What happened
Shares of Spirit Airlines (SAVE 0.25%) fell 11.1% in July, according to data provided by S&P Global Market Intelligence, as investors ran for the exits after the discount airline provided third-quarter guidance that was well below expectations. There's a case to be made that the factors leading to the forecast cut were temporary, but investors would apparently rather watch this story play out from the terminal.
So what
Shares of Spirit Airlines, a no-frills discounter that offers low fares and charges for perks that other airlines offer for free, were on autopilot through the first half of July, trading up almost 16% for the month prior to the airline's July 24 earnings announcement. Spirit grew revenue by 18.9% year over year in the quarter and beat the consensus analyst earnings estimate by $0.04 per share, but the stock plunged due to management's commentary on the third quarter.
A Spirit Airlines A319. Image source: Spirit Airlines.
Spirit warned that it expects nonfuel costs to be up 7% to 8% in the third quarter, well above expectations, due to costs associated with a runway closure at Fort Lauderdale, a key Spirit destination, as well as 200 basis points' worth of costs due to higher estimates for flight disruptions and 150 basis points related to reduced capacity due to cancellations.
The runway issues were known, but the disruptions and completions issues were new and attributed by the company to weather. Spirit coming into 2019 had eliminated some of the slack in its schedule designed to cushion against weather disruptions and cancellations, but the airline has faced more weather challenges than it expected.
Spirit is in the process of adjusting crew schedules and reserves, and the Fort Lauderdale construction project that has caused closures is expected to be done this year, but in the near term the damage has been done.
Now what
There's both an optimistic and pessimistic spin to Spirit's cost issues. The optimist would note that all the factors driving up costs appear to be temporary, and there's a strong case to be made that the third quarter will be the worst of it followed by a recovery. The pessimist would note that the mistakes made were fundamental to airline operations, and question whether Spirit is growing too fast to be managed and perhaps at risk for further stumbles.
Spirit has some potential tailwinds that should push it forward in the quarters to come: The company will introduce in-flight Wi-Fi and is updating its loyalty program and should benefit as six new cities on its route map mature and begin contributing to revenue.
The expense issue has proven to be a costly mistake for shareholders, but there's still a lot to like about Spirit and its growth trajectory. Long-term holders able to ride out the turbulence should feel confident Spirit is still on the right course.
