Spirit Airlines Inc (SAVE) 2022 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Spirit Airlines Third Quarter 2022 Earnings Conference Call. (Operator Instructions) And please be advised that this call is being recorded. After the speakers' prepared remarks, there will be a question-and-answer session. (Operator Instructions)

And now at this time, I'll turn things over to DeAnne Gabel, Senior Director, Investor Relations. Please go ahead, Ma'am.

Thank you, Bob, and welcome, everyone, to Spirit Airlines' third quarter earnings conference 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. Also joining us are other members of our senior leadership team.

Following our prepared remarks, there will be a question-and-answer session for analysts.

Today's discussion contains forward-looking statements that are based on the company's current expectations and are not a guarantee of future performance. There could be significant risks and uncertainties that cause actual results to differ materially from those reflected by the forward-looking statements, including the risk factors discussed in our reports on file with the SEC.

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 third quarter 2022 earnings release, which is available on our website for the reconciliation of our non-GAAP measures.

And with that, I turn the call over to Ted Christie.

Thanks, DeAnne. Thanks everyone for joining us today, and thanks to everyone on the Spirit team. The daily demands of operating an airline are complex and often come with unexpected challenges, and I want to thank our team for being committed to bringing their best day in and day out and delivering excellent service to our guests.

Before discussing our third quarter results, just a quick update about the merger agreement with JetBlue. On October 19, our stockholders voted to approve the transaction. This is an important step forward on our path to closing a combination that will create a compelling low-fare challenger to the dominant U.S. carriers. The transaction remains subject to regulatory approval. JetBlue is taking the lead on this. We are committed to assisting them in whatever way we can.

Turning now to our third quarter results. The business performed well against a set of negative headwinds, including much higher fuel costs, Hurricane Ian, and Florida capacity constraints. Strong demand and sound revenue management coupled with excellent operational reliability, which led to good cost execution, helped mitigate the impacts of these headwinds. We achieved a break-even adjusted pretax margin and $3.6 million of adjusted net income or a profit of $0.03 per share.

Leisure demand remained strong throughout the entire quarter, leading to total revenue increasing 35.4% and compared to the third quarter of 2019 on 13.5% more capacity.

Operationally, we are running great. Despite challenging operating conditions during the quarter with Hurricanes Ian, Florida and the Caribbean. Spirit achieved the best third quarter DOT on-time performance in our company's history. Our team did a fantastic job planning for and reacting to Hurricane Ian as it developed and changed course, minimizing the impact to our guests and on the operation. The crew scheduling and network changes we made earlier in the year also contributed to these record results. There are still many in our home state of Florida that are dealing with the devastating impacts from Hurricane Ian, and our heartfelt thoughts are with them.

While our third quarter 2022 results were in line with our expectations, we continue to face infrastructure constraints that are impeding our return to normalized margins and full utilization. One of the primary limitations is the constraint on flight volume to and from Florida. There has been some improvements since the issue first arose, and we continue to work closely with the FAA on alternative options to increase throughput, but this will likely be a multiyear headwind limiting our network optimization. Our network team has plenty of other growth opportunities, but growing service in our hometown state of Florida is key to our return to normalized operating margins.

We are also facing high rates of labor inflation. Increasing productivity will help mitigate this, which is in part tied to the pace at which we can hire and train pilots. Attrition rates remain elevated, which means we've had to build a bigger schoolhouse and increase resources to train the number of pilots needed to support our growth and to cover the higher attrition. Additionally, attracting new pilot talent has been more challenging as regional airlines and major airlines have announced new pay structures.

However, in September, we began negotiations to amend the current collective bargaining agreement with ALPA, the union representing our pilots. Both parties are working towards an agreement, which may in part address the higher attrition rates. We are very pleased with how smoothly the operation is running, and we are encouraged with the strength we are seeing in demand trends as we head into the fourth quarter.

And now I'll hand it over to Matt and Scott to share additional details about our third quarter performance as well as some color around our fourth quarter outlook.

Matt, over to you.

Thanks, Ted. I also want to thank the Spirit team members for their resiliency in the face of challenging circumstances and for making Spirit a great place to work.

Turning now to our third quarter 2022 revenue performance. Total revenue was $1.34 billion, up 35.4% compared to the third quarter 2019. Total RASM for the quarter was $0.1107, up 19.3% versus 2019, an excellent result in any environment, but especially impressive in conjunction with our increased capacity footprint.

Demand was strong throughout the entire quarter to include holding up particularly well in September. Although September load factor was 2.2 points below that of September 2019 on 26% more capacity, the percent change in total RASM was up nearly 20%. We are not seeing any signs of leisure demand slowing down as one might assume given the overall economic environment.

On a per segment basis, again, compared to the third quarter 2019, total revenue per passenger increased 22% to over $134. Passenger revenue per segment increased 23% to $67.52 and non-ticket per segment increased 21% to $67.07. Our array of dynamically priced ancillary items allows our guests to customize their itinerary and flight experience that works best for their budget and we continue to see guests respond favorably to the options we provide them.

Looking ahead to the fourth quarter of 2022, we are anticipating strong revenue results even with the continued constraints on Florida flight volume, which carries a RASM penalty for the quarter, especially during what is typically the beginning of Florida's peak season. This constraint also limits our connectivity options in Fort Lauderdale, which has effects on how we flow the rest of the network.

Rather than get too much into the weeds discussing network scheduling, I'll summarize by saying that we believe having less variability in the number of flights day-to-day at any given airport better supports our operational reliability and is more likely to maximize earnings in this environment. Our fourth quarter schedules were built with this in mind. This strategy may have a slight downward impact on load factor and total RASM, but we are comfortable this is the right decision in this particular set of circumstances.

Taking all of this into account, we estimate total RASM for the fourth quarter will be up between 15% to 16.5% and versus fourth quarter 2019 on a capacity increase of 24.5%. The implied revenue range based on these inputs is between $1.39 billion and $1.41 billion.

As we look ahead to 2023, we plan to continue to take a pragmatic approach to how we deploy our assets. Given the various infrastructure constraints on our network, anticipated Airbus delivery delays and engine supply chain issues, for planning purposes, we are now targeting 60 billion to 62 billion available seat miles for 2023 or up 23% to 27% and compared to full year 2022.

And with that, I will now turn it over to Scott.

Thanks, Matt. During the quarter, we added 3 destinations to the network, opened 2 new crew bases and carried a new Spirit record of almost 10 million passengers and hired and trained over 800 new crew members and did it all while setting a new on-time performance record for a third quarter even with the hurricane ripping through a large part of our network. I want to acknowledge our entire team and congratulate them on a job well done.

Turning to our third quarter cost performance. Nonfuel operating costs came in better than expected. In addition to good cost management, the benefits of running a great operation drove better-than-expected results throughout the P&L. On the other hand, fuel cost per gallon was $3.82, about $0.15 higher than we had initially expected, driving approximately $27 million of additional fuel expense.

Adjusted operating income for the quarter was $11.3 million. We estimate the direct impact of Hurricane Ian on third quarter operating income was approximately $5 million and will be about $5 million in the fourth quarter as well. In addition, we saw some softness in bookings to Florida destinations and to Myrtle Beach in early October immediately following the hurricane and estimate this will negatively impact fourth quarter 2022 revenue by another $3 million to $5 million.

Liquidity at the end of the third quarter was $1.3 billion, which includes unrestricted cash and cash equivalents, short-term investments and $240 million of available capacity under our revolving credit facility. We took delivery of 4 A320neo aircraft during the third quarter, ending the period with 184 aircraft in our fleet. All of these aircraft were delivered under sale-leaseback transactions.

Year-to-date through September 30, we've made debt payments, including principal, interest and fees of $232 million and have incurred capital expenditures, including net purchase deposits of $190 million. For the full year of 2022, we estimate our capital expenditures, including net purchase deposits, will be approximately $260 million.

For 2023, we estimate gross CapEx will be about $350 million, about $150 million of this is related to the building of our new headquarters facility in Dania Beach. This estimate also includes $10 million of net PDP payments and 5 spare engines. Aircraft utilization for the third quarter was 10.6 hours, down 15.2% compared to the same period in 2019.

Looking ahead, we have 13 aircraft scheduled for delivery during the fourth quarter. Even with the large number of Q4 deliveries, we expect to see sequential quarter-to-quarter improvement in utilization. As mentioned on prior calls, we plan to gradually improve fleet utilization reaching a return to full utilization around the middle of 2023. We estimate our operating margin for the fourth quarter of 2022, a range between 1% to 3%. This assumes total operating expenses of $1.365 billion to $1.375 billion and the fuel price per gallon assumption of $3.55.

One housekeeping item that I want to mention is to explain why we changed our guidance from pretax margin to operating margin. There is one unique accounting item related to a change in the accounting for our 2026 convertibles. Due to a change in how the notes are to be settled under the merger agreement, we are now required to bifurcate the equity component of the 2026 convertible notes. The fair value of the derivative liability will be mark-to-market every quarter. This quarter, the mark-to-market credit was sizable and resulted in a credit to interest expense of approximately $15 million. It is difficult, if not impossible, to estimate the impact of the mark-to-market exercise each quarter. Therefore, we will guide to operating margin going forward.

We did provide an estimate for total nonoperating expense for the fourth quarter of 2022 was $22 million, so this does not include any potential change in the mark-to-market adjustment related to the derivative portion of the convertible notes.

With that, I'll hand it back to Ted.

Thanks, Scott. I'll close with an update on our near-term initiatives. One, network reliability enhancements and growth. Despite the impact of Hurricane Ian and the Florida operational constraints, we capped off one of our most reliable summers on record. We have seen improvement in Florida operations since the spring, but we are going to be very disciplined and pragmatic about building back to our normalized peak.

Regarding network, we are the largest airline in Fort Lauderdale and second largest in Las Vegas and Orlando and have opportunistically grown in Los Angeles and Newark, so both cities are now in our top 10 markets.

Second, utilization and profitability. Our target is to achieve normalized utilization by mid-2023. Utilization in Q4 of this year is on track to show the progress we expected, which reinforces our confidence in achieving this target.

Third, record non-ticket performance. While non-ticket results continue to be the shining star of our revenue results and it's not an official target, $70 per passenger segment is now within reach. And the improvement in non-ticket per segment does not appear to be dilutive to ticket revenue per segment.

And fourth, costs. ex-fuel CASM is still high with labor costs, the primary pressure across the business, but it will mitigate as utilization returns. Fuel price is driving significant margin pressure today, but our burn will continue to improve as fleet mix favors larger NEO aircraft.

Spirit is a group of passionate aviation professionals who want to deliver for our guests and stockholders. So our current financial results are disappointing. However, we believe it is prudent for us to build back the network more methodically, which will allow our team to digest the growth and learn from our experience. 2023 will be a big year for all of us, and I look forward to delivering on our objectives.

With that, back to DeAnne.

Thank you. We are now ready to take questions from the analysts. (Operator Instructions) Operator, we are ready to begin.

Thank you, Ms. Gabel. (Operator Instructions) We'll take our first question this morning from Michael Linenberg at Deutsche Bank.

I guess two questions here. This is probably to Matt or Ted. When I look at your current schedule, it doesn't look like that you, at least at this point, have included the 16 runway timings that you were awarded by the DOT. Is that just subject to some sort of final sign-off? Or is that something that shows up in 2023? When do you start doing those 8 round trips?

Mike, it's Matt. I'll take that question. So we have deployed the use of those peak times in Newark. We were able to take advantage for a while of some of the waivers that were in Newark due to some of the international slots not being used. So we were already scheduling a lot of that flying.

Yes, what the award did was allow us to make that flying permanent and then allow us, as we utilize our gates fully in Newark, to add back in some of the off-peak times to fully utilize those assets up there.

Okay. That makes sense. And as I recall, those runway timings were sort of peak time slots. So that's good. Okay. So that makes sense.

Just a second question on -- when we think about next year and CapEx and sort of it's a big year for growth, how many aircraft are you taking delivery of in 2023? And when we think about -- in the past, you've resorted for many of your craft sale leasebacks, should we assume that most of those airplanes are going to be leased? And have you locked down that financing? Or is that still to be determined on at least a portion of the airplanes for next year?

Mike, this is Scott. We do take 33 aircraft next year, 17 of which are direct order from our order book, 16 are additional leases from lessors. And 13 of those are A321neos that we take as well. But we do have financing lined up for those. We're in the final innings of signing the documents on that, but we do have committed financing for all those. So we're in a good spot there.

And to your point around the deliveries from Airbus, it is also leaseback financing. So there will be no debt associated.

We go next now to Duane Pfennigwerth at Evercore.

So you did such a good job in your initial defense. It's a little bit hard for us to forget about some of the risk factors that you flagged. I just wanted to ask you about attrition and hiring since the merger announcement and trends there. And what, if anything, that you've implemented to create change there or to stem the bleeding for lack of a better word?

Duane, thanks. And I assume you're referring specifically to our defense of our original merger agreement and then where we sit today with.

Yes. So part of the primary restructuring of our agreement with JetBlue was to give us comfort that we were putting ourselves in the best position regardless of the outcome, We're, of course, supportive of and optimistic that we will be granted authority to merge with them and create a real viable fifth competitor to the big 4, which is the primary objective.

But we put in place structures, be they economic or commitment otherwise, that actually have reassured a good deal of our team members that they will be part of the go-forward business. JetBlue has made verbal commitments as such as well. So when you're talking about the kind of general and administrative folks, there is quite a bit of effort there to reassure them that this is just a much bigger airline that will require all of their efforts. And I think they've largely digested that and understand and feel good about that.

When you look at the bigger part of the organization, which is all of our folks who operate the airline every day, our pilots, our flight attendants, our technicians, the people working at our airports, our contracts and service providers, the good news there is this is broadly an accretive transaction for them. They're going to be part of a much larger business. They're going to have greater opportunities of new places to fly, new bases to live in, opportunities for growth, both airlines are growth airlines, and they've been told that story and they understand it. Setting that aside -- so I don't think that, that's incremental to any of the either attrition risk that we're seeing or any change in that regard. If anything, we view it as a positive because it is something that can look forward to be part of a bigger business.

Nonetheless, we are experiencing attrition. I think we've talked about that for the better part of a year now. and it's elevated. It's still elevated. It hasn't really moved off of the level we've seen, which is, I guess, in some respects, good that we can forecast it. But nonetheless, it's still too high and that would be across all work groups.

And I think that, that's a product of more the labor market than it is anything else. But we are looking at ways to address that. I referred to in my prepared comments, specifically our pilots, but we have other things that we talk about at airports and with our technicians and with our flight centers as well. And we keep plugging away. I mean there is a bit -- it is definitely one of the limiting factors for us today is attrition on the back end and attracting and hiring on the front end. But we've addressed that with the schoolhouse and making ourselves a good landing spot for our team members, and we'll continue to hammer away at it.

Ted, I appreciate that very direct answer, and I don't want to put you on the spot, but could we put numbers to pilots, so kind of where are we today? And what do you need to hire to hit the growth plan or the capacity guidance that you've outlined there? Is this simply a function of getting folks that you've already hired through the schoolhouse? Or is this about net new hiring?

Sure. So it's both, Duane. It's -- obviously, we have -- and I think we talked about this over the last few calls, we have ramped up the size of our flight operations schoolhouse and our in-flight schoolhouse, both our flight attendants and our pilots considerably like we more than doubled the size of that throughput in either case and have been successful at attracting new candidates and moving them through that process. But that requires us to not only hire to address the deficit and utilization that we have today because, remember, we're flying about 2 hours per aircraft less than we want to fly today. But we're delivering new airplanes as well. And as we attrit off the back end, we have to make up for that.

So it's quite a bit of effort. The team has done a great job in a very abbreviated amount of time in building that infrastructure to make that happen, which I'm very proud of them of being able to do. It's a daily activity. But I would say that the numbers to think about, and I think Scott even mentioned that in the quarter we hired 800 people. We're onboarding a significant number of new pilots every day. The class sizes are, like I said, more than double what they used to be. And I'd say that's true for flight attendance as well. And that will remain the case for the foreseeable future as we both address attrition, and hopefully, it starts to wane, and we chew into our utilization deficit in the additional airplanes.

We take our next question now from Chris Stathoulopoulos at Susquehanna.

Ted, I was wondering if you could give us some color on what you're seeing around peak versus nonpeak travel and seasonality? And whether any of those trends are perhaps signaling what you think might be a shift with respect to leisure travel due to hybrid work. So meaning our sort of any anomalies showing up there that perhaps non-peaks are less nonpeak, if you will, and seasonality is not behaving the way it normally would, which you believe you could attribute to this hybrid work.

Sure, Chris. I'm actually going to let Matt jump in and give some thoughts on that, Matt?

Yes, sure thing. Yes, Chris, so some of the language we've heard out there in the industry in terms of how passengers have shifted around by day a week, it's something that we're seeing as well. We've seen that all through COVID. And all of a sudden, Thursday became the peak day of the week and Monday became a peak day of the week, more so than Friday and Sunday. And we're seeing similar patterns with that. As we move out of the summer into the fall with a school back in session, it's not as pronounced as we have seen in prior years in terms of day-a-week shift, but we still see some of that, which is good. It stretches the days of the week out and it lends to more flying in general. More trips are happening in general, which is why when we talk about the ULCC model in general and the growth of travel, there's more travel opportunities being opened up now than there ever has been before.

And we believe part of that is hybrid work allows for more trips, shorter trips and more trips to fill in some of those off-peak previously known as off-peak days of the week. Now having said that, we are still seeing differences in yields and load factors on off-peak days of the week. Tuesdays and Wednesdays for us are still Tuesdays and Wednesdays in terms of their demand relative to the days of the week. But overall, they definitely are closer to the median as to where they were pre-COVID.

I would also add in that we are seeing some shift, not just by day a week, but also by time of year. We're definitely seeing, as we mentioned in my prepared remarks, even in September, while load factor was down a little bit versus 2019, overall demand is strong, and the yields were especially impressive coming out of the summer into the fall period. So I guess in summary, you could say, yes, we are seeing some shift we saw throughout COVID, it's still there. Not as pronounced as it was during COVID, but it's definitely still there. And I'd say part of the best part is that we are seeing people move into off-peak times of month, which, over time, will be very beneficial for overall earning production.

Okay. And my follow-up question. So Ted, you spoke about in your prepared remarks about this multiyear headwind to the network as it relates to Florida. But at the same time, you're targeting a full return to utilization by mid-2023. So if we put those together as well as perhaps some of the shift here in travels due to this hybrid phenomena, if you will, is low $0.06 CASM ex still the plan for next year?

Sure. So let me make a couple of comments, I'll let Scott jump in, too, as it relates specifically how we're thinking about CASM. So yes, Florida is a constraint. We're still going to get back to utilization. It's just from a revenue production perspective it's not going to be the optimal answer. So we'll fly to non-Florida places where we have opportunities, but Florida is a big earnings generator for us. Fort Lauderdale is a big powerful spot for us. We're now the second largest airline in Orlando. And those are both a big piece of our network. So we would prefer to have more flying in Florida from a revenue perspective.

But the utilization will come in other places, which are still good opportunities for us. And that will drive by the middle part of next year, middle to late part of summer, utilization sort of more normalized. But the pressures I referenced before are still pressures on CASM ex.

So Scott, what would you add on...

Yes. No, I think that's right. I mean, I think it's around -- we're going to fly the capacity we can fly where we fly, partially dictated by some of the stuff happening in Florida and what we'll have to reallocate the network. But from a cost perspective, really, all we talked about in 2023, and Matt alluded to a slightly lower level of capacity and look, we're still trying to figure out what fleet deliveries will look like. We have insights really into the first half of 2023, and we're going to make some assumptions around how that carries forward the rest of the year. And we'll continue to work with our partners on figuring out delivery dates.

But right now, we're sitting at something slightly lower than what we thought about. So we're probably going to see a little pressure on CASM ex. We had talked about low 6s. So it's probably in the low to mid-6s given the reduced level of capacity. But we'll refine that as we get through the planning process and get definitive dates on deliveries. But capacity is going to be the biggest driver here as we think about 2023 CASM.

We go next now to Conor Cunningham at Melius Research.

I was just wondering if you could just speak to the strategy on both ancillary and base fares. One of your -- I think you alluded to this a little bit in the prepared remarks, but one of your competitors is clearly prioritizing ancillary over base and you guys are coming out of a much more balanced approach. I'm just curious on why you would go that way versus first pushing ancillary. Any thoughts would be helpful.

Sure, Conor. It's Matt. Generally speaking, I understand your question. We are in the game of producing total RASM. So the way that we see our network and the way that we see our long-term production, we think a balanced approach is the right way to go moving forward.

We're not sure if we were to see a reduction in economic activity, what would happen to non-ticket. So we know it's stickier and it's proven to be sticky. But at some point, you might get to a level where you can't maintain a number that moves too high too fast relative to the more traditional method of base fare.

So that's the approach that we're taking right now. We're trying to be very measured and pragmatic in our movements. We're definitely trying to maximize both metrics. So it's not -- we're not trying to minimize one as it relates to the other. I don't know if our competitors are thinking of it the same way or not. But I know for us, we are actively trying to not trade between the 2 buckets. We're trying to make sure that we maximize both on the way up. We think that's a better long-term approach to driving revenue.

Okay. And then on the '23 capacity adjustment that you're making, can you just flesh out a little bit of the puts and takes, like from gauge, new markets, that frequency, that type of things. What I'm trying to really understand is just like what a new normal is for utilization, we talked about normalized utilization all the time, but I just want to know if that number is the same that it was prepandemic. So just any thoughts on the actual makeup of the capacity in '23, I think that would be helpful.

I guess I can offer -- this is Ted, I can offer a couple of comments, and Matt, if you want to jump in as well. But at the highest level, fleet utilization prior to the pandemic here at Spirit was in the low 12 hours range, somewhere 12.25 or maybe plus or minus a little bit more than that, depending on how we felt about the season. Today, we're at 10.6, so we're well underneath that. I think getting back to a 12-plus number is the objective. And that's still the objective.

We updated or gave a view on ASM production next year at 60 billion to 62 billion ASMs, which was less than where we were before and alluded to a few inputs. But direct -- putting it directly, we are seeing supply chain-related issues on aircraft deliveries and supply chain-related issues on engine manufacturing and engine overhaul, which is forcing us to take aircraft out of service. So we're losing active airplanes, which is the primary driver of the reduction in ASMs, which is not the best answer, to be honest. But nonetheless, those are the facts. We'll continue to optimize around that as best we can. We have airplanes that can work a little harder. We have some that we are evaluating eventually retiring and we've got to make decisions on that. So there are still refinements coming, but that's probably the primary reason that we're seeing ASM kind of like come down a little bit in the year. The mix of flying, I would turn it over to Matt, to see if he have a view on that.

Geographically, we are still a little bit constrained as we talked about in Florida. And we learn a lot as we move through the winter here in spring for Florida and how to sort of industry traffic, including general aviation, plays a role in running through the air traffic control system.

So we'll learn a lot. We'll continue to learn more. What we will do is what you'll see us doing, like we're doing in the fourth quarter now as well, is just continue to run a little bit more during the off-peaks in order to generate as many ASMs as we can. As we said in the prepared remarks, running more on off-peaks may have an impact on some metrics like RASM, but we believe at the end of the day, in the environment we're in today, it's better to have the most efficient crew network we possibly can and to have the most efficient crew network we can it requires us to do some things like run a little bit more off-peaks, but that ultimately drives earnings because we're generating more capacity and we're not having an issue of filling that capacity with good yields at this time.

We go next now to Scott Group at Wolfe Research.

I just want to talk about utilization near term. So it's been sort of trending slightly lower throughout '22. It sounds like you think it gets better in Q4. I guess what's the target for utilization in Q4 within the guidance? And then what's the driver of that inflection higher in Q4?

Scott, I'll let our Scott jump in, too. But yes, utilization did trend down. We were very vocal about the fact that we had to pull flying from the third quarter because of Florida ATC constraints and that was a direct impact to utilization. It was not the answer we wanted, but that's where we landed.

You are correct, though, that as we turned the corner heading into the fourth quarter, we are going to see an uptick in utilization. It's not dramatic. So if we landed about 10.5 hours in the third quarter, it will be more like 10.75 hours. But that's right on the line of our expected return to normalization as we move between now and the middle part of next year.

So feeling good that, that's exactly where we want to be, Scott, what would...

Yes, that's exactly right. Look, I mean, we took -- or will take a large number of aircraft in Q4, which will, you can say, mathematically pressure that number in the quarter. But the plan has always been to methodically move utilization from here until the middle of 2023, and we're doing that. We feel good about where our capacity and utilization sit for Q4, where it looks for Q1, Q2 and Q3 of next year. And so I think that's what we're doing is we're balancing the hiring, operational reliability and the economic production of the business. So it's happening along the plan that we had always sort of thought.

We knew this was not going to be a snap your fingers over the ninth trick and we've said that for probably a year now that it's going to take some time. Obviously, the attrition that happened in the crew network has slowed that down a bit, but we're still targeting the middle of next year. So I think we're still moving in that direction.

Okay. That's helpful. And then just want to follow up on the CASM commentary for next year. So one of the other airlines, they talked about first half next year flat to up first half '23 versus '22 and then down year-over-year second half versus '23 versus '22. Directionally, is that how you'd be thinking about CASM for you guys as well, still up in the first half and then down in the second half?

We haven't talked about any quarter or sort of 2023 distribution of how CASM looks. But CASM will be down year-over-year. As we get production back in the business, we will see an annual reduction in unit cost. We do see sometimes the first quarter will be slightly higher just due to a handful of timing, components. But in the year, we do expect CASM to be down as we get utilization back in the airline. But we haven't given any detail to the quarterly breakout.

We'll go next now to Jamie Baker of JPMorgan.

Most of my questions have been addressed. So I'll try to ask something from left field. A question on pilots. The deal you struck back in 2018 had a preferential bidding system. I know that transitioning to a PBS is time consuming, there's some calibration along the way. Just curious if the current results, your current financials fully reflect that benefit. And assuming that it does, does the benefit square with what your expectations were back in the day?

Jamie, it's Ted. Thanks for the left field question.

So yes, we did put PBS in as part of our 2018 contract. It took us about a year to get that implemented. So we got about a year of pre-COVID experience with it. And I'd say that it behaved exactly as the way both parties had agreed, so both the union and ourselves. So that we did get the benefit and they got what they needed out of it. Of course, COVID has disrupted all that. So I wouldn't say anything is included in the way production works today. But yes, it's working the way we anticipated, which is a good sign.

Okay, good. And then a more conventional follow-up. The aforementioned shifts in travel patterns that you and everyone is discussing these days, how does that flow through to scheduling and maintenance? I would have thought it would have been trickier if you have a more consistent schedule. I would think peaks and valleys would make maintenance easier, but that's not the case, that Frontier site. So I'm just kind of curious about how you're flying the airline any differently as a result of these travel patterns.

Well, at the highest level, operators want consistency. They want level stuff, right? And airline commercial people push you into peaks and valleys because they want to maximize revenue. And that tug, that push/pull is what's going on at any business today.

And so what you addressed, you said you would have thought that peaks and valleys would make maintenance easier, what it does is it pushes all the maintenance into the valley, right? And so you may think that, that was like optimized, but I don't think the maintenance people would tell you they want to do that, right? They want a plan, and they want something that's -- because they can staff easier to it, they can order easier to it, they can hangar easier to it. It's just the logistics of it ends up being a lot smoother.

So again, the push/pull is still there today. It's just that we've taken learnings away from the way we operated in the summer of last year. And one of the things that we're doing is smoothing the schedule out because it does make it easier on the airports, it makes it easier on tech ops and it makes us easier on staffing.

We'll go next now to Quinn Wasko of Cowen.

This is Quinn on for Helane. So last call, you talked about having 30% more pilots in prepandemic. I know a part of that is due to aircraft deliveries, part of it is positioning for higher attrition. But are you seeing airport infrastructure improve in your Florida market? Are you confident enough in your own operational performance that you'd be willing to scale back the excess reserve levels of pilots you guys are managing as you add back capacity?

Let me kick off, and then Scott, you feel free to update if we have. But you're right, what's been happening over the course of our recovery here as we build back is that we've been adding in infrastructure, that's pilots, flight attendants, airplanes, staffing, broadly speaking, ahead of the actual ASM production, in addition to the fact that you have the larger schoolhouses across the business, which really has the additional people and expense in it that are not producing anything. Those are just bigger cost drags today than they were before.

And so they're ahead of where overall growth in ASM production would normally be. So yes, that gives us confidence that we will hit our ASM targets. But it is one of the things that makes CASM look higher than it should be. And what are you going to...

Yes. So the only thing I would add there, Quinn, is obviously, when there's volatility in the staffing components of the airline, call out the crew, right? We have higher attrition. We have bigger numbers that we have to hit. We have moving utilization, growing fleet, all those things. So that has given us a bit of caution to make sure we have enough, I'll call it, slack in the system to feel comfortable in predicting where the numbers need to be and actually hitting those.

So as volatility in the ranks reduces, we'll feel more comfortable reducing some of the slack. And over time, that sort of means returning back to traditional reserve levels. And we're doing things to the network that make it slightly easier to operate. And so as we put all those puzzle pieces back together, it's growing the airline and also gaining efficiency as we do it. So all these things will sort of combine over time. But yes, I think once we get levels that we can predict and we get comfortable on how they operate, then we'll be ready to remove some of the slack and that includes reserves.

Got it. That makes sense. And second question, so load factors took a bit of a hit in 3Q. Yields remained strong, though. I'm just wondering in the September month, were you getting any sort of pushback on the fares or seeing any sort of ceiling there?

Quinn, this is Matt. actually, what we started to see happen throughout September was some efforts because we had mentioned about our off-peak day of week and some of the increases we've done in off-peak days of the week, what we found is that the traffic ended up being relatively sticky compared to the fares. What I mean by that is trying to drive a little bit more load factor on those off-peak days a week wasn't necessarily generating the revenue outcome that we thought was maximizing for the company. So we actually found that the fare levels themselves were at the right price points to maximize TRASM. Reducing the fare did not drive higher TRASM, which is why we went back to the sort of our going rate, so to speak. They were still off peak. They were still September. But they weren't as low as they've been in prior years, and that actually drove the best revenue outcome for us.

And on top of that, if I can drive higher TRASM with a little bit less activity at the airport, that's better for everybody involved. So that's actually worked out pretty well for us that we learned last month.

And we'll go next now to Stephen Trent of Citi.

Just a quick one for you. I appreciate the comments on the Florida capacity constraints. When you think about the growth opportunities in some of the other markets? Any high-level views on how you're seeing maybe a westbound flow or Mexico cross-border Caribbean basis? Sort of any high-level views on the growth opportunities you're seeing in other markets?

Stephen, it's Matt. I would tell you that I think we mentioned this on the last call, we were seeing a little bit of a slowdown in traffic to some of our international VFR markets. We saw a little bit of that in Central America, a little bit in South America. The good news is, while we did see some of that slowing down earlier this year, it came back. It's almost all the way back to where it was before -- and this is speculation. We don't know if it was because of just economic slowdown, was it the end of COVID activity, was it inflation, was it currency-related issues? We're not entirely sure. Take your pick. It might have been all of them.

But the good news is that we are seeing that bounce back as well. So where we did see some slowdown geographically in our international VFR, that's come back. It's where we would like to see that. And what we've been able to do is continue to grow a little bit more out on the West Coast and in the middle of the country. So Los Angeles has been a spot that we've been seeing great profitable growth in. Las Vegas continues to grow for us as well. So while we are seeing the constraints on our Florida network, we are able to reallocate that to other parts of the country and we're comfortable with the unit revenue production there. It will serve us well in the future because we're establishing more predictability in our future network now in some of the growth opportunities that we saw for the future. So we're doing those growth opportunities now. And as we and the industry feel more comfortable with throughput into Florida, and I say the industry I'm talking about air traffic control throughput, we'll be able to then grow back into Florida, which is a major strength for us today.

So it's worked out all right. We are taking somewhat of a RASM penalty because of the network construction right now. But for the long term, it should work out quite fine as we ramp back up into our strengths.

The next now will be Savi Syth at Raymond James.

I was curious with the peak of state changes you're seeing. Is there a change in kind of ancillary revenue the way where people are purchasing ancillary revenue items? And along with that, just what's driving some of the ancillary revenue growth currently and into next year? What would you see as kind of being the big drivers?

Sure, Savi. It's Matt again. I'll take that one. In terms of the timing as to when our guests are adding ancillaries onto their itineraries, we're not seeing a real difference in advanced purchase of those ancillaries. What I would tell you, and we don't talk about this very often, but I do think it's important for Spirit and our business model is the use of new technology that is referred to as NDC, which is a new distribution capability technology that is in conjunction with IATA. It's been out for a long time. It continues to improve, and we've really adopted that across the board for our call it, our third-party distribution.

And what that allows us to do is basically treat third-party pricing and display what we provide to those parties is going to be very similar, if not the same, as to what they see at spirit.com and our app. And what that means is it allows us, as we dynamically price more and more of our ancillaries, we're able to push that pricing out to those third-parties. And those third-parties are displaying and selling those products for us. That's a change from pre-COVID to today. And that's a big deal as we continue to move forward, that gives more access to the optional services that our guests lunch and what they want to add to their itineraries. So it just gives us another channel to have more reach.

And I think that's important. So I don't think that's exactly the question you were asking, but I think that's the color that's important to understand is where we're collecting our ancillaries from is changed, not necessarily when we collect them.

And in terms of drivers for next year?

Sure. In terms of drivers for next year, well, we're continuing to build out our bundled services offerings. Those are continuing to get more fine-tuned. Some of our growth in our non-ticket rate that we've seen throughout this year has been due to those offerings. And in conjunction with all of that, we're still seeing nice growth. The trajectory is now really moving more vertically for us, which is great in terms of our co-branded credit card partnership that we have out there. We relaunched the program about 18, 19 months ago now, continues to grow.

One of our largest distribution channels is when we offer the card on our flights themselves and our flight attendant group, our inflate group has been fantastic with that. We were pre-COVID. We had a little bit of a lull during COVID for what I think will be obvious reasons. And now coming out of COVID, we've seen a great adoption once again, and it's been a great partnership throughout the entire company. So I think that is another option for us to keep growing as we get into next year as well.

That's helpful. And if I might, just real quickly, on the margin side, is it -- what's really going to get you back to kind of historical margins. Is it -- can I -- just getting back to utilization sufficient? Or do you need to be able to start kind of growing in Florida again? What are the kind of the key triggers to build back that margin?

Yes, Savi, it's Ted. Thanks for asking the question. I was going to offer that clarity on an earlier question and I kind of got timed out. But I think it's a valid point because we've been talking a lot about what Florida means, where we are with utilization, why is our margin where it is. And I think if you -- we've done some math on this, if we were at peak utilization today, you could probably add about 4 points to the margin. And if we were flying Florida the way we wanted to fly Florida and network -- the way we wanted to fly network, we'd probably be another 3 to 4 points.

So in today's fuel environment, with utilization the way we want it to be, we'd be a double-digit kind of op margin business. Not -- again, not where we wanted to be long term, but closer. And I think that, that's -- those are the building blocks, right, is getting the utilization back up and allowing the network to be where it optimally wants to be. And that's why we've sort of -- and we said this a few times, we've used words like methodical and pragmatic and all that other kind of stuff. We've drawn our guidance line as to when we think we can get back to that type of operation, and we're on that line today. And so admittedly, it's not where we would prefer to be today, but we understand where it is, and we're confident that we will get there by the middle part of next year.

So I think we've time for one more question.

And we'll take that question this morning from Andrew Didora of Bank of America.

Most of my questions have been answered. Just maybe a random one for Ted. Obviously, a lot has transpired over the course of this year. You have the lengthy kind of regulatory process coming up. Where are you and the team spending your time today? And can you focus as much around the day-to-day as you did, say, kind of pre February of this year?

Sure. Well, yes, it was a distracting period for a select number of senior management as we worked through the various ups and downs throughout the course of this M&A drama. But that's all behind us now. We are running the business like we would run the business any other day. And I speak for everyone from the ramper all the way up. So 100% time being focused on achieving those objectives that I laid it out for you and kind of hitting the points that I just laid out to Savi, which is getting us back to where we want to be, both on the margin and on utilization.

Great. That's it for this call, folks. We'll catch you next quarter. Thank you for joining us.

Thank you, Ms. Gabel. Again, ladies and gentlemen, that will conclude Spirit Airlines Third Quarter 2022 Earnings Conference Call. We'd like to thank you all so much for joining us and wish you all a great remainder of your day. Goodbye.