

And again, I think we set ourselves up for a plan that was intended to optimize CASM and earnings at the time.

But obviously, got ourselves a little behind and, quite frankly, over our skis.

So the adjustments we've made, because we knew exactly the things we've done, is we've reinforced our -- I mentioned it in my remarks -- reinforced our crew reserve staffing back to levels that's consistent with what we saw in 2018.

And in addition to that, we've changed the way the network flows so that we're not quite as peaked in the summer, and more importantly, from a fleeting perspective, the older aircraft aren't seeing as many departures on a per day basis as they were in 2019.

And those were the kind of things that were kind of getting us a little bit behind last year.

So we actually feel very confident that these changes, when applied into the summer, will produce a result that's much more consistent with what we would expect, much more consistent with what we experienced in 2019.

And anecdotally, the evidence we're seeing for the latter part of Q3, all of Q4, and quite frankly, year-to-date now, gives us even more confidence that we're set up well into the summer.

Okay.

I appreciate that response.

And I guess for my follow-up, you guys are guiding to roughly flat pretax margin outcomes between '19 and '20.

I've asked this before in prior calls, Ted, but is this the level at which you see favorable returns or would like to grow the business?

Or is there margin opportunities on the forefront as well?

Yes, sure.

So definitely, the answer is, this is a level at which we see favorable returns and we're pleased with the results.

But I think there's always opportunity for us to improve the margin.

You heard both Matt and Scott talk about opportunities in both the top line and the cost side.

We're excited about what we're seeing from a technology perspective in e-commerce, and that's translating well into the nonticket performance that we're beginning to see.

And I think that's going to give us some traction.

When you couple that with some of the network adjustments that Matt alluded to and our team have been focusing on, which is both going to improve reliability but probably produce even better results from a TRASM perspective than we experienced last year, I think that's the beginnings of that traction on the top line.

Cost performance is key to us.

Maintaining and expanding our relative cost advantage gives us the leverage to continue to growth.

It can also help us on the margin line to the extent that we can actually improve.

And Scott mentioned, while we're going to see a little bit of pressure on ex-fuel CASM this year, I think there's an opportunity on the fuel side that's probably a little bit underappreciated, given the exposure that we have to NEO deliveries going forward and what that's going to do to our fuel burn.

We're going to see, probably, on a per ASM basis, we're going to see 2-plus percent improvement this year.

And I think that probably grows over the next 3 years.

So we think there's opportunity always on ex-fuel.

We think there's definitely now opportunity on fuel, holding price neutral.

That gives us at least hope that there's margin opportunity.

Nonetheless, at these numbers, we're very, very excited about continuing our growth profile.

We have Savi Syth on line.

Just a follow on the fleet, with the NEOs that have kind of gotten delayed into, I'm guessing, into 2022, just wondering how many aircraft this year will be like on operating leases versus owned?

And kind of any thoughts on kind of the financing decisions for this year and next year?

Savi, this is Scott.

In 2019, we had considerably more leased aircraft planned.

Into 2020, that does shift a little bit the other way.

Of our currently 15 scheduled aircraft that we'll induct, 3 of those will be operating leases and 12 are scheduled for debt financing.

Okay.

And just on the 20 -- just a follow-up on the fleet in general.

As you look out for growth, when do you have to start making -- I know the new aircraft order is more about, I think, 2024 and beyond with not a lot of deliveries earlier.

Just thoughts on when you need to have some of those kind of leasing finalized and kind of what the market looks like?

Yes.

Savi, so part of what we're doing today is developing a plan and a path to fill in sort of the '22 to '24 time frame.

So we're already doing that.

We will likely not secure leases for all of that capacity need during that period or even early -- in early '22 yet.

So we'll progress over time as we fill in the gaps.

But right now there's a good bit of capacity, and we see line of sight to filling that.

And Savi, on fleet, if I can just offer one clarification, too.

Scott mentioned that we've been seeing delays.

I know that all the Airbus operators have been commenting on production-related delays at Airbus that are coupled with tariff issues or coupled with some engine problems from both manufacturers, quite frankly.

Much of that was already contemplated when we get our capacity guide for 2020.

So we kind of feel like, based on what we know today, we're consistent with the number.

However, a lot of the delays that we're seeing are actually pushing 2021 capacity.

That's where we're probably focused initially.

So Scott and his team are already working with Airbus and Pratt to try to refine that and adjust appropriately.

And then in addition to that, obviously, he's securing the additional airplanes we need in 2022 and beyond.

So at least for this year, despite the noise around delays and that kind of thing, we've largely contemplated that in our capacity guide.

But I think where we start to see some pressure based on what we're hearing from Airbus and Pratt right now is in 2021 and beyond.

We have Jamie Baker on line.

This is Abdul Tambal on behalf of Jamie.

It's been some time since the pilot contract went into effect.

Should we assume that management is fully mining the benefits relating to the preferential bidding system?

And then can you comment on any pilot efficiency metrics such as crews per aircrafts, since they tie the contract to (inaudible)?

Sure.

I'll give it a whirl.

Scott, you can jump in too.

So pref bid is -- we went live with it last summer.

And I think it's fair to say that there's still always learnings from it from both our crews as well as the teams assembling the lines and creating the bid.

But I think we've reached stability largely in the way that we're seeing crews bid using the system.

I think there's -- it's been largely well accepted, by the way.

And it's worked very well.

I think from an implementation standpoint, these can be rather complex.

And with that said, the team did a great job preparing the system on both sides, both our union representatives and the team here, to get us ready.

So from an efficiency standpoint, we're always kind of looking around to make sure that we've capitalized on everything, but the pref bid system, I would say, is largely stable.

Scott?

Yes, I would agree with that on pref bid side.

The other thing I would say is really -- as we've come out of '19 thinking about crews, we're sort of resetting back to something similar to 2018 from a crews per aircraft or as we think about utilization of crews.

So we're sort of resetting the bar a little bit there.

And I think from that point, we'll obviously try to work down from an efficiency perspective to where we get to the point we feel good about where the network is and how the crew numbers are set up.

But we've reset a little bit heading up to 2020.

And then we'll work down from there.

Got it.

Just as a quick follow-up, as it relates to the duration of the MAX grounding, has your ability to attract pilots changed at all?

No.

We've mentioned this before, but Spirit's an attractive place for pilots to come and work because of our growth rate.

We have a new contract, so we think our rates are attractive and the quality of life of our contract is very good.

But in addition to that, our growth rate gives our pilots the opportunity to move up in seniority faster than they can anywhere else, and that gives us a little bit of -- we've got a little bit of a benefit coming from that, too.

So we're still able to attract pilots, qualified pilots and very seasoned pilots as well.

It's obviously a looming concern for the business, the industry broadly speaking, as we see there's more retirements in 2020, 2021 and 2022.

So we're already thinking through those options.

We have a few flow agreements with a couple of smaller carriers today, and we're hopeful that we can optimize that going forward.

We have Hunter Keay on line.

I'm curious why you're still talking about this relative cost advantage when it's pretty clear the competitors are just willing to price match you and your markets no matter what your fare is, and given you're really trying to just sort of stimulate new demand and sort of compete against the elasticity curve more so than take market share.

So I guess, can you tell me why relative cost advantage matters at all and why it's not just all about absolute for you guys?

I think they both matter.

But I think the relative advantage, to your point, is how you stimulate the -- our ability to price a product in a way that can create more demand is predicated on the prevailing price in the environment.

And so if your cost, theoretically, in a rational environment, if your cost structure is such that that benefit is widening against the prevailing supply in the marketplace, then you're going to drive incremental demand.

So relatively does matter as much as absolute.

And so what we've seen in our history here is the benefit of both of those things.

I mentioned it in my -- one of the other questions, is that expanding our relative advantage, we think, expands the opportunity set.

Improving the absolute cost performance is a margin opportunity.

And that's why we look at it both ways.

Okay.

And as we think about the low end of the 17% capacity growth guide this year, what's the risk of you not achieving that, either by more deliveries being pushed out potentially?

How good do you feel about this delivery schedule is the first part of the question.

And the second, if there are more delays or whatever, how high do you have to push aircraft utilization?

How high are you willing and able to push aircraft utilization to achieve that low-end of the capacity guide if you need to do it?

Yes.

Hunter, this is Scott.

From the current fleet delivery schedule from Airbus, we feel pretty good about where they are, and I think Airbus does, at this point, about the current delivery schedule for 2020.

As Ted mentioned, most of the impact from the recent delays have impacted 2021.

But the current delivery schedule, we feel good about now.

The other side of the equation is the engine performance issues that have impacted carriers that fly GTF.

And that continues to be a concern as we think about capacity.

And if that was to continue or even elevate, could provide some ASM or capacity issues thinking about 2020.

But on the other hand, we feel pretty good about where we sit today and how we're thinking about the NEO from an engine perspective.

And if we needed to push capacity, I think there's a little bit of room because I think we've been a little bit conservative about how we thought about the engine heading into 2020.

So we're in a pretty good space.

But all of those things are obviously a concern, but we're really focused on 2021 from a delay perspective.

And we have Dan McKenzie on line.

A couple of questions here.

Ted, if I can go back to your commentary, you can't predict the curveballs but you can be set up to react.

I wonder if you can talk a little bit about or elaborate a little bit on the contingency plans.

For some reason the coronavirus breaks out here domestically, it looks like things are -- it looks like everybody is doing a good job.

But forget about the government bans on flying, the issue is that when demand falls, it collapses almost immediately, as that's what happened to China.

So I'm just wondering, what percent of the fleet is maybe debt-free or that could be parked?

What kinds of tough decisions would you be willing to make?

Yes, sure.

So it's a perfect example of setting yourself up for flexibility.

Obviously, what you said, Dan, we agree with.

I don't think that -- based on what we see today -- that we're talking about that type of a catastrophic risk to the domestic space.

But regardless, if something were to happen, coronavirus or something else, that would induce a demand shock in the United States, we would react.

And there are ways we can do that.

Obviously, it starts with utilization and deployment, which I've mentioned before, one of the best things about Spirit is the nimbleness of our network and we can rotate the network around places much, much easier than a traditional network carrier can do it, because we go where leisure carriers -- leisure passengers want to go.

So we don't have scheduled service that we have to maintain.

So that gives us an ability to do that.

We clearly have fleet flexibility.

As Scott mentioned in his remarks, 27 of our airplanes are unencumbered today.

So there's an opportunity, always, there for us to be a little bit more careful in the deployment.

And the mix of international and domestic is another lever that we have, too.

So today, to your point, we haven't seen an impact as it relates to the coronavirus.

There is some administrative burden that we're dealing with from an inbound passenger perspective at international originations points, that is not material.

But beyond that, we're seeing no impact to demand.

And if that were to change, we would adjust accordingly, in probably the order that I mentioned.

I see.

Okay.

On the loyalty -- second question here, on the loyalty side of the business, I'm wondering if there's any changes that you're contemplating to help drive repeat business.

Is there room for improvement in that part of the business?

And what kind of upside could that potentially mean for Spirit?

Yes.

Sure.

Dan, this is Matt.

I can take that one.

So largely, we've seen pretty good improvements in repeat business just from delivering on a great operation and making sure that we improve the guest experience overall.

That's driving a lot more repeat business.

By running the operation we've run, coming in fourth place in on-time for the U.S. last year, the year before.

And where we're at right now, we feel like that, in and of itself, helps to drive some repeat business.

In terms of the loyalty program overall, when we're ready to unveil a lot of the details behind that, we will certainly let you know and let everyone know what's going on there.

The idea behind what we're thinking of the loyalty program is just more to align the program with our business model overall.

And we do believe that will drive not only repeat business, but some better pickup of our affinity card as well.

And that's the goal behind loyalty program adjustments.

We have Scott Schoenhaus on line.

Just wanted to ask a more broad-based question on the overall domestic market and competitive capacity trends you're seeing.

You guys commented on domestic traffic trends being strong, but pivoting capacity at a weaker-than-expected markets.

Just wanted to get your thoughts on yields.

What your expected trajectory is when we head back into more peak periods?

Are you expecting tighter inventory controls in the domestic market then?

Yes.

Scott, it's Matt.

Yes.

So as we -- as I said in my prepared remarks, and it's been generally true for the last few quarters, that the peak periods are performing well.

We do see good -- really strong booking curve activity on the peak periods.

And what that also allows us to do, when we do have leverage on yields on the passenger side, then it does also give us a little bit of leverage on the nonticket side as well just because of the overall strength of demand for the industry during those periods.

So that's what we're thinking about for peak.

In terms of shoulder periods, I would tell you that right now, as I also mentioned, we're also driving volume there.

We are a low-fare carrier.

We love being a low-fare carrier.

We create markets and stimulate markets, and we have no problem carrying that traffic.

And that's what our cost advantage does for us and what our absolute cost levels do for us as well.

We are quite pleased to be able to do that.

And overall, that's largely what we're continuing to see.

It's the same as we've seen since about May of last year.

So the inventory profile really hasn't changed that much.

And if we start to see that change in a positive way, then we would leverage that along with the rest of the industry.

Perfect.

Great.

And then that kind of leads me to my next question.

You just talked about it again, the success in your nonticket revenue initiatives, bundled products, you mentioned technology initiatives that have helped on the ancillary side.

Can you talk about the pipeline of initiatives in place?

And maybe the cadence of nonticket revenue growth throughout the year to get to the targeted 3% rate?

And maybe potentially where this could grow into 2021?

Sure.

So I'm not going to give you the exact cadence of how we think of it by quarter.

We do have confidence, as we restated, about 3% growth on the nonticket rate this year versus last year's final number.

So we expect to achieve that.

A lot of the initiatives that we have underway are -- some of them I've talked about for a little while now, which are continuing to get better at revenue management practices around some of our ancillary products.

And then the other side of -- which will have a continuous improvement for a long time.

The other side of it is our packaging product.

And then, of course, the loyalty program, which we just talked about, really coming online throughout this year and the spool of those programs will take some time.

So that will actually give us a lot of runway by the end of this year and into 2021 as well.

So we feel confident about this year's growth, and we feel confident that 2021, we'll see improvement on top of this year's improvement.

Up next, we have Joe Caiado.

Matt, maybe just a quick one for you.

Last year, you had talked about, I think around mid-year, some new routes that were taking a little bit longer to mature than you had expected.

So not just the general dilution from new market growth, but also the fact that they were taking longer to mature and they were a bit of a drag on your TRASM in the back half.

But you did expect them to become accretive this year.

Can you just give us an update on those?

Have they started to mature and are less of a drag?

And any changes that you had to make to get there?

Yes.

Absolutely, Joe.

So what we had last year, and even through fourth quarter, the quarter that just ended of 2019, we were growing what we call our spool percentage or the immature city percentage of our seats was -- in Q4 was up from 5% in '18 to 8% in 2019.

It's flipping.

So this quarter that we're in right now, first quarter, last year, 8% of our seats were in new cities.

And this year, it's 5% of our seats are in new cities.

And next quarter, it's even more favorable to us, where 11% of our seats last year were in new cities, and this year it's 6% of our seats are in new cities.

So that changed.

When we talk about the network maturation, that in and of itself is just a high level number that is meaningful for us as we move through this year.

And then on top of that, we're always doing network adjustments and optimization.

I think we have a pretty good hit rate on what we start versus what we end up exiting.

For example, since first quarter of last year, we've entered 68 new routes and we have exited 15 of those routes, 15 other routes.

So that's a pretty good add-to-remove ratio for us.

So as you think about what we either pull down or pull out of on occasion, that is an immediate benefit to unit revenue and it's also an immediate benefit to margin as well.

So as we move through this year, we're going to have less new cities.

And we're also in the midst of making sure that our growth this year is more focused on where we're strong and where we can continue to add frequency where we're strong.

Let me give you some more numbers on that.

In 2018, about 17% of our seats were -- of the growth we had in '18, 17% of those seats were in new cities.

Last year, of the growth we had, the number went from 17% to 32%.

This year, new city growth as a percentage of our overall ASM growth is going to go from 32% last year to 15% this year.

And where we're adding in markets that we're already strong, the number in 2019 was 44% of our growth was in places that we're adding frequency where we already fly.

This year, it's nearly 2/3.

So when we talk about network maturation and building on our strengths and building on who we are as a ULCC serving the leisure segment of the population, where everything we're doing from a network perspective has been moving towards that way to take advantage of our strengths, and that's what gives us a lot of confidence about what we're talking about from a unit revenue perspective throughout the year.

That's great color.

Maybe just a quick follow-up on the domestic revenue environment and this recent pullback in fuel prices.

I mean, Scott was very clear on the more conservative assumption in the full year guidance with respect to fuel.

But just given the very recent nature of this pullback, have you seen that make its way into pricing?

Has that impact made its way into pricing?

Or is it too soon for that and so you think you can retain the bulk of these fuel savings here in the near term?

Yes.

It's definitely too soon to be able to say that it's having an impact.

Fuel moves up and down and it takes a little while for adjustments to be made, if they're made.

Demand is pretty good right now.

So from our perspective, fuel's going down and demand remains good.

And as we head into spring break and the peak season, there doesn't seem to us to see any reason to think that demand is going to fall off and demand lower fares.

We have Helane Becker on line.

I just have 2 questions.

The first question is a follow-up to that last question, Matt, about adding seats in strong markets, then connecting dots.

Is that a pattern we could expect where you, like every other year, you add a lot more cities than you do connecting dots?

Or is it at -- the network at the point where that's not going to happen going forward?

So, Helane, great question.

We don't set out to have a pattern like that.

I think as we've talked about last year, a lot of the new cities we added were in places that had real estate constraints, that if we didn't make the move then, then we likely would have been locked out for a little while in some of those airports.

So I wouldn't necessarily say a pattern sets in.

When we see opportunities to add new cities that we think are strategic to our network and will add to profitability, then we will do that.

This year, we're taking a little bit of a pause in the number of new cities, given that we added 9 in 2018 and 7 in 2019.

We have lots of connect-the-dot opportunities as we call them, as well as understanding where we're strong and adding frequencies in those routes as well.

Okay.

That's very helpful.

And then my follow-up question is, and I think it's probably more a question for Scott, can you just talk about how you're thinking about costs, CASM ex longer-term?

As you invest in the product, the operation, you're so much bigger now than you were, let's say, 3 or 5 years ago.

Have there been any changes to the way you think about that?

Helane, yes, this is Scott.

So I would say a couple of things to that.

I think we've learned really since 2016, as we've invested in the operation, we've learned how to run a good airline.

And I think that's sort of critical to our predictability and our stability of unit cost.

But I think, too, we're also still learning, from a crew perspective and some of the network changes we've made, about how that can impact not only the revenue line but the cost line.

And as we grow, you sort of reinvent the airline every handful of years when you grow at the rate we've been growing.

And so I think we continue to evolve in how we think about the airline.

But from a cost structure, I mean, we think that the relative cost advantage is our #1 weapon.

And so we guard that pretty carefully.

And so as we think about our competitive advantage going forward, we're going to find ways to continue to manage unit costs.

And we haven't given up on the idea of flat or even flat to declining unit cost.

So we're going to continue to manage that carefully.

And we think there's opportunity to do some of that.

Now, obviously, we have a handful of inflationary pressures we have to manage going forward, but we haven't given up on that and we're going to continue to press forward.

So I think we're going to manage that weapon we have.

And we have Michael Linenberg on line.

Two here.

Matt, that was great cover -- great color on sort of breaking out the growth where it was new cities or the percent in growth markets.

What's the remaining piece?

If I add them, what are the other buckets?

Maybe it's just one other bucket that gets you to 100% of your growth ASMs.

Yes, sure.

So when you look at the -- of the growth, we think of it in 3 ways: it's adding frequencies where we already serve that route, and in 2020 that's roughly 2/3 of our growth will be there; and then we have new cities, which is a new route that would touch a new city, that's about 15% of our growth -- of the growth, that's 15% of that growth; and then the balance is in what we call connect the dots, which is really we serve -- 2 cities we already serve but don't fly between those cities yet.

Okay.

That's helpful.

And then just my second question, when I look at the 17% to 19%, correct me if I'm wrong on this, but I felt like that that's been the plan for more than a quarter.

Maybe even a couple of quarters ago, you were sort of saying, hey, high teens in 2020.

But now we're looking at 6 airplanes less, right?

We're going to get, what, I think, 35 in 2020 instead of 41.

And yet you're still committed to that.

And I think, to like Hunter's question, I think you answered that maybe you're at the lower end.

But has there been changes in how you think about your growth this year in some of your city pair adds, where maybe you're doing a little bit longer stage length because you're taking the NEOs, and that's still going to get you to that 17% to 19%?

Because if you can do that type of growth with 6 less airplanes, and I realize that they may be somewhat back-end loaded and then maybe helping you to get there, but it does seem like you're going to get better utilization.

However you want to answer that.

Yes.

Mike, this is Scott, I'll start, and Ted and Matt can fill in too.

But I think a lot of the way we thought about 2019 was that we knew a little bit about the delays heading into -- sorry, 2020, we knew about some of the delays heading into the planning process, so we assumed a handful of those delays.

And some of the recent delays that we've had, again, it impacts really 2020, so most -- sorry, 2021.

So most of the 2020 plan was already sort of set in stone.

And most of the recent delays haven't affected 2020.

So we feel pretty good about where we are today.

Again, we mentioned some of the engine problems that could affect us.

But we feel pretty good about where utilization sits in 2020 and our ability to perform.

But really, it's 2021 that we're really focused on.

We have Catherine O'Brien on line.

So one for you, Matt.

Your first quarter RASM outlook implies a nice sequential improvement in core trends, especially including -- excluding, rather, that tax benefit from the fourth quarter.

So what are you seeing that makes you confident in that sequential improvement?

Is it improving industry back backdrop, maybe tightening in the loose inventory control you mentioned earlier?

Or is that really more a function of Spirit's specific initiatives?

Right.

Catherine, so it really is a function -- we believe it's largely a function of what we've been talking about from Spirit's specific initiatives.

The maturing of the network is a big deal.

We've made a lot of changes to set ourselves up for the future last year.

And even at the end of '18 with our expansion out of Orlando to a lot of international destinations in Latin America and the Caribbean.

So as those continue to mature and as those continue to get the proper awareness on both sides of that international travel, we're going to continue to see improvement.

I think that's probably the best way to sum it up.

And as we mentioned about inventory, it's been relatively stable.

And we can operate in this environment quite well.

Okay, got it.

And then maybe on the cost side.

I know there are several headwinds, areas of headwind into next year.

You mentioned airport rents and landing fees last quarter, but can you speak to what portion of that -- of the cost pressure in 2020, if any, is really an investment in continuing to improve from an operational perspective after some of the issues faced last summer?

And then, I guess, part 2 to that question is, if part of the cost pressure is an investment in the operational front, is there any potential upside, maybe for a productivity standpoint, that would come in better than you're currently forecasting?

Catherine, this is Scott.

So as we think about 2020 from a cost perspective, it's really a couple of themes.

I mean, one is we set ourselves up to run a good airline, really.

So the comparison to 2019 provides us with a tailwind of about 150 to 200 basis points of really operational improvement benefit.

But we have headwinds.

As we've talked about before, airport costs and ground handling costs.

In fact, we've seen a 5% to 10% increase in CPE costs as well as ground handling rates for '18, '19, and we assume that for '20 as well.

So that's a continued inflationary pressure.

And we think that in addition to those, we're going to have amortization expense pressure as well as our decision to lease a few more aircraft in 2019.

That full year effect will have about a point in pressure as well.

But to your point around a little bit of continued investment, that is true.

I think Q4 and Q1, we've seen a little bit of pressure from really a catch-up in the number of crews that we've had from a reserve perspective.

And then that hit us a little bit in travel and lodging and a couple of other components like group health.

But those things will sort of level out as we get through the year.

So we think by the -- sort of right in front of the summer, around May, we'll get to the point where we feel comfortable with reserves and that will flatten out.

Again, gives us some of that sort of pressure that we're seeing in Q1, which is why the elevated year-over-year number, 3.5% to 4.5% in Q1, and that will get smaller as the year progresses.

But yes, we think we're set up well from a crew perspective.

And even though we have some inflationary pressures, we have a good bit of tailwind to help us out.

We have Duane Pfennigwerth on line.

This is actually Ray on for Duane.

Firstly, what percentage of your fleet is owned?

And as the company matures, could there be any opportunities to do lower utilization, low frequency flying with a subfleet?

We mentioned earlier around -- we have 27 unencumbered aircraft, but what is owned is around 63% in total, both unencumbered and those with mortgages.

And I guess to the question of could you use airplanes as they age differently, the answer is yes.

The ownership expense in the airplane obviously goes down dramatically.

The maintenance expense goes up.

And so you think about utilization that way.

And to the extent that we were to keep older airplanes, we would be thoughtful that way.

But for now, we're a young aircraft, young fleet operator.

And I think the opportunity that exists for Spirit going forward, which translates on the unit cost line over the longer-term, is how we optimize that play between aging aircraft and new aircraft.

And so Scott mentioned that we're keenly focused on both the relative advantage and the absolute number.

And Spirit is in a different phase today than it was in 2012 and 2013 when I joined the business, growing -- when we were growing then and able to capitalize on it.

We're much bigger now.

But at the same time, that gives us opportunities that we simply didn't have back then.

So -- and I think the fleet is a big component of it.

All right.

Great.

And for my follow-up, how should we think about the relationship between fuel and your capacity growth?

Do you see opportunities to flex up this year?

Or does the self-imposed guardrails to drive higher reliability, along with the NEO engine issues, kind of take this off the table?

Yes.

Historically, we've not really moved our capacity around based on swings in oil.

In fact, even going back to the more peak oil periods of $100 to $110 a barrel, we were pretty consistent about what our growth rate was going to be over the long term.

And I think we've maintained that today even at half the price.

So it's impossible not to say that in very small, very close-in tactical reasons, you may go after some opportunity that the variable costs would influence you to do.

But longer term, we don't swing our fleet planning and our growth profile based on the fuel, the machinations of the fuel market.

We have Joseph DeNardi on line.

Matt, I appreciate the color around kind of the nature of your growth next year relative to last year.

But what should we do with those figures exactly, like how important are they relative to like industry capacity or just the pricing backdrop?

Sure, Joe.

So we believe it's material in terms of how we deploy the assets and how that mix then plays out within -- for unit revenue production.

So just giving you some more numbers on that, if you look out at -- if you go out into the summer of this year, overall for the entire network, not just where we're growing, but if you look at the network as a whole, our new city capacity is expected to be around 3% of our total network by the third quarter.

Last year, that number was 7% of the whole network was in new cities.

So that's meaningful for us.

And that new city growth, the reduction in the growth number is actually moving towards 2 mature markets.

Meaning the connect-the-dots percentage is relatively flat year-over-year.

Those kinds of moves in the network give us confidence that we'll be able to not only learn how to best distribute that product, but the more time and experience we have in routes gives us better ability to maximize the nonticket production in those routes as well.

Okay.

That's helpful.

And then can we just talk about kind of the base fare a little bit.

You guys were doing really well on the nonticket side and you've managed the total RASM, I think.

But the base fare is down quite a bit the last couple of years.

So do you have -- is there visibility into that inflecting?

And then from a demand standpoint, like what sort of effect does that have on demand stimulation when base fare comes down that much?

So Joe, we're are a low-fare carrier that grows markets and stimulates traffic for people across the U.S., Latin America and the Caribbean.

That's who we are and that's what we do.

We know exactly who we are, which makes it pretty easy for us to move forward with how we think about growth.

Having said that, the longer that we are able to continue to drive nonticket production, it will give us the ability to think about where we grow and the opportunity set that's out there.

We do manage to total revenue, which means in some cases we're going to go in places that we think may have a below-average passenger fare, but we think we can drive higher nonticket revenue.

So we do think about that.

So could you say maybe there's a little bit of an artificial reduction to passenger revenue because we're trying to maximize total revenue?

I guess you could say that, but that's not really how we think about it.

That doesn't mean, though, that there's not a lot of leverage on the passenger ticket side.

We know there is.

We actively work to push that up.

Overall capacity in the industry will drive some of that, of course, since it's a supply-demand business.

But overall, we know where the leverage is and we spend a lot of time looking at that and thinking about not just how we think about things from an inventory perspective, but how we think about the actual fares we put in markets as well, based on season, based on region, based on actual routes, and frequently, part of that process is thinking of time of day as well.

So we're looking at all of those things as we try to push up tickets as well, ticket fare.

We have Darryl Genovesi on line.

Okay, Mr. Genovesi just dropped.

We'll take Stephen Trent.

Just very quickly, I'm curious about what you've mentioned on Latin America, the new routes and your expansion.

What are you seeing on Puerto Rico when we think about competitors' capacity, and you've had some earthquakes there, and what have you, recently?

Just curious what you're seeing on that corridor.

Sure, Stephen.

So for -- this is Matt.

For Puerto Rico, we have seen some impact in Puerto Rico.

It's really hard to say exactly what is related to earthquake versus just increased capacity in general.

We've added a lot of capacity to Puerto Rico.

And it's doing quite well for us, actually, from an earnings perspective.

Our estimates on what the earthquake may be causing and the after effects of that are really too early to put a good number on that.

If we feel like it becomes material, we would update you on that in the future.

But as of right now, we like what we're doing in Puerto Rico.

Our cost model allows us to serve all kinds of routes profitably out of Puerto Rico and we expect to leverage that strength moving forward.

Okay, super.

Really appreciate that.

And just one last minor housekeeping issue.

You mentioned in 4Q, if I heard the numbers correctly, a completion factor of 99.4%.

And did you say on-time performance was 84%?

I wasn't sure if I caught all that correctly.

That's right, Stephen, 84.2%.

We have Chris Stathoulopoulos on line.

Two questions.

With respect to your operational playbook, if you will, for 2020, what are the assumptions that you have baked into -- and I'm looking specifically at the crew scheduling -- but what are the assumptions you have baked into the competitive capacity, namely the MAX?

And how quickly are you able to adapt when the aircraft is ungrounded?

And what are the cost implications around that?

So Chris, I'll take a whale at that.

It sounds like you had kind of 2 issues at play, maybe.

One is the return of the MAX and what it does to capacity, but also you alluded to a cost issue.

I don't know if that meant recruiting of pilots or something.

But today, we know what everyone knows about the MAX, which is rumored recertification of the airplane in the late summer period.

There will be a lag time for the operators to get the airplanes back into service.

So I think the common assumption, the conventional wisdom, right now is for a late fall kind of start to return.

And I think that's what we're assuming too.

And absent better information, I think that's what everyone is kind of dealing with.

As far as cost implications, we don't anticipate there being any for us.

We maintain our pipeline of pilots.

We maintain our capacity deployment ideas.

And so I don't think that there should be any impact there.

To the extent that the MAX adds capacity domestically, there's a potential revenue impact of supply.

But I think we thought about that in the way we thought about our opportunity this year on the margin.

Okay.

The cost I was referring to was whether that impacts any of your plans around crew scheduling.

But the second question is, a few years ago when you set out to address service and such, could you talk about how you're thinking about that going forward without structurally undermining your low-cost DNA and as we think about all these inflationary pressures that you've mentioned for this year and going forward around items such as the airport and landing fee costs?

So the investment in the operation and the product originally, to take you back in time, originally started as a testing of the thesis that diminishing returns had actually taken hold here.

And we were actually destroying cost performance by pushing the airline too hard.

And so our experiment in 2017 and 2018 started to bear that true.

And actually in our attempts to optimize the utilization side of things, I think we proved to ourselves again in 2019 that there is validity in that thesis: that if you push too hard, you're going to spend more money fixing problems than you would have spent upfront with additional buffer.

So the opportunity in 2020 is clearly to reverse that trend again.

We feel very confident about our ability to do so.

And I think while the absolute line items in the cost structure will bounce around, you'll probably have a little more salaries, wages and benefits, but you'll have less other operating expense.

And the net effect of that is a good guy.

That's the way we're thinking about it.

Going forward, we will continue to refine.

I mentioned in my comments that we don't -- we haven't given up the ghost on being able to optimize utilization and productivity and all those things.

I think what we've done, though, is narrowed the volatility around that.

And so is there opportunity?

We believe there is, actually.

And we'll learn from our experiences in this quarter and in this year, and we'll use that as we think about our plan going forward.

Great.

Thank you all for joining us today.

Thank you.

Ladies and gentlemen, this concludes today's conference.

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